Document:

<PAGE>

Exhibit 10.28

                              EMPLOYMENT AGREEMENT

         This Employment Agreement between World Airways, Inc., a Delaware
corporation ("World" or the "Company") and John E. Ellington ("Ellington") is
entered into this 1st of June 2002.

         WHEREAS, Ellington has agreed to continue to serve as World's President
and Chief Operating Officer as of June 1, 2002.

         NOW, THEREFORE, World and Ellington, in consideration of the foregoing
and other mutual covenants and promises contained herein, the sufficiency of
which are hereby acknowledged, hereby agree as follows:

         1. Acceptance of Employment. Subject to the terms and conditions set
forth below, World agrees to employ Ellington and Ellington accepts such
employment.

         2. Term. The period of employment shall be from June 1, 2002, through
May 31, 2005, unless further extended or sooner terminated as hereinafter set
forth. In the absence of notice, this Agreement shall be renewed on the same
terms and conditions for one year from the date of expiration. Not later than
December 1, 2004, Ellington shall initiate discussions with the Chairman of the
Board (hereinafter "Chairman") regarding the renewal of this Agreement. At that
time, if Ellington wishes to renew this Agreement on different terms, Ellington
shall give written notice to the Chairman. If the Chairman does not wish to
renew this Agreement at its expiration, or wishes to renew on different terms,
the Chairman shall give written notice to Ellington no later than December 1,
2004.

         3. Position and Duties. Ellington shall continue to serve as President
and Chief Operating Officer with the duties performed as of June 1, 2002. The
Chairman will have reasonable latitude to make changes in Ellington's
responsibilities, except that Ellington's responsibilities may not be modified
in a way that would be inconsistent with the status of President and Chief
Operating Officer. Following a Change of Control (as hereinafter defined),
Ellington's responsibilities may not be changed without mutual agreement.
Ellington agrees to render his services to the best of his abilities and will
comply with all policies, rules and regulations of the company and will advance
and

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<PAGE>

promote to the best of his ability the business and welfare of the Company.
Ellington shall devote all of his working time, attention, knowledge and skills
solely to the business and interests of World. Ellington may not accept any
other engagement with or without compensation, which would affect his ability to
devote all of his working time and attention to the business and affairs of
World without the prior written approval of the Chairman of the Board. Ellington
agrees to accept assignments on behalf of World or affiliated companies
commensurate with his responsibilities hereunder, except that the terms and
conditions of assignments exceeding 60 consecutive days outside the Atlanta,
Georgia, Standard Metropolitan Statistical Area will require mutual agreement.

         4. Compensation and Related Matters.

            (a) Base Salary. Ellington shall receive a minimum salary of
$225,000 per annum payable in accordance with the payroll procedures for World's
salaried employees in effect during the term of this Agreement. Ellington agrees
to participate equally, on a percentage basis, in any across the board salary
reductions approved by senior management.

            (b) Performance Stock Options. Ellington has been granted 150,000
options to purchase World's Common Stock, par value $.001 per share ("World
Airways Common Stock") pursuant to the 1995 World Airways Stock Option Plan (the
"Plan") as set forth in the Stock Option Agreements between World and Ellington
dated January 8, 2002, and June 1, 2002 (together, the "Options" and the "Option
Agreements"). In the event of a Change in Control as defined below, all Options
shall be immediately exercisable.

            (c) Business Expenses. Ellington shall be entitled to reimbursement
of reasonable business related expenses from time to time consistent with
World's policies, including, without limitation, submitting in a timely manner
appropriate documentation of such expenses.

            (d) Fringe Benefits. Ellington shall be entitled to participate in
all employee benefit

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<PAGE>

plans made available from time to time to all executives of World in accordance
with the terms of such plans. In the event this Agreement is terminated by
either party for any reason other than death or for cause, Ellington may
participate in World's health and other benefit programs for a period of one
year from the date of Ellington's termination, or until Ellington obtains
comparable coverage, whichever is earlier.

            (e) Personnel Policies, Conditions and Benefits. Except as otherwise
provided herein, Ellington's employment shall be subject to the personnel
policies and benefits plans which apply generally to World's employees as the
same may be interpreted, adopted, revised or deleted from time to time, during
the term of this Agreement, by World in its sole discretion. While this
Agreement is in effect, Ellington shall receive twenty (20) days of vacation, in
addition to sick leave, holidays, and such other leave as World may provide. All
such vacation and leave shall be taken in accordance with the Company's
procedures.

            (f) Indemnification; D&O Insurance. Subject to Section 6(b) of this
Agreement, World shall provide (or cause to be provided) to Ellington
indemnification against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlements in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (including an action by or in the right of World) by reason of
his being or having been an officer, director or employee of World or any
affiliated entity, advance expenses (including attorneys' fees) incurred by
Ellington in defending any such civil, criminal, administrative or investigative
action, suit or proceeding and maintain directors' and officers' liability
insurance coverage (including coverage for securities-related claims) upon
substantially the same terms and conditions as set forth in the Indemnification
Agreement dated June 1, 2002 between Ellington and World Airways, Inc. (the
"Indemnity Agreement").

         5. Termination of Employment.

            (a) Death. Ellington's employment hereunder shall terminate upon his
death, in

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which event World shall have no further obligation to Ellington or his estate
with respect to compensation, other than the disposition of life insurance and
related benefits and accrued and unpaid base salary and incentive compensation,
if any, for periods prior to the date of termination pursuant to the terms of
the respective employee benefits and incentive compensation plans then in
effect.

            (b) By World for Disability. If Ellington is unable, or fails, to
perform services pursuant to this agreement through illness or physical or
mental disability and such failure or disability shall exist for twelve (12)
consecutive months, then World may terminate this Agreement upon written notice
to Ellington, in which event World shall have no obligation to Ellington with
respect to compensation under Section 4(a) of this Agreement. If Ellington
becomes entitled to Social Security benefits payable on account of disability,
he will be deemed conclusively to be disabled for purposes of this Agreement.

            (c) By World for Cause. (i) Except under the circumstances set forth
in 5(c)(ii) below, the Chairman of the Board may terminate this Agreement for
Cause. "Cause" shall be defined as (A) sustained performance deficiencies which
are communicated to Ellington in written performance appraisals and/or other
written communications (including, but not limited to memos and/or letters) by
the Chairman, (B) gross misconduct, including significant acts or omissions
constituting dishonesty, intentional wrongdoing or malfeasance, whether or not
relating to the business of World, or (C) commission of a felony or any crime
involving fraud or dishonesty, or (D) a material breach of this Agreement.

       (ii) In the event of a Change of Control, as defined below, Ellington may
only be terminated for Cause pursuant to a resolution duly adopted by the
affirmative vote of a majority of the entire membership of the Board, at a
meeting of the Board finding that, in the good faith opinion of the Board,
Ellington was guilty of conduct set forth in 5(c)(i)(A), or (B), provided,
however, that Ellington may not be terminated for Cause hereunder unless: (1)
Ellington receives prior written notice of World's intention to terminate this
Agreement for Cause and the specific reasons therefore; and (2) Ellington

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has an opportunity to be heard by World's Board and be given, if the acts are
correctable, a reasonable opportunity to correct the act or acts (or non-action)
giving rise to such written notice. If the Board, by resolution duly adopted by
the affirmative vote of a majority of the entire membership of the Board, finds
that Ellington fails to make such correction after reasonable opportunity to do
so, this Agreement may be terminated for Cause.

            (d) By World for Other Than Cause. In the event the Board terminates
this Agreement for reasons other than Cause or Disability as defined in
sub-paragraph (c) above, World will pay to Ellington within ten (10) days of
notice of termination (or, in the case of incentive bonus compensation, if any,
within ten (10) days of determination of amounts payable under the applicable
bonus plan) eighteen months base salary, in each case including deferred salary
and/or bonus compensation, if any, payable under this Agreement. In addition,
all granted but unvested Options under the Option Agreements shall become
immediately exercisable. In the event that any payment to Ellington under this
paragraph is subject to any federal or state excise tax, World shall pay to
Ellington an additional amount equal to the excise tax imposed including
additional federal and state income and excise taxes as a result of the payments
under this paragraph, and such payment will be made when the excise tax and
income taxes are due; provided, however, that Ellington agrees to assist World
Airways by using his best efforts to structure matters so that any payment to
Ellington under this paragraph is not subject to any federal or state excise
tax. Whether an excise tax is payable, and the amount of the excise tax and
additional income taxes payable, shall be determined by World's accountants and
World shall hold Ellington harmless from any and all taxes, penalties, and
interest that may become due as a result of the failure to properly determine
that an excise tax is payable or the correct amount of the excise tax and
additional income taxes, together with all legal and accounting fees reasonably
incurred by Ellington in connection with any dispute with any taxing authority
with respect to such determinations and/or payments.

            (e) By Ellington for Good Reason. Ellington may terminate his
employment hereunder

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(for purposes of this Agreement "Good Reason") after giving at least 30 days
notice in the event that, without Ellington's consent, (i) World relocates its
general and administrative offices or Ellington's place of employment to an area
other than the Atlanta, Georgia Standard Metropolitan Statistical Area, (ii) he
is assigned any duties substantially inconsistent with Section 3 hereof, (iii)
World reduces his annual base salary as in effect on the date hereof or as the
same may be increased from time to time, except as provided in Section 4(a)
above; (iv) World fails, without Ellington's consent, to pay Ellington any
portion of his current compensation, or to pay him any portion of an installment
of deferred compensation under any deferred compensation program of World,
within seven (7) days of the date such compensation is due; (v) World fails to
continue in effect any compensation plan in which Ellington participates which
is material to Ellington's total compensation, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, or to continue Ellington's participation therein (or in
such substitute or alternative Plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of Ellington's
participation relative to other participants; (vi) World fails to continue to
provide Ellington with benefits substantially similar to those enjoyed by
Ellington under any of World's pension, life insurance, medical, health and
accident, or disability plans in which Ellington was participating, World takes
any action which would directly or indirectly materially reduce any of such
benefits or deprive Ellington of any material fringe benefit enjoyed by
Ellington; (vii) World terminates, or proposes to terminate, Ellington's
employment hereunder contrary to the requirements of Section 5(c) hereof (for
purposes of this Agreement, no such termination or purported termination shall
be effective); or (viii) the Board approves the liquidation or dissolution of
World prior to the end of this Agreement. In the event that Ellington decides to
terminate this Agreement and his employment with World or any successor in
interest in accordance with the provisions of this Section 5(e), World shall
have the same obligations as set forth in Section 5(d) hereof. Any other
payments due or actions required under this paragraph shall be made as lump sums
or taken within 10 days of termination of the Agreement.

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          (f)  By Ellington for Other Than Good Reason. Notwithstanding the
above, Ellington may upon giving reasonable notice, not to be less than 30 days,
terminate this Agreement without further obligation on the part of Ellington or
World.

          (g)  Changes of Control. For purposes of this Agreement, a "Change of
Control" includes the occurrence of any one or more of the following events:

               (i)   any Person, other than the Company, is or becomes the
Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), directly or indirectly, of securities of
World representing more than 50% of the combined voting power of World's then
outstanding securities; or

               (ii)  during any period of two (2) consecutive years (not
including any period prior to the execution of this Agreement), individuals who
at the beginning of such period constitute the Board of World and any new
director (other than a director designated by a Person who has entered into an
agreement with World to effect a transaction described in clause (i), (iii) or
(iv) or this Section 5 (f)) whose election by the Board of World or nomination
for election by the stockholders of World was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
or

               (iii) the shareholders of World approve a merger or consolidation
of World with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of World outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or being
converted into voting securities of the surviving entity), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of World or any of its affiliates, at least 50% of the
combined voting power of the voting securities of World or

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such surviving entity outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to implement a
recapitalization of World (or similar transaction) in which no Person acquires
more than 50% of the combined voting power of World's then outstanding
securities; or

               (iv)  the shareholders of World approve a plan of complete
liquidation of World or an agreement for the sale or disposition by World of all
or substantially all of World's assets.

          (h)  "Person" Defined. For purposes of this Section, "Person" shall
have the meaning given in Section (3)(a)(9) of the Exchange Act, as modified and
used in Sections 13(d) and 14(d) thereof; however, a Person shall not include
(i) World or WorldCorp, Inc. or any of their subsidiaries or affiliates; (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
World or WorldCorp, Inc. or any of their subsidiaries; (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities; or
(iv) a corporation owned, directly or indirectly, by the stockholders of World
or WorldCorp, Inc. in substantially the same proportions as their ownership of
stock of World or WorldCorp, Inc.

          (i)  Notice of Termination. Termination of this Agreement by World or
termination of this Agreement by Ellington shall be communicated by written
notice to the other party hereto, specifically indicating the termination
provision relied upon.

          (j)  Company Property. At the termination of Ellington's employment,
whether voluntary or involuntary, Ellington shall return all company property,
including without limitation all electronic and paper files and documents and
all copies thereof.

     6.   Confidentiality. (a) Ellington recognizes and acknowledges that he
will acquire during his employment with World information that is confidential
to World and that represents valuable, special and unique assets of World
("Confidential Information"). Such Confidential Information (whether or not
reduced to tangible form) includes, but is not limited to: trade secrets;
financing

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documents and information; financial data; new product information; copyrights;
information relating to schedules and locations; cost and pricing information;
performance features; business techniques; business methods; business and
marketing plans or strategies; business dealings and arrangements; business
objectives; customer information; sales information; acquisition, merger or
business development plans or strategies; research and development projects;
legal documents and information; personnel information; and any and all other
information concerning World's business and business practices that is not
generally known or made available to the public or to World's competitors or is
not readily ascertainable by other means, which, if misused or disclosed, could
adversely affect the business of World. Ellington agrees that he will not,
during employment with World and for a period of two (2) years following
termination of employment for any reason, whether voluntary or involuntary, with
or without Cause, directly or indirectly:

     (i)  disclose any Confidential Information to any person, company or other
          entity (other than authorized persons employed by or affiliated with
          World who, in the interest of World, have a business need to know such
          information), or

     (ii) use any Confidential Information in any way, except as required by his
          duties to World or by law, unless he obtains World's prior written
          approval of such disclosure or use. World's rights under this Section
          shall be cumulative to, and shall not limit, World's rights under the
          Georgia Uniform Trade Secrets Act or any other state or federal trade
          secret or unfair competition statute or law. The parties hereto
          stipulate that as between them, the foregoing matters are important,
          material, and confidential and gravely affect the successful conduct
          of the business of World, and World's good will, and that any breach
          of the terms of this paragraph shall be a material breach of this
          Agreement.

     (b)  Section 4(f) of this Agreement and any other indemnity agreements
between Ellington and World shall not apply to actions, suits or proceedings to
enforce World's rights under, or that otherwise relate to, this Agreement,
including without limitation, this Section 6.

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     (c)  References in this Section 6 to "World" include World Airways, Inc.
and any and all of its current or future parents, subsidiaries, affiliated
companies, and divisions.

     7.   Beneficiary. The Beneficiary of any payment due and payable at the
time of Ellington's death, or otherwise due upon his death, shall be such person
or persons, as Ellington shall designate in writing to World. If no such
beneficiary shall survive Ellington, any such payments shall be made to his
estate.

     8.   Intellectual Property. (a) Any improvements, new techniques,
processes, inventions, works, discoveries, products or copyrightable or
patentable materials made or conceived by Ellington, either solely or jointly
with other person(s), (1) during Ellington's period of employment by World,
during working hours; (2) during the period after termination of his employment
during which he is retained by World as a consultant; or (3) with use of World's
intellectual property or Confidential Information, shall be the sole and
exclusive property of World without royalty or other consideration to Ellington.

          (b)  Ellington agrees to inform World promptly and in full of such
intellectual property by a full written report setting forth in detail the
procedures used and the results achieved.

          (c)  Ellington shall at World's request and expense execute any and
all applications, assignments, or other instruments which World shall deem
necessary to apply for, register, and/or obtain copyrights or Letters Patent of
the United States or of any foreign country, or to otherwise protect World's
interests in such intellectual property.

          (d)  Ellington shall assign and does hereby assign to World all
interests and rights, including but not limited to copyrights, in any such
intellectual property.

     9.   No Waiver. The failure of either party at any time to enforce any
provisions of this Agreement or to exercise any remedy, option, right, power or
privilege provided for herein, or to require the performance by the other party
of any of the provisions hereof, shall in no way be deemed a waiver of such
provision at the same or at any prior or subsequent time.

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     10.  Governing Law. All questions concerning the construction, validity,
application and interpretation of this Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia without giving
effect to any choice of law or conflict of law provision or rule (whether of
Georgia or any other jurisdiction) that would cause the application of the law
of any jurisdiction other than Georgia. Ellington agrees to submit to personal
jurisdiction in the State of Georgia.

     11.  Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not be deemed to affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.

     12.  Successors. This Agreement shall inure to the benefit of and be
binding upon World, its successors and assigns, including any corporation or
other business entity which may acquire all or substantially all of World's
assets or business, or within which World may be consolidated or merged, or any
surviving corporation in a merger involving World.

     13.  Waiver of Modification of Agreement. No waiver or modification of this
Agreement shall be valid unless in writing and duly executed by both parties.

     14.  Counterparts. This Agreement may be executed in one or more
counterparts, each of which together will constitute one and the same
instrument.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.

                               WORLD AIRWAYS, INC.

                               By:  /s/ Hollis L. Harris
                                    --------------------
                                    Hollis L. Harris
                                    Chairman and CEO

                                    /s/ John E. Ellington
                                    ---------------------
                                    John E. Ellington

                                       11<PAGE>

Exhibit 4(a)
Form of Indenture

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

                    B. F. SAUL REAL ESTATE INVESTMENT TRUST,
                                     Obligor

                                       AND

                      U.S. BANK TRUST NATIONAL ASSOCIATION,
                                Indenture Trustee

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

                                    Indenture

                            Dated as of [____], 2003

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

                                   $50,000,000

                           NOTES DUE FROM ONE YEAR TO
                          TEN YEARS FROM DATE OF ISSUE

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

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<PAGE>

                              CROSS REFERENCE TABLE
                                 OF INDENTURE OF
                     B. F. SAUL REAL ESTATE INVESTMENT TRUST
                        TO SECTIONS 310 THROUGH 318(a) OF
                         THE TRUST INDENTURE ACT OF 1939

<TABLE>
<CAPTION>
<S>                                                           <C>
         Section of Trust                                     Section of
         Indenture Act                                        Indenture
310(a)(l)and(2) ..........................................    6.09
         (a)(3) and (4) ..................................    Not Applicable
         (b) .............................................    6.08
         .................................................    6.10(d)
         (c) .............................................    Not Applicable
311(a)   .................................................    6.13(a)
         (b) .............................................    6.13(b)
         (c) .............................................    Not Applicable
312(a)   .................................................    7.01
         .................................................    7.02(a)
         (b) .............................................    7.02(b)
         (c) .............................................    7.02(c)
313(a)(l)(2)(3)(4)(6) and (7) ............................    7.03(a)
         (a)(5) ..........................................    Not Applicable
         (b)(l) ..........................................    Not Applicable
         (b)(2) ..........................................    7.03(b)
         (c) .............................................    7.03(a)
         .................................................    7.03(b)
         (d) .............................................    7.03(c)
314(a)   .................................................    7.04
         (b) .............................................    Not Applicable
         (c)(l) and (2) ..................................    1.02
         (c)(3) ..........................................    Not Applicable
         (d) .............................................    Not Applicable
         (e) .............................................    1.02
         (f) .............................................    Not Applicable
315(a)   .................................................    6.01(a)
         (b) .............................................    6.02
         (c) .............................................    6.01(b)
         (d) .............................................    6.01(c)
         (d)(l) ..........................................    6.01(a)
         (d)(2) ..........................................    6.0l(c)(2)
         (d)(3) ..........................................    6.01(c)(3)
         (e) .............................................    5.14
316(a)   .................................................    1.01
         (a)(l)(A) .......................................    5.02, 5.12
         (a)(l)(B) .......................................    5.13
         (a)(2) ..........................................    Omitted
         (b) .............................................    5.08
317(a)(1) ................................................    5.03
   (a)(2) ................................................    5.04
   (b) ...................................................    10.03
318(a) ...................................................    1.07
</TABLE>

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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                          PAGE
<S>                                                                       <C>
Parties .................................................................    1

Recitals ................................................................    1

ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION .....    1

  SECTION 1.01.  Definitions. ...........................................    1

   Act ..................................................................    2

   Affiliate ............................................................    2

   Authorized Newspaper .................................................    2

   Business Day .........................................................    2

   Commission ...........................................................    2

   Corporate Trust Office ...............................................    2

   Declaration of Trust .................................................    2

   Event of Default .....................................................    2

   Holder ...............................................................    2

   Indenture Trustee ....................................................    2

   Independent ..........................................................    2

   Interest Payment Date ................................................    3

   Maturity .............................................................    3

   Noteholder ...........................................................    3

   Note Register ........................................................    3

   Officers' Certificate ................................................    3

   Opinion of Counsel ...................................................    3

   Outstanding ..........................................................    3

   Paying Agent .........................................................    4

   Person ...............................................................    4

   Place of Payment .....................................................    4

   Predecessor Notes ....................................................    4

   Record Date ..........................................................    4

   Redemption Date ......................................................    4

   Regular Record Date ..................................................    4

   Responsible Officer ..................................................    4

   Shares ...............................................................    4

   Special Record Date ..................................................    4

   Stated Maturity ......................................................    5

   Subsidiary ...........................................................    5
</TABLE>

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<TABLE>
<S>                                                                                <C>
     Trust .....................................................................   5

     Trustees' Resolution ......................................................   5

     Trust Indenture Act or TIA ................................................   5

     Trust Request and Trust Order .............................................   5

     Vice President ............................................................   5

   SECTION 1.02.  Compliance Certificates and Opinions. ........................   5

   SECTION 1.03.  Form of Documents Delivered to Indenture Trustee. ............   6

   SECTION 1.04.  Acts of Noteholders. .........................................   6

   SECTION 1.05.  Notices, etc., to Indenture Trustee and Trust. ...............   7

   SECTION 1.06.  Notices to Noteholders; Waiver. ..............................   7

   SECTION 1.07.  Conflict with Trust Indenture Act. ...........................   8

   SECTION 1.08.  Effect of Headings and Table of Contents. ....................   8

   SECTION 1.09.  Successors and Assigns. ......................................   8

   SECTION 1.10.  Separability Clause. .........................................   8

   SECTION 1.11.  Benefits of Indenture. .......................................   8

   SECTION 1.12.  Governing Law. ...............................................   8

   SECTION 1.13.  Execution of Agreement by Trust. .............................   8

 ARTICLE TWO NOTE FORMS ........................................................   9

   SECTION 2.01.  Forms Generally. .............................................   9

   SECTION 2.02.  Form of Note. ................................................   9

 ARTICLE THREE THE NOTES .......................................................  12

   SECTION 3.01.  Title and Terms. .............................................  12

   SECTION 3.02.  Form and Denominations. ......................................  12

   SECTION 3.03.  Execution, Authentication, Delivery and Dating. ..............  12

   SECTION 3.04.  Temporary Notes. .............................................  13

   SECTION 3.05.  Registration, Transfer and Exchange. .........................  14

   SECTION 3.06.  Mutilated, Destroyed, Lost and Stolen Notes. .................  14

   SECTION 3.07.  Payment of Interest; Interest Rights Preserved. ..............  15
</TABLE>

                                      iii

<PAGE>

<TABLE>
<S>                                                                                                       <C>
   SECTION 3.08.   Persons Deemed Owners .............................................................    16

   SECTION 3.09.   Cancellation ......................................................................    16

ARTICLE FOUR SATISFACTION AND DISCHARGE ..............................................................    17

   SECTION 4.01.   Satisfaction and Discharge of Indenture ...........................................    17

   SECTION 4.02.   Application of Trust Money ........................................................    18

ARTICLE FIVE REMEDIES ................................................................................    18

   SECTION 5.01.   Event of Default ..................................................................    18

   SECTION 5.02.   Acceleration of Maturity; Rescission and Annulment ................................    19

   SECTION 5.03.   Collection of Indebtedness and Suits for Enforcement by Indenture Trustee .........    20

   SECTION 5.04.   Indenture Trustee May File Proofs of Claim ........................................    20

   SECTION 5.05.   Indenture Trustee May Enforce Claims Without Possession of Notes ..................    21

   SECTION 5.06.   Application of Money Collected ....................................................    21

   SECTION 5.07.   Limitation on Suits ...............................................................    21

   SECTION 5.08.   Unconditional Right of Noteholders to Receive Principal and Interest ..............    22

   SECTION 5.09.   Restoration of Rights and Remedies ................................................    22

   SECTION 5.10.   Rights and Remedies Cumulative ....................................................    22

   SECTION 5.11.   Delay or Omission Not Waiver ......................................................    23

   SECTION 5.12.   Control by Noteholders ............................................................    23

   SECTION 5.13.   Waiver of Past Defaults ...........................................................    23

   SECTION 5.14.   Undertaking for Costs .............................................................    23

   SECTION 5.15.   Waiver of Stay or Extension Laws ..................................................    24

   ARTICLE SIX THE INDENTURE TRUSTEE .................................................................    24

   SECTION 6.01.   Certain Duties and Responsibilities ...............................................    24

   SECTION 6.02.   Notice of Defaults ................................................................    25

   SECTION 6.03.   Certain Rights of Indenture Trustee ...............................................    25

   SECTION 6.04.   Not Responsible for Recitals or Issuance of Notes .................................    26
</TABLE>

                                       iv

<PAGE>

<TABLE>
<S>                                                                                                       <C>
   SECTION 6.05.   May Hold Notes ......................................................................   26

   SECTION 6.06.   Money Held in Trust .................................................................   26

   SECTION 6.07.   Compensation and Reimbursement ......................................................   26

   SECTION 6.08.   Disqualification; Conflicting Interests .............................................   27

   SECTION 6.09.   Corporate Trustee Required; Eligibility .............................................   32

   SECTION 6.10.   Resignation and Removal; Appointment of Successor ...................................   32

   SECTION 6.11.   Acceptance of Appointment by Successor ..............................................   33

   SECTION 6.12.   Merger, Conversion, Consolidation or Succession to Business of Indenture Trustee ....   33

   SECTION 6.13.   Preferential Collection of Claims against Trust .....................................   34

ARTICLE SEVEN NOTEHOLDERS' LISTS AND REPORTS BY INDENTURE TRUSTEE AND TRUST ............................   37

   SECTION 7.01.   Trust to Furnish Indenture Trustee Names and Addresses of Noteholders ...............   37

   SECTION 7.02.   Preservation of Information; Communications to Noteholders ..........................   37

   SECTION 7.03.   Reports by Indenture Trustee ........................................................   38

   SECTION 7.04.   Reports by Trust ....................................................................   39

ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER ............................................   40

   SECTION 8.01.   Trust May Consolidate, etc., only on Certain Terms ..................................   40

   SECTION 8.02.   Successor Substituted ...............................................................   41

ARTICLE NINE SUPPLEMENTAL INDENTURES ...................................................................   41

   SECTION 9.01.   Supplemental Indentures Without Consent of Noteholders ..............................   41

   SECTION 9.02.   Supplemental Indentures With Consent of Noteholders .................................   42

   SECTION 9.03.   Execution of Supplemental Indentures ................................................   43

   SECTION 9.04.   Effect of Supplemental Indentures ...................................................   43

   SECTION 9.05.   Conformity with Trust Indenture Act .................................................   43

   SECTION 9.06.   Reference in Notes to Supplemental Indentures .......................................   43

ARTICLE TEN COVENANTS ..................................................................................   43
</TABLE>

                                        v

<PAGE>

<TABLE>
   <S>                                                                                                            <C>
   SECTION 10.01.        Payment of Principal and Interest. ..................................................    43

   SECTION 10.02.        Maintenance of Office or Agency. ....................................................    43

   SECTION 10.03.        Money for Note Payments to be Held in Trust. ........................................    44

   SECTION 10.04.        Payment of Taxes and other Claims. ..................................................    45

   SECTION 10.05.        Maintenance of Properties. ..........................................................    45

   SECTION 10.06.        Statement as to Compliance. .........................................................    45

   SECTION 10.07.        Existence. ..........................................................................    45

   SECTION 10.08.        Maintenance of Insurance. ...........................................................    46

   SECTION 10.09.        Waiver of Certain Covenants. ........................................................    46

   ARTICLE ELEVEN REDEMPTION OF CERTAIN NOTES ................................................................    46

   SECTION 11.01.        Right of Redemption; Redemption Price. ..............................................    46

   SECTION 11.02.        Applicability of Article. ...........................................................    46

   SECTION 11.03.        Election to Redeem; Notice to Indenture Trustee. ....................................    46

   SECTION 11.04.        Selection of Notes to be Redeemed. ..................................................    47

   SECTION 11.05.        Notice of Redemption. ...............................................................    47

   SECTION 11.06.        Deposit of Redemption Price. ........................................................    47

   SECTION 11.07.        Notes Payable on Redemption Date. ...................................................    47

ARTICLE TWELVE IMMUNITY OF ORGANIZERS, HOLDERS OF SHARES OF BENEFICIAL INTEREST OF TRUST, OFFICERS AND
TRUSTEES .....................................................................................................    48

   SECTION 12.01.        Exemption from Individual Liability. ................................................    48

   SECTION 12.02.        No Liability Other Than of Trust. ...................................................    48
</TABLE>

                                       vi

<PAGE>

         INDENTURE dated as of [______], 2003, between B. F. SAUL REAL ESTATE
INVESTMENT TRUST (hereinafter called the "Trust"), a Maryland real estate
investment trust established pursuant to a declaration of trust dated July 31,
1962 and currently operating and existing pursuant to a Second Amended and
Restated Declaration of Trust, dated as of January 31, 2002 (hereinafter called
the "Declaration of Trust"), a copy of which is on file with the Department of
Assessments and Taxation of the State of Maryland, having its principal office
at 7501 Wisconsin Avenue, Bethesda, Maryland, and U.S. BANK TRUST NATIONAL
ASSOCIATION (hereinafter called the "Indenture Trustee") having its Corporate
Trust Office at the date hereof at 100 Wall Street, Suite 1600, New York, NY
10005, Attn: Corporate Trust Department.

                              RECITALS OF THE TRUST

         The Trust has duly authorized the creation of an issue of its Notes Due
From One Year to Ten Years From Date of Issue (hereinafter called the "Notes")
of substantially the tenor and amount hereinafter set forth, and to provide
therefor the Trust has duly authorized the execution and delivery of this
Indenture.

         All things necessary to make the Notes, when executed by the Trust and
authenticated and delivered hereunder and duly issued by the Trust, the valid
obligations of the Trust and to make this Indenture a valid agreement of the
Trust, in accordance with their and its terms, have been done.

         NOW, THEREFORE, THIS INDENTURE WITNESSETH:

         For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:

                                  ARTICLE ONE
             DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

         SECTION 1.01.  Definitions.

         For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:

               (1) the terms defined in this Article have the meanings assigned
         to them in this Article, and include the plural as well as the
         singular;

               (2) all other terms used herein which are defined in the Trust
         Indenture Act, either directly or by reference therein, have the
         meanings assigned to them therein;

               (3) all accounting terms not otherwise defined herein have the
         meanings assigned to them in accordance with generally accepted
         accounting principles, and, except as otherwise herein expressly
         provided, the term "generally accepted accounting principles" with
         respect to any computation required or permitted hereunder shall mean
         such accounting principles as are generally accepted at the date of
         such computation;

               (4) "This Indenture" means this instrument as originally executed
         or as it may from time to time be supplemented or amended by one or
         more indentures supplemental hereto entered into pursuant to the
         applicable provisions hereof; and

                                       1

<PAGE>

               (5) all references in this instrument to designated "Articles",
         "Sections" and other subdivisions are to the designated Articles,
         Sections and other subdivisions of this instrument as originally
         executed. The words "herein", "hereof" and "hereunder" and other words
         of similar import refer to this Indenture as a whole and not to any
         particular Article, Section or other subdivision.

         Certain terms, used principally in Article Six, are defined separately
in that Article.

         "Act" when used with respect to any Noteholder has the meaning
specified in Section 1.04.

         "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

         "Authorized Newspaper" means a newspaper of general circulation in The
City of New York, printed in the English language and customarily published on
each Business Day.

         "Business Day" means any Monday, Tuesday, Wednesday, Thursday or Friday
which is not a day on which banking institutions in The City of New York are
lawfully authorized or obligated by law or executive order to close.

         "Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.

         "Corporate Trust Office" when used with respect to the Indenture
Trustee means said office of the Indenture Trustee at the location set forth in
the first paragraph of this instrument or at any future location thereof, or
said office of any successor Indenture Trustee.

         "Declaration of Trust" means the Second Amended and Restated
Declaration of Trust referred to in the first paragraph of this instrument as
the same may from time to time be amended or restated.

         "Event of Default" has the meaning specified in Article Five.

         "Holder" when used with respect to any Note means a Noteholder.

         "Indenture Trustee" means the Person named as the "Indenture Trustee"
in the first paragraph of this instrument until a successor Indenture Trustee
shall have become such pursuant to the applicable provisions of this Indenture,
and thereafter "Indenture Trustee" shall mean such successor Indenture Trustee.

         "Independent" when used with respect to any specified Person means such
a Person who (1) is in fact independent, (2) does not have any direct financial
interest or any material indirect financial interest in the Trust or in any
other obligor upon the Notes or in any Affiliate of the Trust or of such other
obligor, and (3) is not connected with the Trust or such other obligor or any
Affiliate of the Trust or of such other obligor, as an officer, employee,
promoter, organizer,

                                       2

<PAGE>

underwriter, trustee, partner, director or Person performing similar functions.
Whenever it is herein provided that any Independent Person's opinion or
certificate shall be furnished to the Indenture Trustee, such Person shall be
appointed by a Trust Order and approved by the Indenture Trustee in the exercise
of reasonable care, and such Opinion of Counsel or certificate shall state that
the signer has read this definition and that the signer is Independent within
the meaning hereof.

         "Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.

         "Maturity" when used with respect to any Note means the date on which
the principal of such Note becomes due and payable as therein or herein
provided, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or otherwise.

         "Noteholder" means a Person in whose name a Note is registered in the
Note Register.

         "Note Register" and "Note Registrar" have the respective meanings
specified in Section 3.05.

         "Officers' Certificate" means a certificate signed, by any of the
Trustees, the President or a Vice President, and by the Treasurer, an Assistant
Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an
Assistant Secretary of the Trust, and delivered to the Indenture Trustee.

         "Opinion of Counsel" means a written opinion of counsel, who may
(except as otherwise expressly provided in this Indenture) be counsel for the
Trust, including an employee of either the Trust or an affiliate of the Trust.

         "Outstanding" when used with respect to Notes means, as of the date of
determination, all Notes theretofore authenticated and delivered under this
Indenture, or any Indenture supplemental hereto entered into pursuant to Section
9.01, except:

                         (i)   Notes theretofore cancelled by the Indenture
                    Trustee or delivered to the Indenture Trustee for
                    cancellation;

                         (ii)  Notes for whose payment (or redemption) money in
                    the necessary amount has been theretofore deposited with the
                    Indenture Trustee or any Paying Agent in trust for the
                    Holders of such Notes provided that, if such Notes are to be
                    redeemed, notice of such redemption has been duly given
                    pursuant to this Indenture, or any Indenture supplemental
                    hereto entered into pursuant to Section 9.01, or provision
                    therefor satisfactory to the Indenture Trustee has been
                    made; and

                         (iii) Notes in exchange for or in lieu of which other
                    Notes have been authenticated and delivered pursuant to this
                    Indenture or Indenture supplemental hereto entered into
                    pursuant to Section 9.01;

provided, however, that in determining whether the Holders of the requisite
principal amount of Notes Outstanding have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Trust or any other obligor upon the Notes or any Affiliate of the Trust or
such other obligor shall be disregarded and deemed not to be Outstanding, except
that,

                                       3

<PAGE>

in determining whether the Indenture Trustee shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Notes which the Indenture Trustee knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Indenture Trustee the pledgee's right so to act with respect to such Notes and
that the pledgee is not the Trust or any other obligor upon the Notes or any
Affiliate of the Trust or such other obligor.

         "Paying Agent" means any Person (including the Trust acting as Paying
Agent) authorized by the Trust to pay the principal of (and premium, if any) or
interest on any Notes on behalf of the Trust. Initially, the Trust will act as
its own Paying Agent.

         "Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.

         "Place of Payment" means a city or any political subdivision thereof
designated as such in Section 10.02.

         "Predecessor Notes" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.06 in lieu of a mutilated,
destroyed, lost or stolen Note shall be deemed to evidence the same debt as the
mutilated, destroyed, lost or stolen Note.

         "Record Date" means either a Regular Record Date or a Special Record
Date.

         "Redemption Date" when used with respect to any Note to be redeemed
means the date fixed for such redemption by or pursuant to this Indenture.

         "Regular Record Date" for the interest payable on any Interest Payment
Date means the twentieth day (whether or not a Business Day) preceding such
Interest Payment Date.

         "Responsible Officer" when used with respect to the Indenture Trustee
means the chairman or vice-chairman of the board of directors, the chairman or
vice-chairman of the executive committee of the board of directors, the
president, any vice president, the secretary, any assistant secretary, the
treasurer, any assistant treasurer, the cashier, any assistant cashier, any
trust officer or assistant trust officer, the controller and any assistant
controller or any officer of the Indenture Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any officer to
whom such matter is referred because of his knowledge of and familiarity with
the particular subject.

         "Shares" means any shares of beneficial interest of the Trust or other
equity securities, including options, warrants and other rights to purchase such
shares of beneficial interest, of the Trust of any class which have no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Trust.

         "Special Record Date" for the payment of any Defaulted Interest (as
defined in Section 3.07) means a date fixed by the Indenture Trustee pursuant to
Section 3.07.

                                       4

<PAGE>

         "Stated Maturity" when used with respect to any Note or any installment
of interest thereon means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.

         "Subsidiary" means any corporation, company, partnership, association,
business trust or other like entity more than 50% (by voting power) of the
voting securities of which is owned and controlled by the Trust or by one or
more other Subsidiaries or by the Trust in conjunction with one or more other
Subsidiaries. The term "voting securities" shall mean those securities of any
such entity having voting power for the election of directors, trustees or other
governing body, either at all times or only so long as no senior class of
securities has such voting power arising out of default in dividends or the
existence of some other default.

         "Trust" means the Person named as the "Trust" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trust" shall mean such
successor Person.

         "Trustees' Resolution" means a copy of a resolution certified by the
Chairman, the Secretary or an Assistant Secretary of the Trust to have been duly
adopted by the Trustees and to be in full force and effect on the date of such
certification, and delivered to the Indenture Trustee.

         "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as in force at the date as of which this instrument was executed.

         "Trust Request" and "Trust Order" mean, respectively, a written request
or order signed in the name of the Trust by any of the Trustees, its Chairman, a
Vice Chairman, a Vice President, its Treasurer, an Assistant Treasurer,
Secretary, or an Assistant Secretary, and delivered to the Indenture Trustee.

         "Vice President" when used with respect to the Trust or the Indenture
Trustee means any vice president, whether or not designated by a number or a
word or words added before or after the title.

         SECTION 1.02.  Compliance Certificates and Opinions.

         Upon any application or request by the Trust to the Indenture Trustee
to take any action under any provisions of this Indenture, the Trust shall
furnish to the Indenture Trustee an Officers' Certificate stating that all
conditions precedent (including any covenant compliance with which constitutes a
condition precedent), if any, provided for in this Indenture relating to the
proposed action have been complied with and an Opinion of Counsel stating that
in the opinion of such Counsel all such conditions precedent, if any, have been
complied with, except that in the case of any such application or request as to
which the furnishing of such documents is specifically required by any
provisions of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.

         Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include

               (1) a statement that each individual signing such certificate or
         opinion has read such covenant or condition and the definitions herein
         relating thereto;

                                       5

<PAGE>

               (2)  a brief statement as to the nature and scope of the
         examination or investigation upon which the statements or opinions
         contained in such certificate or opinion are based;

               (3)  a statement that, in the opinion of each such individual, he
         has made such examination or investigation as is necessary to enable
         him to express an informed opinion as to whether or not such covenant
         or condition has been complied with; and

               (4)  a statement as to whether, in the opinion of each such
         individual, such condition or covenant has been complied with.

         SECTION 1.03.  Form of Documents Delivered to Indenture Trustee.

         In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.

         Any certificate or opinion of an officer of the Trust may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Trust stating that the
information with respect to such factual matters is in the possession of the
Trust, unless such Counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.

         Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

         SECTION 1.04.  Acts of Noteholders.

         (a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Noteholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Noteholders in person or by agent
duly appointed in writing; and, except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Indenture Trustee, and, where it is hereby expressly required,
to the Trust. Such instrument or instruments and the action embodied therein and
evidenced thereby are herein sometimes referred to as the "Act" of the
Noteholders signing such instrument or instruments. Proof of execution of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 6.01) conclusive in
favor of the Indenture Trustee and the Trust, if made in the manner provided in
this Section.

         (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or

                                       6

<PAGE>

writing acknowledged to him the execution thereof. Where such execution is by a
signer acting in a capacity other than his individual capacity, such certificate
or affidavit shall also constitute sufficient proof of authority. The fact and
date of the execution of any such instrument or writing, or the authority of the
person executing the same, may also be proved in any other manner which the
Indenture Trustee deems sufficient.

         (c)   The principal amount of and serial numbers of Notes held by any
Person, and the date of holding the same, shall be proved by the Note Register.

         (d)   Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind the Holder of every
Note issued upon the transfer thereof or in exchange therefor or in lieu
thereof, in respect of anything done or suffered to be done by the Indenture
Trustee or the Trust in reliance thereon, whether or not notation of such action
is made upon such Note.

         SECTION 1.05.  Notices, etc., to Indenture Trustee and Trust.

         Any request, demand, authorization, direction, notice, consent, waiver
or Act of Noteholders or other document provided or permitted by this Indenture
to be made upon, given or furnished to, or filed with,

               (1) the Indenture Trustee by any Noteholder or by the Trust shall
         be sufficient for every purpose hereunder if made, given, furnished or
         filed in writing to or with the Indenture Trustee at its Corporate
         Trust Office, or

               (2) the Trust by the Indenture Trustee or by any Noteholder shall
         be sufficient for every purpose hereunder (unless otherwise herein
         expressly provided) if in writing and mailed, first class postage
         prepaid, or delivered by recognized courier to the Trust addressed to
         it at the address of its principal office specified in the first
         paragraph of this Indenture or at any other address previously
         furnished in writing to the Indenture Trustee by the Trust.

         SECTION 1.06.  Notices to Noteholders; Waiver.

         Where this Indenture provides for notice of any event to Noteholders by
the Trust or the Indenture Trustee, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed, first
class postage prepaid, to each Noteholder affected by such event, at his address
as it appears in the Note Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In any
case where notice to Noteholders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular
Noteholder shall affect the sufficiency of such notice with respect to other
Noteholders. Any notice mailed to a Noteholder in the manner herein prescribed
shall be conclusively deemed to have been received such Noteholder, whether or
not such Noteholder actually receives such notice. Where this Indenture provides
for notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Noteholders
shall be filed with the Indenture Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.

         In case, by reason of the suspension of publication of any Authorized
Newspaper or suspension of or irregularities in mail service, or by reason of
any other cause, it shall be impracticable to mail notice of any event to
Noteholders

                                       7

<PAGE>

or, if applicable, to make publication of any notice in an Authorized Newspaper
or Authorized Newspapers when such notice is required to be given pursuant to
any provision of this Indenture, , then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.

         SECTION 1.07.  Conflict with Trust Indenture Act.

         If any provision of this Indenture limits, qualifies or conflicts with
another provision which is required to be included in this Indenture by any of
the provisions of TIA, such required provision shall control.

         SECTION 1.08.  Effect of Headings and Table of Contents.

         The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.

         SECTION 1.09.  Successors and Assigns.

         All covenants and agreements in this Indenture by the Trust shall bind
its successors and assigns, whether so expressed or not.

         SECTION 1.10.  Separability Clause.

         In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

         SECTION 1.11.  Benefits of Indenture.

         Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Holders of Notes, any benefit or any legal or equitable right, remedy or
claim under this Indenture.

         SECTION 1.12.  Governing Law.

         This Indenture and each Note shall be deemed to be a contract made
under and to be performed in accordance with the laws of the State of Maryland,
and this Indenture and each Note, including the validity thereof, shall be
construed in accordance with and governed by the laws, including the conflict of
laws rules, of said State.

         SECTION 1.13.  Execution of Agreement by Trust.

         The name "B.F. Saul Real Estate Investment Trust" is the designation of
the Trustees of the Trust under a Declaration of Trust. All persons dealing with
the Trust must look solely to the property and assets of the Trust for the
enforcement of any claims against the Trust, and none of the Trustees,
shareholders, officers, employees or agents of the Trust in their individual
capacities assume any personal liability for the obligations of the Trust and
the respective properties of the Trustees, shareholders, officers, employees and
agents of the Trust in their individual capacities shall not be subject to the
claims of any such persons with respect to any such obligations.

                                       8

<PAGE>

                                  ARTICLE TWO
                                   NOTE FORMS

        SECTION 2.01.  Forms Generally.

        The Notes and the certificates of authentication thereon shall be in
substantially the forms set forth in this Article with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange, or as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of the Notes. Any portion of the text of any Note
may be set forth on the reverse thereof, with an appropriate reference thereto
on the face of the Note.

        The definitive Notes shall be printed, lithographed or engraved or
produced by any combination of those methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange
on which the Notes may be listed, all as determined by the officers executing
such Notes, as evidenced by their execution of such Notes.

        SECTION 2.02.  Form of Note.

                             B. F. SAUL REAL ESTATE INVESTMENT TRUST

                                      NOTE

        No.                                         $_______________
        Registered Owner:                           Interest Rate:
        Principal Amount:                           Stated Maturity:

        B. F. SAUL REAL ESTATE INVESTMENT TRUST (hereinafter called the "Trust,"
which term includes any successor trust or corporation under the Indenture
hereinafter referred to), operating as a Maryland real estate investment trust,
duly organized pursuant to a declaration of trust dated July 31, 1962 and
currently operating and existing pursuant to a Second Amended and Restated
Declaration of Trust dated as of January 31, 2002 (hereinafter called the
"Declaration of Trust"), for value received, hereby promises to pay to the
Registered Owner shown above, or registered assigns, the Principal Amount shown
above on the Stated Maturity shown above, and to pay interest on said Principal
Amount at the per annum Interest Rate shown above, semi-annually on the day six
months from the date of issue and each succeeding six months thereafter
("Interest Payment Dates"), from and after the date of this Note until the
principal hereof has been paid or duly provided for, and on the Stated Maturity.
All such payments shall be made in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts. The interest so payable on any Interest Payment Date,
and punctually paid or duly provided for, will be paid, as provided in said
Indenture, to the person in whose name this Note (or one or more Predecessor
Notes, as defined in said Indenture) is registered at the close of business on
the Regular Record Date for such interest which shall be the twentieth day
(whether or not a Business Day) preceding such Interest Payment Date and will be
paid by check mailed to the registered address of such person. Any such interest
not so punctually paid or duly provided for shall forthwith cease to be payable
to the registered holder on such Regular Record Date, and may be paid to the
person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business on a Special Record Date for the payment of such
defaulted interest to be fixed by the Indenture Trustee (as hereinafter
defined), notice

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<PAGE>

whereof shall be given to Noteholders not less than 10 days prior to such
Special Record Date, or may be paid at any time in any lawful manner not
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture. Payment of the Principal Amount of this
Note due at maturity will be made at the office of U.S. Bank Trust National
Association 100 Wall Street, Suite 1600, New York, NY 10005, Attn: Corporate
Trust Department.

         This Note is one of the duly authorized issue of Notes of the Trust
designated as its Notes Due From One Year to Ten Years From Date of Issue
(herein called the "Notes"), issued and to be issued under an Indenture dated as
of [______], 2003 (as supplemented, herein called the "Indenture"), between the
Trust and U.S. Bank Trust National Association, as Indenture Trustee (herein
called the "Indenture Trustee," which term includes any successor Indenture
Trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights
thereunder of the Trust, the Indenture Trustee and the holders of the Notes, and
the terms upon which the Notes are, and are to be, authenticated and delivered.
Capitalized terms used herein and not defined have the meanings given to such
terms in the Indenture.

         The Trust may, at its sole election, redeem any of the Notes having a
Stated Maturity of more than one year from date of issue on any Interest Payment
Date with respect to such Note on or after the first anniversary of the date of
issue of such Note at a Redemption Price (exclusive of the installment of
interest due on the Redemption Date, payment of which shall have been made or
duly provided for to the registered holder on the relevant Record Date) equal to
the Principal Amount of the Note so redeemed.

         If an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal hereof may be declared due and payable
in the manner and with the effect provided in the Indenture.

         The Indenture contains provisions permitting the Trust and the
Indenture Trustee, without the consent of the holders of the Notes, to increase
the aggregate principal amount of Notes issuable thereunder by one or more
supplemental indentures. The Indenture also permits, with certain exceptions as
therein provided, the amendment thereof and the modification of the rights and
obligations of the Trust and the rights of the holders of the Notes under the
Indenture at any time by the Trust with the consent of the holders of 66 2/3% in
aggregate principal amount of the Notes at the time Outstanding, as defined in
the Indenture. The Indenture also contains provisions permitting the holders of
specified percentages in aggregate principal amount of the Notes at the time
Outstanding, as defined in the Indenture, on behalf of the holders of all the
Notes, to waive compliance by the Trust with certain provisions of the Indenture
and certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the holder of this Note shall be conclusive and binding
upon such holder and upon all future holders of this Note and of any Note issued
upon the transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Note.

         No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Trust, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.

         As provided in the Indenture and subject to certain limitations therein
set forth, this Note is transferable on the Note Register of the Trust, upon
surrender of this Note for transfer at the office or agency of the Trust
maintained for such purpose in The City of New York, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Trust and the Note Registrar

                                       10

<PAGE>

duly executed by, the registered holder hereof or his attorney duly authorized
in writing, and thereupon one or more new Notes, of authorized denominations and
for the same aggregate principal amount, interest rate and maturity date, will
be issued to the designated transferee or transferees. As provided in the
Indenture, if at any time the Trust shall fail to maintain such office or agency
or shall fail to furnish the Indenture Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Indenture Trustee.

     The Notes are issuable only as registered Notes, without coupons, in
denominations of $1,000 and integral multiples of $1,000. As provided in the
Indenture and subject to certain limitations therein set forth, this Note is
exchangeable for a like aggregate principal amount of Notes (with a like
interest rate and maturity date) of a different authorized denomination as
requested by the holder surrendering the same.

     No service charge will be made for any such transfer or exchange, but the
Trust may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.

     The Trust, the Indenture Trustee and any agent of the Trust or the
Indenture Trustee may treat the person in whose name this Note is registered as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes whether or not this Note be overdue, and neither the Trust,
the Indenture Trustee nor any such agent shall be affected by notice to the
contrary.

     The covenants and obligations set forth in this Note and in the Indenture
as having been made by the Trust have been made or assumed by the trustees of
the Trust acting as such trustees pursuant to the authority vested in them under
the Declaration of Trust. This Note and the Indenture have been executed by
trustees or officers of the Trust in their capacities as trustees or officers
under the Declaration of Trust, and not individually, and, in accordance with
the provisions of the Declaration of Trust, the covenants and obligations of the
Trust or the trustees of the Trust hereunder and under the Indenture are not
personally binding upon, nor shall resort be had to the private property of, any
of the trustees or shareholders, officers, employees or agents of the Trust, but
the Trust property only shall be bound.

     No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture or any indenture supplemental
thereto, personally, against any organizer of the Trust, holder of shares of
beneficial interest of the Trust, officer or trustee, past, present or future,
as such, of the Trust or of any predecessor or successor of the Trust whether by
virtue of any constitution, statute or rule of law or equity, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.

     Unless the certificate of authentication hereon has been executed by or on
behalf of the Indenture Trustee by manual signature, this Note shall not be
entitled to any benefit under the Indenture, or be valid or obligatory for any
purpose.

     IN WITNESS WHEREOF, the Trust has caused this Instrument to be duly
executed under its common seal.

Dated: ____________________

Attest:                                  B. F. SAUL REAL ESTATE INVESTMENT TRUST

                                       11

<PAGE>

________________________________    By: _________________________________

This is one of the Notes referred to in the within-mentioned Indenture.

                                        U.S. BANK TRUST, NATIONAL ASSOCIATION,
                                        as Indenture Trustee

                                    By: ___________________________________
                                            Authorized Signature

                                  ARTICLE THREE
                                    THE NOTES

     SECTION 3.01. Title and Terms.

     The Notes shall be designated as Notes Due From One Year to Ten Years from
Date of Issue. The initial aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is limited to $50,000,000,
except for Notes authenticated and delivered upon transfer of, or in exchange
for, or in lieu of other Notes pursuant to Section 3.04, 3.05, 3.06 or 9.06.
Additional Notes in excess of such aggregate principal amount may be issued
pursuant to supplemental indentures as provided by Section 9.01.

     Interest rates on the Notes will be subject to change by the Trust from
time to time for various maturities, but no such change will affect any Notes
issued prior thereto. Interest on each Note shall be payable semi annually on
the date six months from the date of issue and each six months thereafter
("Interest Payment Dates") from and after the date of issue of the Note until
the principal thereof has been paid or duly provided for, and on the Stated
Maturity date. The interest so payable on any Interest Payment Date, and
punctually paid or duly provided for, will be paid, as provided herein, to the
Person in whose name the Note (or one or more Predecessor Notes as defined
herein) is registered at the close of business on the Regular Record Date for
such interest which shall be the twentieth day (whether or not a Business Day)
preceding such Interest Payment Date and will be paid by check mailed to the
registered address of such Person.

     The principal of (and premium, if any) and accrued interest due at maturity
on the Notes shall be payable at the office or agency of the Trust maintained
for such purpose pursuant to Section 10.02.

     SECTION 3.02. Form and Denominations.

     The Notes may be issued only as registered notes, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Trust may require
that purchases be for amounts which exceed $1,000.

     SECTION 3.03. Execution, Authentication, Delivery and Dating.

     The Notes shall be executed on behalf of the Trust by its Chairman of the
Board, one of its Trustees or by one of its Vice Presidents under its common
seal reproduced thereon and attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these individuals on the Notes may be
manual or facsimile and may be manual or facsimile signatures of the present or
any future such authorized officer and may be imprinted or otherwise reproduced
on the Notes.

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<PAGE>

     Notes bearing the manual or facsimile signatures of individuals who were at
any time the proper Trustees or officers of the Trust shall bind the Trust,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.

     At any time and from time to time after the execution and delivery of this
Indenture, the Trust may deliver Notes executed by the Trust to the Indenture
Trustee for authentication. The Indenture Trustee shall authenticate and deliver
such Notes upon a Trust Order, without any further action by the Trust.

     All Notes shall be dated the date of their authentication and shall bear
interest from the date of issue at the rate, and mature on the date, set forth
in the Trust Order requesting their authentication.

     No Note shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose, unless there appears on such Note a certificate
of authentication substantially in the form provided for herein executed by or
on behalf of the Indenture Trustee by manual signature by an authorized
signatory, and such certificate upon any Note shall be conclusive evidence, and
the only evidence, that such Note has been duly authenticated and delivered
hereunder.

     In case the Trust, pursuant to Article Eight, shall be consolidated or
merged with or into any other Person or shall convey or transfer its assets
substantially as an entirety to any other Person or Persons (other than a
transfer pursuant to Section 8.03) and the successor Person resulting from such
consolidation, or surviving such merger, or into which the Trust shall have been
merged, or the Person or Persons which shall have received a conveyance or
transfer as aforesaid, shall have executed an indenture supplemental hereto with
the Trustee pursuant to Article Eight, any of the Notes authenticated or
delivered prior to such consolidation, merger, conveyance or transfer may, from
time to time, at the request of the successor Person, be exchanged for other
Notes executed in the name of the successor Person with such changes in
phraseology and form as may be appropriate, but otherwise in substance of like
tenor as the Notes surrendered for such exchange and of like principal amount;
and the Indenture Trustee, upon Trust Request of the successor Person, shall
authenticate and deliver Notes as specified in such request for the purpose of
such exchange. If Notes shall at any time be authenticated and delivered in any
new name of a successor Person pursuant to this Section in exchange or
substitution for or upon registration of transfer of any Notes, such successor
Person, at the option of the Noteholders but without expense to them, shall
provide for the exchange of all Notes at the time Outstanding for Notes
authenticated and delivered in such new name. Each Note delivered under this
Section 3.03 shall bear the date of issue of the Note which was surrendered for
it.

     SECTION 3.04. Temporary Notes.

     Pending the preparation of definitive Notes, the Trust may execute, and
upon a Trust Order the Indenture Trustee shall authenticate and deliver,
temporary Notes which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any denomination, substantially of the tenor of the
definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as evidenced by their execution of such
Notes.

     If temporary Notes are issued, the Trust will cause definitive Notes to be
prepared without unreasonable delay. After the preparation of definitive Notes,
the temporary Notes shall be exchangeable for definitive Notes upon surrender of
the temporary Notes at the office or agency of the Trust maintained for such

                                       13

<PAGE>

purpose pursuant to Section 10.02, without charge to the Holder. Upon surrender
for cancellation of any one or more temporary Notes, the Trust shall execute and
the Indenture Trustee shall authenticate and deliver in exchange therefor
definitive Notes of authorized denominations of a like aggregate principal
amount, interest rate and maturity date. Until so exchanged, the temporary Notes
shall in all respects be entitled to the same benefits under this Indenture as
definitive Notes.

     SECTION 3.05. Registration, Transfer and Exchange.

     The Trust shall cause to be kept at the Corporate Trust Office of the
Indenture Trustee a register (herein sometimes referred to as the "Note
Register") in which, subject to such reasonable regulations as it may prescribe,
the Trust shall provide for the registration of Notes and the registration of
transfers of Notes. The Note Register shall be in written form or in any form
capable of being reduced into written form within a reasonable time. The
Indenture Trustee is hereby initially appointed "Note Registrar" for the purpose
of registering Notes and registering transfers of Notes as herein provided.

     Upon surrender for transfer of any Note at the office or agency of the
Trust maintained for that purpose in a Place of Payment, the Trust shall
execute, and the Indenture Trustee shall authenticate and deliver, in the name
of the designated transferee or transferees, one or more new Notes of any
authorized denominations, of a like aggregate principal amount, interest rate
and maturity date.

     At the option of the Holder, Notes may be exchanged for other Notes of any
authorized denominations, of a like aggregate principal amount, interest rate
and maturity date, upon surrender of the Notes to be exchanged at such office or
agency. Whenever any Notes are so surrendered for exchange, the Trust shall
execute, and the Indenture Trustee shall authenticate and deliver, the Notes
which the Noteholder making the exchange is entitled to receive.

     All Notes issued upon any transfer or exchange of Notes shall be the valid
obligations of the Trust, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such transfer or
exchange.

     Every Note presented or surrendered for transfer or exchange shall be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Trust and the Note Registrar duly executed, by the Holder
thereof or his attorney duly authorized in writing.

     No service charge shall be made for any transfer or exchange of Notes, but
the Trust may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any transfer or
exchange of Notes, other than exchanges pursuant to Section 3.04 or 9.06 not
involving any transfer.

     The Trust shall not be required (i) to issue, register or transfer of any
Note during a period beginning at the opening of business 15 days before the
selection of Notes to be redeemed under Section 11.04 and ending at the close of
business on the day of such mailing of the relevant notice of redemption, or
(ii) to register the transfer of any Note so selected for redemption.

     SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Notes.

     If (i) any mutilated Note is surrendered to the Indenture Trustee, or (ii)
the Trust and the Indenture Trustee receive evidence to their satisfaction of
the destruction, loss or theft of any Note, and there is delivered to the Trust
and the

                                       14

<PAGE>

Indenture Trustee such security or indemnity as may be required by them to save
each of them harmless, then, in the absence of notice to the Trust or the
Indenture Trustee that such Note has been acquired by a bona fide purchaser, the
Trust shall execute and upon its request the Indenture Trustee shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Note, a new Note of like tenor and principal amount,
interest rate and maturity date, bearing a number not contemporaneously
outstanding.

     In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Trust in its discretion may, instead of
issuing a new Note, pay such Note.

     Upon the issuance of any new Note under this Section, the Trust may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Indenture Trustee) connected therewith.

     Every new Note issued pursuant to this Section in lieu of any destroyed,
lost or stolen Note shall constitute an original additional contractual
obligation of the Trust, whether or not the destroyed, lost or stolen Note shall
be at any time enforceable by anyone, and shall be entitled to all the benefits
of this Indenture equally and proportionately with any and all other Notes duly
issued hereunder.

     The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.

     SECTION 3.07. Payment of Interest; Interest Rights Preserved.

     Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest; provided that, payment of
interest shall be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.

     Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder on the
relevant Regular Record Date by virtue of his having been such Holder; and,
except as hereinafter provided, such Defaulted Interest may be paid by the
Trust, at its election in each case, as provided in Clause (1) or Clause (2)
below:

          (1) The Trust may elect to make payment of any Defaulted Interest to
     the Persons in whose names the Notes (or their respective Predecessor
     Notes) are registered at the close of business on a Special Record Date for
     the payment of such Defaulted Interest, which shall be fixed in the
     following manner. The Trust shall notify the Indenture Trustee in writing
     of the percentage of Defaulted Interest proposed to be paid on each Note
     and the date of the proposed payment (which must be at least 30 days
     subsequent to such notification), and at the same time the Trust shall
     deposit with the Indenture Trustee an amount of money equal to the
     aggregate amount proposed to be paid in respect of such Defaulted Interest
     or shall make arrangements satisfactory to the Indenture Trustee for such
     deposit prior to the date of the proposed payment, such money when
     deposited to be held in trust for the benefit of the Persons entitled to
     such Defaulted Interest as in this Clause provided. Thereupon the Indenture
     Trustee shall fix a Special Record Date for the payment of such Defaulted
     Interest which shall be not more

                                       15

<PAGE>

     than 15 nor less than 10 days prior to the date of the proposed payment and
     not less than 10 days after the receipt by the Indenture Trustee of the
     notice of the proposed payment. The Indenture Trustee shall promptly notify
     the Trust of such Special Record Date and, in the name and at the expense
     of the Trust, shall cause notice of the proposed payment of such Defaulted
     Interest and the Special Record Date therefor to be mailed, first class
     postage prepaid, to each Noteholder at his address as it appears in the
     Note Register, not less than 10 days prior to such Special Record Date. The
     Indenture Trustee may, in its discretion, in the name and at the expense of
     the Trust, cause a similar notice to be published at least once in an
     Authorized Newspaper in the Place of Payment, but such publication shall
     not be a condition precedent to the establishment of such Special Record
     Date. Notice of the proposed payment of such Defaulted Interest and the
     Special Record Date therefor having been mailed as aforesaid, such
     Defaulted Interest shall be paid to the Persons in whose names the Notes
     (or their respective Predecessor Notes) are registered on such Special
     Record Date and shall no longer be payable pursuant to the following Clause
     (2).

          (2)  The Trust may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Notes may be listed, and upon such notice as may be required by
such exchange, if, after notice given by the Trust to the Indenture Trustee of
the proposed payment pursuant to this Clause, such manner of payment shall be
deemed practicable by the Indenture Trustee.

     Subject to the foregoing provisions of this Section, each Note delivered
under this Indenture upon transfer of or in exchange for or in lieu of any other
Note shall carry the rights to interest accrued and unpaid, and to accrue, which
were carried by such other Note.

     SECTION 3.08. Persons Deemed Owners.

     Prior to the due presentment of a Note for transfer, the Trust, the
Indenture Trustee and any agent of the Trust or the Indenture Trustee may treat
the Person in whose name any Note is registered as the owner of such Note for
the purpose of receiving payment of principal of (and premium, if any, on), and
(subject to Section 3.07) interest on, such Note and for all other purposes
whatsoever, whether or not such Note be overdue, and neither the Trust, the
Indenture Trustee nor any agent of the Trust or the Indenture Trustee shall be
affected by notice to the contrary.

     SECTION 3.09. Cancellation.

     All Notes surrendered for payment, transfer or exchange shall, if
surrendered to any Person other than the Indenture Trustee, be delivered to the
Indenture Trustee and shall be promptly cancelled by it. The Trust may at any
time deliver to the Indenture Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Trust may have acquired in any
manner whatsoever, and all Notes so delivered shall be promptly cancelled by the
Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for
any Notes cancelled as provided in this Section, except as expressly permitted
by this Indenture. All cancelled Notes held by the Indenture Trustee shall be
destroyed and a certificate of such destruction delivered to the Trust.

                                       16

<PAGE>

                                  ARTICLE FOUR
                           SATISFACTION AND DISCHARGE

     SECTION 4.01. Satisfaction and Discharge of Indenture.

     This Indenture shall cease to be of further effect (except as to any
surviving rights of transfer or exchange of Notes herein expressly provided
for), and the Indenture Trustee, on demand of and at the expense of the Trust,
shall execute proper instruments acknowledging satisfaction and discharge of
this Indenture, when

          (1)  either

               (A)  all Notes theretofore authenticated and delivered (other
          than (i) Notes which have been mutilated, destroyed, lost or stolen
          and which have been replaced or paid as provided in Section 3.06, and
          (ii) Notes for whose payment money has theretofore been deposited in
          trust or segregated and held in trust by the Trust and thereafter
          repaid to the Trust or discharged from such trust, as provided in
          Section 10.03) have been delivered to the Indenture Trustee for
          cancellation; or

               (B)  all such Notes not theretofore delivered to the Indenture
          Trustee for cancellation

                    (i)   have become due and payable,

                    (ii)  will become due and payable at their Stated Maturity
               within one year, or

                    (iii) are to be called for redemption within one year under
               arrangements satisfactory to the Indenture Trustee for the giving
               of notice of redemption by the Indenture Trustee in the name, and
               at the expense, of the Trust,

          and the Trust, in the case of (i), (ii), or (iii) above, has deposited
          or caused to be deposited with the Indenture Trustee as trust funds in
          trust an amount sufficient to pay at their Stated Maturity all such
          Notes not theretofore delivered to the Indenture Trustee for
          cancellation, including principal (and premium, if any) and interest
          due or to become due on their Stated Maturity or Redemption Date, as
          the case may be;

          (2)  The Trust has paid or caused to be paid all other sums payable
     hereunder by the Trust; and

          (3)  the Trust has delivered to the Indenture Trustee an Officers'
     Certificate and an Opinion of Counsel each stating that all conditions
     precedent herein provided for relating to the satisfaction and discharge of
     this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Trust to the Indenture Trustee under Section 6.07 and, if
money shall have been deposited with the Indenture Trustee pursuant to subclause
(B) of clause (1) of this Section, the obligations of the Indenture Trustee
under Section 4.02 and the last paragraph of Section 10.03 shall survive.

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<PAGE>

     SECTION 4.02. Application of Trust Money.

     Subject to the provisions of the last paragraph of Section 10.03, all money
deposited with the Indenture Trustee pursuant to Section 4.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Trust acting as its own Paying Agent), as the Indenture Trustee
may determine, to the persons entitled thereto, of the principal (and premium,
if any) and interest for whose payment such money has been deposited with the
Indenture Trustee; but such money need not be segregated from other funds except
to the extent required by law.

                                  ARTICLE FIVE
                                    REMEDIES

     SECTION 5.01. Event of Default.

     "Event of Default", wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law pursuant to any
judgment, decree or order of any court on any order, rule or regulation of any
administrative or governmental body):

          (1)  default in the payment of any interest upon any Note when it
     becomes due and payable, and continuance of such default for a period of 30
     days; or

          (2)  default in the payment of the principal of (and premium, if any,
     on) any Note at its Maturity; or

          (3)  default in the performance, or breach, of any covenant or
     warranty of the Trust in this Indenture (other than a covenant or warranty
     a default in whose performance or whose breach is elsewhere in this Section
     specifically dealt with), and continuance of such default or breach for a
     period of 60 days after there has been given, by registered or certified
     mail, to the Trust by the Indenture Trustee or to the Trust and the
     Indenture Trustee by the Holders of at least 25% in principal amount of the
     Outstanding Notes, a written notice specifying such default or breach and
     requiring it to be remedied and stating that such notice is a "Notice of
     Default" hereunder; or

          (4)  the entry of a decree or order by a court having jurisdiction in
     the premises adjudging the Trust a bankrupt or insolvent, or approving as
     properly filed a petition seeking reorganization, arrangement, adjustment
     or composition of or in respect of the Trust under the Federal Bankruptcy
     Act or any other applicable Federal or State law, or appointing a receiver,
     liquidator, assignee, trustee, sequestrator (or other similar official) of
     the Trust or of any substantial part of its property, or ordering the
     winding up or liquidation of its affairs, and the continuance of any such
     decree or order unstayed and in effect for a period of 60 consecutive days;
     or

          (5)  the institution by the Trust of proceedings to be adjudicated a
     bankrupt or insolvent, or the consent by it to the institution of
     bankruptcy or insolvency proceedings against it, or the filing by it of a
     petition or answer or consent seeking reorganization or relief under the
     Federal Bankruptcy Act or any other applicable Federal or State law, or the
     consent by it to the filing of any such petition or to the appointment of a
     receiver, liquidator, assignee,

                                       18

<PAGE>

     trustee, sequestrator (or other similar official) of the Trust or of any
     substantial part of its property, or the making by it of an assignment for
     the benefit of creditors, or the admission by it in writing of its
     inability to pay its debts generally as they became due, or the taking of
     action by the Trustees in furtherance of any such action; or

          (6)  B. F. Saul Advisory Company, L.L.C. ceases to be the investment
     advisor to the Trust without being immediately replaced by another entity
     the majority voting interest of which is owned or controlled, directly or
     indirectly, by the B. F. Saul Company, B. Francis Saul II, B. Francis Saul
     III, members of their immediate families, or trusts created solely for the
     benefit of the foregoing persons.

     SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.

     If an Event of Default occurs and is continuing, then and in every such
case the Indenture Trustee or the Holders of not less than 25% in principal
amount of the Notes Outstanding may declare the principal of all the Notes to be
due and payable immediately, by a notice in writing to the Trust (and to the
Indenture Trustee if given by Noteholders), and upon any such declaration such
principal shall become immediately due and payable.

     At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Indenture Trustee as hereinafter in this Article provided, the Holders of a
majority in principal amount of the Notes Outstanding, by written notice to the
Trust and the Indenture Trustee, may rescind and annul such declaration and its
consequences if

          (1)  the Trust has paid or deposited with the Indenture Trustee a sum
     sufficient to pay

               (A)  all overdue installments of interest on all Notes,

               (B)  the principal of (and premium, if any, on) any Notes which
     have become due otherwise than by such declaration of acceleration and
     interest thereon at the rate borne by the Notes,

               (C)  to the extent that payment of such interest is lawful,
     interest upon overdue installments of interest at the rate borne by the
     Notes, and

               (D)  all sums paid or advanced by the Indenture Trustee hereunder
     and the reasonable compensation, expenses, disbursements and advances of
     the Indenture Trustee, its agents and counsel; and

          (2)  all Events of Default, other than the non-payment of the
     principal of Notes which have become due solely by such acceleration, have
     been cured or waived as provided in Section 5.13.

No such rescission shall affect any subsequent default or impair any right
consequent thereto.

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     SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Indenture Trustee.

     The Trust covenants that if

          (1)  default is made in the payment of any interest on any Note when
     such interest becomes due and payable and such default continues for a
     period of 30 days, or

          (2)  default is made in the payment of the principal of (or premium,
     if any, on) any Note at the Maturity thereof,

the Trust will, upon demand of the Indenture Trustee, pay to it, for the benefit
of the Holders of such Notes, the whole amount then due and payable on such
Notes for principal (and premium, if any) and interest, with interest upon the
overdue principal (and premium, if any) and, to the extent that payment of such
interest shall be legally enforceable, upon overdue installments of interest, at
the rate borne by the Notes; and, in addition thereto, such further amount as
shall be sufficient to cover the cost and expenses of collection, including the
reasonable, compensation, expenses, disbursements and advances of the Indenture
Trustee, its agents and counsel.

     If the Trust fails to pay such amount forthwith upon such demand, the
Indenture Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid, and may prosecute such proceeding to judgment or final decree, and may
enforce the same against the Trust or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Trust or any other obligor upon the Notes,
wherever situated.

     If an Event of Default occurs and is continuing, the Indenture Trustee may
in its discretion proceed to protect and enforce its rights and the rights of
the Noteholders by such appropriate judicial proceedings as the Indenture
Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.

     SECTION 5.04. Indenture Trustee May File Proofs of Claim.

     In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Trust or any other obligor upon the Notes or
the property of the Trust or of such other obligor or their creditors, the
Indenture Trustee (irrespective of whether the principal of any of the Notes
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Indenture Trustee shall have made any
demand on the Trust for the payment of overdue principal or interest) shall be
entitled and empowered, by intervention in such proceeding or otherwise

                   (i)  to file and prove a claim for the whole amount of
                 principal (and premium, if any) and interest owing and unpaid
                 in respect of the Notes and to file such other papers or
                 documents as may be necessary or advisable in order to have the
                 claims of the Indenture Trustee (including any claim for the
                 reasonable compensation, expenses, disbursements and advances
                 of the Indenture Trustee, its agents and counsel) and of the
                 Noteholders allowed in such judicial proceeding, and

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<PAGE>

                    (ii) to collect and receive any moneys or other property
               payable or deliverable on any such claims and to distribute the
               same; and any receiver, assignee, trustee, liquidator,
               sequestrator or other similar official in any such judicial
               proceeding is hereby authorized by each Noteholder to make such
               payments to the Indenture Trustee, and in the event that the
               Indenture Trustee shall consent to the making of such payments
               directly to the Noteholders, to pay to the Indenture Trustee any
               amount due to it for the reasonable compensation, expenses,
               disbursements and advances of the Indenture Trustee, its agents
               and counsel, and any other amounts due the Indenture Trustee
               under Section 6.07.

     Nothing herein contained shall be deemed to authorize the Indenture Trustee
to authorize or consent to or accept or adopt on behalf of any Noteholder any
plan of reorganization, arrangement, adjustment or composition affecting the
Notes or the rights of any Holder thereof, or to authorize the Indenture Trustee
to vote in respect of the claim of any Noteholder in any such proceeding.

     SECTION 5.05. Indenture Trustee May Enforce Claims Without Possession of
Notes.

     All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Indenture Trustee without the possession of any
of the Notes or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Indenture Trustee shall be brought in its
own name, as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Notes in respect of which such
judgment has been recovered.

     SECTION 5.06. Application of Money Collected.

     Any money collected by the Indenture Trustee pursuant to this Article shall
be applied in the following order, at the date or dates fixed by the Indenture
Trustee and, in case of the distribution of such money on account of principal
or interest, upon presentation of the Notes and the notation thereon of the
payment, if only partially paid, and upon surrender thereof, if fully paid:

          FIRST:   To the payment of all amounts due the Indenture Trustee under
     Section 6.07;

          SECOND:  To the payment of the amounts then due and unpaid upon the
     Notes for principal (and premium, if any) and interest, in respect of which
     or for the benefit of which such money has been collected, ratably, without
     preference or priority of any kind, according to the amounts due and
     payable on such Notes for principal (and premium, if any) and interest,
     respectively; and

          THIRD:   The balance, if any, to the Person or Persons entitled
     thereto.

     SECTION 5.07. Limitation on Suits.

     No Holder of any Note shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless

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<PAGE>

          (1)  such Holder has previously given written notice to the Indenture
     Trustee of a continuing Event of Default;

          (2)  the Holders of not less than 25% in principal amount of the
     Outstanding Notes shall have made written request to the Indenture Trustee
     to institute proceedings in respect of such Event of Default in its own
     name as Indenture Trustee hereunder;

          (3)  such Holder or Holders have offered to the Indenture Trustee
     reasonable indemnity against the costs, expenses and liabilities to be
     incurred in compliance with such request;

          (4)  the Indenture Trustee for 60 days after its receipt of such
     notice, request and offer of indemnity has failed to institute any such
     proceedings; and

          (5)  no direction inconsistent with such written request has been
     given to the Indenture Trustee during such 60-day period by the Holders of
     a majority in principal amount of the Outstanding Notes;

it being understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Notes, or to obtain or to seek to obtain priority or preference over
any other Holders or to enforce any right under this Indenture, except in the
manner herein provided and for the equal and ratable benefit of all the Holders
of Notes.

     SECTION 5.08. Unconditional Right of Noteholders to Receive Principal and
Interest.

     Notwithstanding any other provision in this Indenture, the Holder of any
Note shall have the right which is absolute and unconditional to receive payment
of the principal of (and premium, if any) and (subject to Section 3.07) interest
on such Note on the respective Stated Maturities expressed in such Note (or, in
the case of redemption, on the Redemption Date) and to institute suit for the
enforcement of any such payment, and such right shall not be impaired without
the consent of such Holder.

     SECTION 5.09. Restoration of Rights and Remedies.

     If the Indenture Trustee or any Noteholder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Indenture Trustee or to such Noteholder, then and in every such case the
Trust, the Indenture Trustee and the Noteholders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Indenture Trustee and the Noteholders shall continue as though no such
proceeding had been instituted.

     SECTION 5.10. Rights and Remedies Cumulative.

     Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Notes in the last paragraph of Section
3.06, no right or remedy herein conferred upon or reserved to the Indenture
Trustee or to the Noteholders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any

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<PAGE>

right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.

     SECTION 5.11. Delay or Omission Not Waiver.

     No delay or omission of the Indenture Trustee or of any Holder of any Note
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by law
to the Indenture Trustee or to the Noteholders may be exercised from time to
time, and as often as may be deemed expedient, by the Indenture Trustee or by
the Noteholders, as the case may be.

     SECTION 5.12. Control by Noteholders.

     The Holders of a majority in principal amount of the Outstanding Notes
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee or exercising any
trust or power conferred on the Indenture Trustee, provided that

          (1)  such direction shall not be in conflict with any rule of law or
     with this Indenture, and

          (2)  the Indenture Trustee may take any other action deemed proper by
     the Indenture Trustee which is not inconsistent with such direction.

     SECTION 5.13. Waiver of Past Defaults.

     Subject to Section 5.02, the Holders of not less than a majority in
principal amount of the Outstanding Notes may on behalf of the Holders of all
the Notes waive any past default hereunder and its consequences, except a
default

          (1)  in respect of the payment of the principal of (or premium, if
     any, on) or interest on any Note, or

          (2)  in respect of a covenant or provision hereof which under Article
     Nine cannot be modified or amended without the consent of the Holder of
     each Outstanding Note affected.

     Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereto.

     SECTION 5.14. Undertaking for Costs.

     The parties to this Indenture agree, and each Holder of any Note by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Indenture Trustee for any action
taken or omitted by it as Indenture Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Indenture Trustee, to any suit instituted by any Noteholder, or group of
Noteholders, holding in the aggregate more than 25% in principal amount of the
Outstanding Notes, or to any

                                       23

<PAGE>

suit instituted by any Noteholder for the enforcement of the payment of the
principal of (or premium, if any, on) or interest on any Note on or after the
respective Stated Maturities expressed in such Note (or, in the case of
redemption, on or after the Redemption Date).

     SECTION 5.15. Waiver of Stay or Extension Laws.

     The Trust covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law wherever enacted, now or
at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Trust (to the extent that it may lawfully
do so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Indenture Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.

                                  ARTICLE SIX
                              THE INDENTURE TRUSTEE

     SECTION 6.01. Certain Duties and Responsibilities.

     (a)  Except during the continuance of an Event of Default,

          (1)  the Indenture Trustee undertakes to perform such duties and only
     such duties as are specifically set forth in this Indenture and no implied
     covenants or obligations shall be read into this Indenture against the
     Indenture Trustee; and

          (2)  in the absence of bad faith on its part, the Indenture Trustee
     may conclusively rely, as to the truth of the statements and the
     correctness of the opinions expressed therein, upon certificates or
     opinions furnished to the Indenture Trustee and conforming to the
     requirements of this Indenture; but in the case of any such certificates or
     opinions which by any provision hereof are specifically required to be
     furnished to the Indenture Trustee, the Indenture Trustee shall be under a
     duty to examine the same to determine whether or not they conform to the
     requirements of this Indenture.

     (b)  In case an Event of Default has occurred and is continuing, the
Indenture Trustee shall exercise such of the rights and powers vested in it by
this Indenture, and use the same degree of care and skill in their exercise, as
a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.

     (c)  No provision of this Indenture shall be construed to relieve the
Indenture Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that

          (1)  this Subsection shall not be construed to limit the effect of
     Subsection (a) of this Section;

          (2)  the Indenture Trustee shall not be liable for any error of
     judgment made in good faith by a Responsible Officer, unless it shall be
     proved that the Indenture Trustee was negligent in ascertaining the
     pertinent facts;

          (3)  the Indenture Trustee shall not be liable with respect to any
     action taken or omitted to be taken by it in good faith in

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<PAGE>

     accordance with the direction of the Holders of a majority in principal
     amount of the Outstanding Notes relating to the time, method and place of
     conducting any proceeding for any remedy available to the Indenture
     Trustee, or exercising any trust or power conferred upon the Indenture
     Trustee, under this Indenture; and

          (4)  no provision of this Indenture shall require the Indenture
     Trustee to expend or risk its own funds or otherwise incur any financial
     liability in the performance of any of its duties hereunder, or in the
     exercise of any of its rights or powers, if it shall have reasonable
     grounds for believing that repayment of such funds or adequate indemnity
     against such risk or liability is not reasonably assured to it.

     (d)  Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Indenture Trustee shall be subject to the provisions of this
Section.

     SECTION 6.02. Notice of Defaults.

     Within 90 days after the occurrence of any default hereunder, the Indenture
Trustee shall transmit by mail to all Noteholders, as their names and addresses
appear in the Note Register, notice of such default hereunder known to the
Indenture Trustee, unless such default shall have been cured or waived;
provided, however, that, except in the case of a default in the payment of the
principal of or interest on any Note, the Indenture Trustee shall be protected
in withholding such notice if and so long as the board of directors or board of
trustees, the executive committee or a trust committee of directors or trustees
and/or Responsible Officers of the Indenture Trustee in good faith determine
that the withholding of such notice is in the interests of the Noteholders; and
provided, further, that in the case of any default of the character specified in
Section 5.01(3) no such notice to Noteholders shall be given until at least 60
days after the occurrence thereof. For the purpose of this Section, the term
"default" means any event which is, or after notice or lapse of time or both
would become, an Event of Default.

     SECTION 6.03. Certain Rights of Indenture Trustee.

     Except as otherwise provided in Section 6.01:

     (a)  the Indenture Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note or other paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties;

     (b)  any request or direction of the Trust mentioned herein shall be
sufficiently evidenced by a Trust Request or Trust Order and any resolution of
the Trustees may be sufficiently evidenced by a Trustees' Resolution;

     (c)  whenever in the administration of this Indenture the Indenture Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Indenture Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, rely upon an Officers' Certificate;

     (d)  the Indenture Trustee may consult with counsel and the written advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization

                                       25

<PAGE>

and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;

       (e)    the Indenture Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Noteholders pursuant to this Indenture, unless such
Noteholders shall have offered to the Indenture Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;

       (f)    the Indenture Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note or other paper or document, but the Indenture Trustee, in its
discretion, may make such further inquiry or investigation into such facts or
matters as it may see fit, and, if the Indenture Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Trust, personally or by agent or attorney;
and

       (g)    the Indenture Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Indenture Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due
care by it hereunder.

       SECTION 6.04.   Not Responsible for Recitals or Issuance of Notes.

       The recitals contained herein and in the Notes, except the certificates
of authentication, shall be taken as the statements of the Trust, and the
Indenture Trustee assumes no responsibility for their correctness. The Indenture
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes. The Indenture Trustee shall not be accountable for
the use or application by the Trust of the Notes or the proceeds thereof.

       SECTION 6.05.   May Hold Notes.

       The Indenture Trustee, any Paying Agent, Note Registrar or any other
agent of the Trust, in its individual or any other capacity, may become the
owner or pledgee of Notes and, subject to Sections 6.08 and 6.13, may otherwise
deal with the Trust with the same rights it would have if it were not Indenture
Trustee, Paying Agent, Note Registrar or such other agent.

       SECTION 6.06.   Money Held in Trust.

       All money received by the Indenture Trustee shall, until used or applied
as herein provided, be held in trust hereunder for the purposes for which they
were received. Money held by the Indenture Trustee in trust hereunder need not
be segregated from other funds except to the extent required by law. The
Indenture Trustee shall be under no liability for interest on any money received
by it hereunder except as otherwise agreed with the Trust.

       SECTION 6.07.   Compensation and Reimbursement.

       The Trust agrees

              (1)    to pay to the Indenture Trustee from time to time
       reasonable compensation for all services rendered by it hereunder (which
       compensation shall not be limited by any provision of law in regard to
       the compensation of a trustee of an express trust);

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<PAGE>

              (2)    except as otherwise expressly provided herein, to reimburse
       the Indenture Trustee upon its request for all reasonable expenses,
       disbursements and advances incurred or made by the Indenture Trustee in
       accordance with any provision of this Indenture (including the reasonable
       compensation and the expenses and disbursements of its agents and
       counsel), except any such expense, disbursement or advance as may be
       attributable to its negligence or bad faith; and

              (3)    to indemnify the Indenture Trustee for, and to hold it
       harmless against, any loss, liability or expense incurred without
       negligence or bad faith on its part, arising out of or in connection with
       the acceptance or administration of this trust, including the costs and
       expenses of defending itself against any claim of liability in connection
       with the exercise or performance of any of its powers or duties
       hereunder.

       As security for the performance of the obligations of the Trust under
this Section the Indenture Trustee shall have a lien prior to the Notes upon all
property and funds held or collected by the Indenture Trustee as such, except
funds held in trust for the payment of principal of, premium, if any, on or
interest on the Notes.

       SECTION 6.08.   Disqualification; Conflicting Interests.

       (a)    If the Indenture Trustee has or shall acquire any conflicting
interest, as defined in this Section, within 90 days after ascertaining that it
has such conflicting interest, and if the default to which such conflicting
interest relates has not been cured or duly waived or otherwise eliminated
before the end of such 90 day period, the Indenture Trustee shall either
eliminate such conflicting interest or resign in the manner and with the effect
hereinafter specified in this Article.

       (b)    In the event that the Indenture Trustee shall fail to comply with
the provisions of Subsection (a) of this Section, the Indenture Trustee shall,
within 10 days after the expiration of such 90 day period, transmit by mail to
all Noteholders, as their names and addresses appear in the Note Register,
notice of such failure.

       (c)    For the purpose of this Section, the Indenture Trustee shall be
deemed to have a conflicting interest if the Notes are in default (as defined
herein) and

              (1)    the Indenture Trustee is trustee under another indenture
       under which any other securities, or certificates of interest or
       participation in any other securities, of the Trust are outstanding,
       unless such other indenture is a collateral trust indenture under which
       the only collateral consists of Notes issued under this Indenture,
       provided that there shall be excluded from the operation of this
       paragraph any indenture or indentures under which other securities, or
       certificates of interest or participation in other securities, of the
       Trust are outstanding, if

                            (i)    this Indenture and such other indenture or
                     indentures are wholly unsecured and rank equally and such
                     other indenture or indentures are specifically described in
                     this Indenture or are hereafter qualified under TIA, unless
                     the Commission shall have found and declared by order
                     pursuant to Section 305(b) or Section 307(c) of TIA that
                     differences exist between the provisions of this Indenture
                     and the provisions of such other indenture or indentures
                     which are so likely to involve a material conflict of

                                       27

<PAGE>

                     interest as to make it necessary in the public interest or
                     for the protection of investors to disqualify the Indenture
                     Trustee from acting as such under this Indenture and such
                     other indenture or indentures, or

                            (ii)   the Trust shall have sustained the burden of
                     proving, on application to the Commission and after
                     opportunity for hearing thereon, that trusteeship under
                     this Indenture and such other indenture or indentures is
                     not so likely to involve a material conflict of interest as
                     to make it necessary in the public interest or for the
                     protection of investors to disqualify the Indenture Trustee
                     from acting as such under one of such indentures.

       The following indentures shall be deemed to be "specifically described"
in this Indenture for purposes of Section 310(b)(iii)(1)(C)(i) of the Trust
Indenture Act:

              B.F. Saul Real Estate Investment Trust Notes Due
              from One to Ten Years of Date of Issue (Indenture
              dated September 1, 1992) and First and Second
              Supplemental Indentures thereto;

              (2)    the Indenture Trustee or any of its directors or executive
       officers is an underwriter for an obligor upon the Notes;

              (3)    the Indenture Trustee directly or indirectly controls or is
       directly or indirectly controlled by or is under direct or indirect
       common control with an underwriter for an obligor upon the Notes;

              (4)    the Indenture Trustee or any of its directors or executive
       officers is a Trustee or director, officer, partner, employee, appointee
       or representative of the Trust, or of an underwriter (other than the
       Indenture Trustee itself) for the Trust who is currently engaged in the
       business of underwriting, except that (i) one individual may be a
       director or an executive officer, or both, of the Indenture Trustee and a
       Trustee or an executive officer, or both, of the Trust but may not be at
       the same time an executive officer of both the Indenture Trustee and the
       Trust; (ii) if and so long as the number of directors of the Indenture
       Trustee in office is more than nine, one additional individual may be a
       director or an executive officer, or both, of the Indenture Trustee and a
       Trustee of the Trust; and (iii) the Indenture Trustee may be designated
       by the Trust or by any underwriter for the Trust to act in the capacity
       of transfer agent, registrar, custodian, paying agent, fiscal agent,
       escrow agent, or depositary, or in any other similar capacity, or,
       subject to the provisions of paragraph (1) of this Subsection, to act as
       trustee, whether under an indenture or otherwise;

              (5)    10% or more of the voting securities of the Indenture
       Trustee is beneficially owned either by the Trust or by any Trustee or
       executive officer thereof, or 20% or more of such voting securities is
       beneficially owned, collectively, by any two or more of such persons; or
       10% or more of the voting securities of the Indenture Trustee is
       beneficially owned either by an underwriter for the Trust or by any
       director, partner or executive officer thereof, or is beneficially owned,
       collectively, by any two or more such persons;

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<PAGE>

              (6)    the Indenture Trustee is the beneficial owner of, or holds
       as collateral security for an Obligation which is in default (as
       hereinafter in this Subsection defined), (i) 5% or more of the voting
       securities, or 10% or more of any other class of security, of the Trust
       not including the Notes issued under this Indenture and securities issued
       under any other indenture under which the Indenture Trustee is also
       trustee, or (ii) 10% or more of any class of security of an underwriter
       for the Trust;

              (7)    the Indenture Trustee is the beneficial owner of, or holds
       as collateral security for an obligation which is in default (as
       hereinafter in this Subsection defined), 5% or more of the voting
       securities of any person who, to the knowledge of the Indenture Trustee,
       owns 10% or more of the voting securities of, or controls directly or
       indirectly or is under direct or indirect common control with, the Trust;

              (8)    the Indenture Trustee is the beneficial owner of, or holds
       as collateral security for an obligation which is in default (as
       hereinafter in this Subsection defined), 10% or more of any class of
       security of any person who, to the knowledge of the Indenture Trustee,
       owns 50% or more of the voting securities of the Trust; or

              (9)    the Indenture Trustee owns, on the date of default upon the
       Notes or any anniversary of such default while such default remains
       outstanding, in the capacity of executor, administrator, testamentary or
       inter vivos trustee, guardian, committee or conservator, or in any other
       similar capacity, an aggregate of 25% or more of the voting securities,
       or of any class of security, of any person, the beneficial ownership of a
       specified percentage of which would have constituted a conflicting
       interest under paragraphs (6), (7) or (8) of this Subsection. As to any
       such securities of which the Indenture Trustee acquired ownership through
       becoming executor, administrator, or testamentary trustee of an estate
       which included them, the provisions of the preceding sentence shall not
       apply, for a period of two years from the date of such acquisition, to
       the extent that such securities included in such estate do not exceed 25%
       of such voting securities or 25% of any such class of security. Promptly
       after the dates of any such default upon the Notes and annually in each
       succeeding year that the Notes remain in default, the Indenture Trustee
       shall make a check of its holdings of such securities in any of the
       above-mentioned capacities as of such dates. If the Trust fails to make
       payment in full of the principal of, or interest on, any of the Notes
       when and as the same becomes due and payable, and such fail to make
       payment in full of the principal of, or interest on, any of the Notes
       when and as the same becomes due and payable, and such failure continues
       for 30 days thereafter, the Indenture Trustee shall make a prompt check
       of its holdings of such securities in any of the above-mentioned
       capacities as of the date of the expiration of such 30 day period, and
       after such date, notwithstanding the foregoing provisions of this
       paragraph, all such securities so held by the Indenture Trustee, with
       sole or joint control over such securities vested in it, shall, but only
       so long as such failure shall continue, be considered as though
       beneficially owned by the Indenture Trustee for the purposes of
       paragraphs (6), (7) and (8) of this Subsection.

       The specification of percentages in paragraphs (5) to (9), inclusive, of
this Subsection shall not be construed as indicating that the ownership of such
percentages of the securities of a person is or is not necessary or sufficient
to

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<PAGE>

constitute direct or indirect control for the purposes of paragraphs (3) or (7)
of this Subsection.

       For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay moneys lent to a person by one or more banks, trust companies or banking
firms, or any certificate of interest or participation in any such note or
evidence of indebtedness; (ii) an obligation shall be deemed to be "in default"
when a default in payment of principal shall have continued for 30 days or more
and shall not have been cured; and (iii) the Indenture Trustee shall not be
deemed to be the owner or holder of (A) any security which it holds as
collateral security, as trustee or otherwise, for an obligation which is not in
default as defined in clause (ii) above, or (B) any security which it holds as
collateral security under this Indenture, irrespective of any default hereunder,
or (C) any security which it holds as agent for collection, or as custodian,
escrow agent, or depositary, or in any similar representative capacity.

       (d)    For the purposes of this Section:

              (1)    The term "underwriter" when used with reference to the
       Trust means every person who, within one year prior to the time as of
       which the determination is made, has purchased from the Trust with a view
       to, or has offered or sold for the Trust in connection with, the
       distribution of any security of the Trust outstanding at such time, or
       has participated or has had a direct or indirect participation in any
       such undertaking, or has participated or has had a participation in the
       direct or indirect underwriting of any such undertaking, but such term
       shall not include a person whose interest was limited to a commission
       from an underwriter or dealer not in excess of the usual and customary
       distributors' or sellers' commission.

              (2)    The term "director" means any director of a corporation, or
       any individual performing similar functions with respect to any
       organization whether incorporated or unincorporated.

              (3)    The term "person" means an individual, a corporation, a
       partnership, an association, a joint stock company, a trust, an
       unincorporated organization, or a government or political subdivision
       thereof. As used in this paragraph, the term "trust" shall include only a
       trust where the interest or interests of the beneficiary or beneficiaries
       are evidenced by a security.

              (4)    The term "voting security" means any security presently
       entitling the owner or holder thereof to vote in the direction or
       management of the affairs of a person, or any security issued under or
       pursuant to any trust, agreement or arrangement whereby a trustee or
       trustees or agent or agents for the owner or holder of such security are
       presently entitled to vote in the direction or management of the affairs
       of a person.

              (5)    The term "Trust" means any obligor upon the Notes.

              (6)    The term "executive officer" means the president, every
       vice president, every trust officer, the cashier, the secretary, and the
       treasurer of a corporation, and any individual customarily performing
       similar functions with respect to any organization whether

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<PAGE>

       incorporated or unincorporated, but shall not include the chairman of the
       board of directors.

       (e)    The percentages of voting securities and other securities
specified in this Section shall be calculated in accordance with the following
provisions.

              (1)    A specified percentage of the voting securities of the
       Indenture Trustee, the Trust or any other person referred to in this
       Section (each of whom is referred to as a "person " in this paragraph)
       means such amount of the outstanding voting securities of such person as
       entitles the holder or holders thereof to cast such specified percentage
       of the aggregate votes which the holders of all the outstanding voting
       securities of such person are entitled to cast in the direction or
       management of the affairs of such person.

              (2)    A specified percentage of a class of securities of a person
       means such percentage of the aggregate amount of securities of the class
       outstanding.

              (3)    The term "amount" when used in regard to securities means
       the principal amount if relating to evidences of indebtedness, the number
       of shares if relating to capital shares, and the number of units if
       relating to any other kind of security.

              (4)    The term "outstanding" means issued and not held by or for
       the account of the issuer. The following securities shall not be deemed
       outstanding within the meaning of this definition:

                            (i)   securities of an issuer held in a sinking fund
                     relating to securities of the issuer of the same class;

                            (ii)  securities of an issuer held in a sinking fund
                     relating to another class of securities of the issuer, if
                     the obligation evidenced by such other class of securities
                     is not in default as to principal or interest or otherwise;

                            (iii) securities pledged by the issuer thereof as
                     security for an obligation of the issuer not in default as
                     to principal or interest or otherwise; and

                            (iv)  securities held in escrow if placed in escrow
                     by the issuer thereof; provided, however, that any voting
                     securities of an issuer shall be deemed outstanding if any
                     person other than the issuer is entitled to exercise the
                     voting rights thereof.

              (5)    A security shall be deemed to be of the same class as
       another security if both securities confer upon the holder or holders
       thereof substantially the same rights and privileges; provided, however,
       that, in the case of secured evidences of indebtedness, all of which are
       issued under a single indenture, differences in the interest rates or
       maturity dates of various series thereof shall not be deemed sufficient
       to constitute such series different classes and provided, further, that,
       in the case of unsecured evidences of indebtedness, differences in the
       interest rates or maturity dates thereof shall not be deemed sufficient
       to constitute them securities of different classes, whether or not they
       are issued under a single indenture.

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       SECTION 6.09.   Corporate Trustee Required; Eligibility.

       There shall at all times be an Indenture Trustee hereunder which shall be
a corporation organized and doing business under the laws of the United States
of America or of any State, authorized under such laws to exercise corporate
trust powers, having a combined capital and surplus of at least $8,000,000, and
subject to supervision or examination by Federal or State authority. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the
Indenture Trustee shall cease to be eligible in accordance with the provisions
of this Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.

       SECTION 6.10.   Resignation and Removal; Appointment of Successor.

       (a)    No resignation or removal of the Indenture Trustee and no
appointment of a successor Indenture Trustee pursuant to this Article shall
become effective until the acceptance of appointment by the successor Indenture
Trustee under Section 6.11.

       (b)    The Indenture Trustee may resign at any time by giving written
notice thereof to the Trust. If an instrument of acceptance by a successor
lndenture Trustee shall not have been delivered to the Indenture Trustee within
30 days after the giving of such notice of resignation, the resigning Indenture
Trustee may petition any court of competent jurisdiction for the appointment of
a successor Indenture Trustee.

       (c)    The Indenture Trustee may be removed at any time by Act of the
Holders of a majority in principal amount of the Outstanding Notes, delivered to
the Indenture Trustee and to the Trust.

       (d)    If at any time:

              (1)    the Indenture Trustee shall fail to comply with Section
       6.08(a) after written request therefor by the Trust or by any Noteholder
       who has been a bona fide Holder of a Note for at least six months, or

              (2)    the Indenture Trustee shall cease to be eligible under
       Section 6.09 and shall fail to resign after written request therefor by
       the Trust or by any such Noteholder, or

              (3)    the Indenture Trustee shall become incapable of acting or
       shall be adjudged a bankrupt or insolvent or a receiver of the Indenture
       Trustee or of its property shall be appointed or any public officer shall
       take charge or control of the Indenture Trustee or of its property or
       affairs for the purpose of rehabilitation, conservation or liquidation,
       then, in any such case, (i) the Trust by a Trustees' Resolution may
       remove the Indenture Trustee, or (ii) subject to Section 5.14, any
       Noteholder who has been a bona fide Holder of a Note for at least six
       months may, on behalf of himself and all others similarly situated,
       petition any court of competent jurisdiction for the removal of the
       Indenture Trustee and the appointment of a successor Indenture Trustee.

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<PAGE>

       (e)    If the Indenture Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Indenture
Trustee for any cause, the Trust, by a Trustees' Resolution, shall promptly
appoint a successor Indenture Trustee. If, within one year after such
resignation, removal or incapability, or the occurrence of such vacancy, a
successor Indenture Trustee shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Notes delivered to the Trust and
the retiring Indenture Trustee, the successor Indenture Trustee so appointed
shall, forthwith upon its acceptance of such appointment, become the successor
Indenture Trustee and supersede the successor Indenture Trustee appointed by the
Trust. If no successor Indenture Trustee shall have been so appointed by the
Trust or the Noteholders and accepted appointment in the manner hereinafter
provided, any Noteholder who has been a bona fide Holder of a Note for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Indenture
Trustee.

       (f)    The Trust shall give notice of each resignation and each removal
of the Indenture Trustee and each appointment of a successor Indenture Trustee
by mailing written notice of such event by first-class mail, postage prepaid, to
the Holders of Notes as their names and addresses appear in the Note Register.
Each notice shall include the name of the successor Indenture Trustee and the
address of its Corporate Trust Office.

       SECTION 6.11.   Acceptance of Appointment by Successor.

       Every successor Indenture Trustee appointed hereunder shall execute,
acknowledge and deliver to the Trust and to the retiring Indenture Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Indenture Trustee shall become effective and such successor
Indenture Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Indenture
Trustee; but, on request of the Trust or the successor Indenture Trustee, such
retiring Indenture Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Indenture Trustee all the
rights, powers and trusts of the retiring Indenture Trustee and shall duly
assign, transfer and deliver to such successor Indenture Trustee all property
and money held by such retiring Indenture Trustee hereunder, subject
nevertheless to its lien, if any, provided for in Section 6.07. Upon request of
any such successor Indenture Trustee, the Trust shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Indenture Trustee all such rights, powers and trusts.

       No successor Indenture Trustee shall accept its appointment unless at the
time of such acceptance such successor Indenture Trustee shall be qualified and
eligible under this Article.

       SECTION 6.12.   Merger, Conversion, Consolidation or Succession to
Business of Indenture Trustee.

       Any corporation into which the Indenture Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Indenture Trustee
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of the Indenture Trustee, shall be the successor to
the Indenture Trustee hereunder, provided such corporation shall be otherwise
qualified and eligible under this Article, without the execution or filing of
any paper or any further act on the part of any of the parties hereto. In case
any Notes shall have been authenticated, but not yet delivered, by the Indenture
Trustee then in office, any successor by merger, conversion or consolidation to
such authenticating Indenture Trustee may adopt such authentication and deliver
the Notes so authenticated with the same effect as if such successor Indenture
Trustee had itself authenticated

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<PAGE>

such Notes; and in case at that time any of the Notes shall not have been
authenticated, any successor Indenture Trustee may authenticate such Notes
either in the name of any predecessor hereunder or in the name of the successor
Indenture Trustee; and in all such cases such certificates shall have the full
force which it is anywhere in the Notes or in this Indenture provided that the
certificate of the Indenture Trustee shall have; provided, however, that the
right to adopt the certificate of authentication of any predecessor Indenture
Trustee or to authenticate Notes in the name of any predecessor Indenture
Trustee shall apply only to its successor or successors by merger, conversion or
consolidation.

       SECTION 6.13.   Preferential Collection of Claims against Trust.

       (a)    Subject to Subsection (b) of this Section, if the Indenture
Trustee shall be or shall become a creditor, directly or indirectly, secured or
unsecured, of the Trust within three months prior to a default, as defined in
Subsection (c) of this Section, or subsequent to such a default, then, unless
and until such default shall be cured, the Indenture Trustee shall set apart and
hold in a special account for the benefit of the Indenture Trustee individually,
the Holders of the Notes and the holders of other indenture securities (as
defined in Subsection (c) of this Section):

              (1)    an amount equal to any and all reductions in the amount due
       and owing upon any claim as such creditor in respect of principal or
       interest, effected after the beginning of such three months period and
       valid as against the Trust and its other creditors, except any such
       reduction resulting from the receipt or disposition of any property
       described in paragraph (2) of this Subsection, or from the exercise of
       any right of set off which the Indenture Trustee could have exercised if
       a petition in bankruptcy had been filed by or against the Trust upon the
       date of such default; and

              (2)    all property received by the Indenture Trustee in respect
       of any claim as such creditor, either as security therefor, or in
       satisfaction or composition thereof, or otherwise, after the beginning of
       such three months period, or an amount equal to the proceeds of any such
       property, if disposed of, subject, however, to the rights, if any, of the
       Trust and its other creditors in such property or such proceeds.

Nothing herein contained, however, shall affect the right of the Indenture
Trustee

                     (A)    to retain for its own account (i) payments made on
              account of any such claim by any Person (other than the Trust) who
              is liable thereon, and (ii) the proceeds of the bona fide sale of
              any such claim by the Indenture Trustee to a third person, and
              (iii) distributions made in cash, securities or other property in
              respect of claims filed against the Trust in bankruptcy or
              receivership or in proceedings for reorganization pursuant to the
              Federal Bankruptcy Act or applicable State law;

                     (B)    to realize, for its own account, upon any property
              held by it as security for any such claim, if such property was so
              held prior to the beginning of such three months period;

                     (C)    to realize, for its own account, but only to the
              extent of the claim hereinafter mentioned, upon any property held
              by it as security for any such claim, if such claim was created
              after the beginning of such three months period and such property
              was received as security therefor simultaneously with the creation
              thereof, and if the Indenture Trustee shall sustain the

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<PAGE>

              burden of proving that at the time such property was so received
              the Indenture Trustee had no reasonable cause to believe that a
              default as defined in Subsection (c) of this Section would occur
              within three months; or

                     (D)    to receive payment on any claim referred to in
              paragraph (B) or (C) against the release of any property held as
              security for such claim as provided in paragraph (B) or (C), as
              the case may be, to the extent of the fair value of such property.

       For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such three months period for property held as security at
the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released, and, to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre existing claim of the Indenture Trustee as such creditor, such claim
shall have the same status as such pre-existing claim.

       If the Indenture Trustee shall be required to account, the funds and
property held in such special account and the proceeds thereof shall be
apportioned between the Indenture Trustee, the Noteholders and the holders of
other indenture securities in such manner that the Indenture Trustee, the
Noteholders and the holders of other indenture securities realize, as a result
of payments from such special account and payments of dividends on claims filed
against the Trust in bankruptcy or receivership or in proceedings for
reorganization pursuant to the Federal Bankruptcy Act or applicable State law,
the same percentage of their respective claims, figured before crediting to the
claim of the Indenture Trustee anything on account of the receipt by it from the
Trust of the funds and property in such special account and before crediting to
the respective claims of the Indenture Trustee and the Noteholders and the
holders of other indenture securities dividends on claims filed against the
Trust in bankruptcy or receivership or in proceedings for reorganization
pursuant to the Federal Bankruptcy Act or applicable State law, but after
crediting thereon receipts on account of the indebtedness represented by their
respective claims from all sources other than from such dividends and from the
funds and property so held in such special account. As used in this paragraph,
with respect to any claim, the term "dividends" shall include any distribution
with respect to such claim, in bankruptcy or receivership or proceedings for
reorganization pursuant to the Federal Bankruptcy Act or applicable State law,
whether such distribution is made in cash, securities, or other property, but
shall not include any such distribution with respect to the secured portion, if
any, of such claim. The court in which such bankruptcy, receivership or
proceedings for reorganization are pending shall have jurisdiction (i) to
apportion between the Indenture Trustee and the Noteholders and the holders of
other indenture securities, in accordance with the provisions of this paragraph,
the funds and property held in such special account and proceeds thereof, or
(ii) in lieu of such apportionment, in whole or in part, to give to the
provisions of this paragraph due consideration in determining the fairness of
the distributions to be made to the Indenture Trustee and the Noteholders and
the holders of other indenture securities with respect to their respective
claims, in which event it shall not be necessary to liquidate or to appraise the
value of any securities or other property held in such special account or as
security for any such claim, or to make a specific allocation of such
distributions as between the secured and unsecured portions of such claims, or
otherwise to apply the provisions of this paragraph as a mathematical formula.

       Any Indenture Trustee which has resigned or been removed after the
beginning of such three months period shall be subject to the provisions of this
Subsection as though such resignation or removal had not occurred. If any
Indenture Trustee

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<PAGE>

has resigned or been removed prior to the beginning of such three months period,
it shall be subject to the provisions of this Subsection if and only if the
following conditions exist:

                    (i)  the receipt of property or reduction of claim, which
              would have given rise to the obligation to account, if such
              Indenture Trustee had continued as Indenture Trustee, occurred
              after the beginning of such three months period; and

                    (ii) such receipt of property or reduction of claim occurred
              within three months after such resignation or removal.

     (b)  There shall be excluded from the operation of Subsection (a) of this
Section a creditor relationship arising from

          (1) the ownership or acquisition of securities issued under any
     indenture, or any security or securities having a maturity of one year or
     more at the time of acquisition by the Indenture Trustee;

          (2) advances authorized by a receivership or bankruptcy court of
     competent jurisdiction, or by this Indenture, for the purpose of preserving
     any property which shall at any time be subject to the lien of this
     Indenture or of discharging tax liens or other prior liens or encumbrances
     thereon, if notice of such advances and of the circumstances surrounding
     the making thereof is given to the Noteholders at the time and in the
     manner provided in this Indenture;

          (3) disbursements made in the ordinary course of business in the
     capacity of trustee under an indenture, transfer agent, registrar,
     custodian, paying agent, fiscal agent or depositary, or other similar
     capacity;

          (4) an indebtedness created as a result of services rendered or
     premises rented; or an indebtedness created as a result of goods or
     securities sold in a cash transaction as defined in Subsection (c) of this
     Section;

          (5) the ownership of stock or of other securities of a corporation
     organized under the provisions of Section 25(a) of the Federal Reserve Act,
     as amended, which is directly or indirectly a creditor of the Trust; or

          (6) the acquisition, ownership, acceptance or negotiation of any
     drafts, bills of exchange, acceptances or obligations which fall within the
     classification of self liquidating paper as defined in Subsection (c) of
     this Section.

     (c)  For the purposes of this Section only:

          (1) The term "default" means any failure to make payment in full of
     the principal of or interest on any of the Notes or upon the other
     indenture securities when and as such principal or interest becomes due and
     payable.

          (2) The term "other indenture securities" means securities upon which
     the Trust is an obligor outstanding under any other indenture (i) under
     which the Indenture Trustee is also trustee, (ii) which contains

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<PAGE>

     provisions substantially similar to the provisions of this Section, and
     (iii) under which a default exists at the time of the apportionment of the
     funds and property held in such special account.

          (3) The term "cash transaction" means any transaction in which full
     payment for goods or securities sold is made within seven days after
     delivery of the goods or securities in currency or in checks or other
     orders drawn upon banks or bankers and payable upon demand.

          (4) The term "self-liquidating paper" means any draft, bill of
     exchange, acceptance or obligation which is made, drawn, negotiated or
     incurred by the Trust for the purpose of financing the purchase,
     processing, manufacturing, shipment, storage or sale of goods, wares or
     merchandise and which is secured by documents evidencing title to,
     possession of, or a lien upon, the goods, wares or merchandise or the
     receivables or proceeds arising from the sale of the goods, wares or
     merchandise previously constituting the security, provided the security is
     received by the Indenture Trustee simultaneously with the creation of the
     creditor relationship with the Trust arising from the making, drawing,
     negotiating or incurring of the draft, bill of exchange, acceptance or
     obligation.

          (5) The term "Trust" means any obligor upon the Notes.

                                 ARTICLE SEVEN
          NOTEHOLDERS' LISTS AND REPORTS BY INDENTURE TRUSTEE AND TRUST

     SECTION 7.01. Trust to Furnish Indenture Trustee Names and Addresses of
Noteholders.

     The Trust and any other obligor on the Notes will furnish or cause to be
furnished to the Indenture Trustee

     (a) semi-annually, not more than 15 days after each June 15 and December
15, a list, in such form as the Indenture Trustee may reasonably require, of the
names and addresses of the Holders of Notes as of such date, and

     (b) at such other times as the Indenture Trustee may request in writing,
within 30 days after the receipt by the Trust of any such request, a list of
similar form and content as of a date not more than 15 days prior to the time
such list is furnished, provided that no such list need be furnished so long as
the Indenture Trustee is the Note Registrar hereunder.

     SECTION 7.02. Preservation of Information; Communications to Noteholders.

     (a) The Indenture Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders of Notes contained in
the most recent list furnished to the Indenture Trustee as provided in Section
7.01 and the names and addresses of Holders of Notes received by the Indenture
Trustee in its capacity as Note Registrar. The Indenture Trustee may destroy any
list furnished to it as provided in Section 7.01 upon receipt of a new list so
furnished.

     (b) If three or more Holders of Notes (hereinafter referred to as
"applicants") apply in writing to the Indenture Trustee, and furnish to the
Indenture Trustee reasonable proof that each such applicant has owned a Note for
a period of at least six months preceding the date of such application, and such
application states that the applicants desire to communicate with other Holders
of Notes with respect to their rights under this Indenture or under the Notes
and is

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<PAGE>

accompanied by a copy of the form of proxy or other communication which such
applicants propose to transmit, then the Indenture Trustee shall, within five
Business Days after the receipt of such application, at its election, either

                    (i)  afford such applicants access to the information
               preserved at the time by the Indenture Trustee in accordance with
               Subsection (a) of this Section, or

                    (ii) inform such applicants as to the approximate number of
               Holders of Notes whose names and addresses appear in the
               information preserved at the time by the Indenture Trustee in
               accordance with Subsection (a) of this Section, and as to the
               approximate cost of mailing to such Noteholders the form of proxy
               or other communication, if any, specified in such application.

     If the Indenture Trustee shall elect not to afford such applicants access
to such information, the Indenture Trustee shall, upon the written request of
such applicants, mail to each Noteholder whose name and address appear in the
information preserved at the time by the Indenture Trustee in accordance with
Subsection (a) of this Section, a copy of the form of proxy or other
communication which is specified in such request, with reasonable promptness
after a tender to the Indenture Trustee of the material to be mailed and of
payment, or provisions for the payment, of the reasonable expenses of mailing
unless within five days after such tender the Indenture Trustee shall mail to
such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Indenture Trustee, such mailing would be contrary to the best interests of
the Holders of Notes or would be in violation of applicable law. Such written
statement shall specify the basis of such opinion. If the Commission, after
opportunity for a hearing upon the objections specified in the written statement
so filed, shall enter an order refusing to sustain any of such objections or if,
after the entry of an order sustaining one or more of such objections, the
Commission shall find, after notice and opportunity for hearing, that all the
objections so sustained have been met and shall enter an order so declaring, the
Indenture Trustee shall mail copies of such material to all such Noteholders
with reasonable promptness after the entry of such order and the renewal of such
tender; otherwise the Indenture Trustee shall be relieved of any obligation or
duty to such applicants respecting their application.

     (c)  Every Holder of Notes, by receiving and holding the same, agrees with
the Trust and the Indenture Trustee that neither the Trust nor the Indenture
Trustee shall be held accountable by reason of the disclosure of any such
information as to the names and addresses of the Holders of Notes in accordance
with Subsection (b) of this Section, regardless of the source from which such
information was derived, and that the Indenture Trustee shall not be held
accountable by reason of mailing any material pursuant to a request made under
Subsection (b) of this Section.

     SECTION 7.03. Reports by Indenture Trustee.

     (a)  The term "reporting date", as used in this Section, means May 15,
beginning May 15, 2003. Within 60 days after the reporting date in each year,
the Indenture Trustee shall transmit by mail to all Noteholders, as their names
and addresses appear in the Note Register, a brief report dated as of such
reporting date with respect to:

          (1) its eligibility under Section 6.09 and its qualifications under
     Section 6.08, or in lieu thereof, if to the best of its knowledge

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     it has continued to be eligible and qualified under said Sections, a
     written statement to such effect;

          (2) the character and amount of any advances (and if the Indenture
     Trustee elects so to state, the circumstances surrounding the making
     thereof) made by the Indenture Trustee (as such) which remain unpaid on the
     date of such report, and for the reimbursement of which it claims or may
     claim a lien or charge, prior to that of the Notes, on any property or
     funds held or collected by it as Indenture Trustee, except that the
     Indenture Trustee shall not be required (but may elect) to report such
     advances if such advances so remaining unpaid aggregate not more than 1/2
     of 1% of the principal amount of the Notes Outstanding on the date of such
     report;

          (3) the amount, interest rate and maturity date of all other
     indebtedness owing by the Trust (or by any other obligor on the Notes) to
     the Indenture Trustee in its individual capacity, on the date of such
     report, with a brief description of any property held as collateral
     security therefor, except an indebtedness based upon a creditor
     relationship arising in any manner described in Section 6.13(b) (2), (3),
     (4) or (6);

          (4) the property and funds, if any, physically in the possession of
     the Indenture Trustee as such on the date of such report;

          (5) any additional issue of Notes which the Indenture Trustee has not
     previously reported; and

          (6) any action taken by the Indenture Trustee in the performance of
     its duties hereunder which it has not previously reported and which in its
     opinion materially affects the Notes, except action in respect of a
     default, notice of which has been or is to be withheld by the Indenture
     Trustee in accordance with Section 6.02.

     (b)  The Indenture Trustee shall transmit by mail to all Noteholders, as
their names and addresses appear in the Note Register, a brief report with
respect to the character and amount of any advances, and, if the Indenture
Trustee elects so to state, the circumstances surrounding the making thereof,
made by the Indenture Trustee (as such) since the date of the last report
transmitted pursuant to Subsection (a) of this Section (or if no such report has
yet been so transmitted, since the date of execution of this instrument) for the
reimbursement of which it claims or may claim a lien or charge, prior to that of
the Notes, on property or funds held or collected by it as Indenture Trustee,
and which it has not previously reported pursuant to this Subsection, except
that the Indenture Trustee shall not be required (but may elect) to report such
advances if such advances remaining unpaid at any time aggregate 10% or less of
the principal amount of the Notes Outstanding at such time, such report to be
transmitted within 90 days after such time.

     (c)  A copy of each such report shall, at the time of such transmission to
Noteholders, be filed by the Indenture Trustee with each stock exchange upon
which the Notes are listed, and also with the Commission. The Trust will notify
the Indenture Trustee when the Notes are listed on any stock exchange.

     SECTION 7.04. Reports by Trust.

     The Trust will

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<PAGE>

          (1) file with the Indenture Trustee, within 15 days after the Trust is
     required to file the same with the Commission, copies of the annual reports
     and of the information, documents and other reports (or copies of such
     portions of any of the foregoing as the Commission may from time to time by
     rules and regulation prescribe) which the Trust may be required to file
     with the Commission pursuant to Section 13 or Section 15(d) of the
     Securities Exchange Act of 1934; or, if the Trust is not required to file
     information, documents or reports pursuant to either of said Sections, then
     it will file with the Indenture Trustee and the Commission, in accordance
     with rules and regulations prescribed from time to time by the Commission,
     such of the supplementary and periodic information, documents and reports
     which may be required pursuant to Section 13 of the Securities Exchange Act
     of 1934 in respect of a security listed and registered on a national
     securities exchange as may be prescribed from time to time in such rules
     and regulations;

          (2) file with the Indenture Trustee and the Commission, in accordance
     with rules and regulations prescribed from time to time by the Commission,
     such additional information, documents and reports with respect to
     compliance by the Trust with the conditions and covenants of this Indenture
     as may be required from time to time by such rules and regulations; and

          (3) transmit by mail to all Noteholders, as their names and addresses
     appear in the Note Register, within 30 days after the filing thereof with
     the Indenture Trustee, such summaries of any information, documents and
     reports required to be filed by the Trust pursuant to paragraphs (1) and
     (2) of this Section as may be required by rules and regulations prescribed
     from time to time by the Commission.

                                 ARTICLE EIGHT
                  CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER

     SECTION 8.01. Trust May Consolidate, etc., only on Certain Terms.

     The Trust shall not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, other than a transfer pursuant to Section 8.03 hereof, unless:

          (1) the Person formed by such consolidation or into which the Trust is
     merged or the Person which acquires by conveyance or transfer the
     properties and assets of the Trust substantially as an entirety shall be a
     voluntary association, corporation or other entity organized and existing
     under the laws of the United States of America or any State or the District
     of Columbia, and shall expressly assume, by an indenture supplemental
     hereto, executed and delivered to the Indenture Trustee, in form
     satisfactory to the Indenture Trustee, the due and punctual payment of the
     principal of and interest on all the Notes and the performance of every
     covenant of this Indenture on the part of the Trust to be performed or
     observed;

          (2) immediately after giving effect to such transaction, no Event of
     Default, and no event which, after notice or lapse of time, or both, would
     become an Event of Default, shall have happened and be continuing; and

          (3) the Trust has delivered to the Indenture Trustee an Officers'
     Certificate and an Opinion of Counsel each stating that such

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<PAGE>

         consolidation, merger, conveyance or transfer and such supplemental
         indenture comply with this Article and that all conditions precedent
         herein provided for relating to such transaction have been complied
         with.

         SECTION 8.02. Successor Substituted.

         Upon any consolidation or merger, or any conveyance or transfer of the
properties and assets of the Trust substantially as an entirety in accordance
with Section 8.01, the successor formed by such consolidation or into which the
Trust is merged or to which such conveyance or transfer is made shall succeed
to, and be substituted for, and may exercise every right and power of, the Trust
under this Indenture with the same effect as if such successor had been named as
the Trust herein. When a successor assumes all of the obligations of its
predecessor under this Indenture and the Notes, the predecessor shall be
released from such obligations. In the event of any such conveyance or transfer,
the Trust may be dissolved, wound up and liquidated at any time thereafter.

         SECTION 8.03. Transfer of Chevy Chase Bank, F.S.B. Capital Stock.

         The Trust may at any time, so long as no Event of Default has occurred
and is continuing under this Indenture, without the consent of the Noteholders
and notwithstanding the other provisions of this Indenture, transfer the capital
stock of Chevy Chase Bank, F.S.B. (the "Bank") or the capital stock of any
Subsidiary owning the capital stock of the Bank, along with any capital
contribution or other transfer in amounts deemed appropriate by the Trust in its
sole discretion, to any other Person. Notice of such transfer will be mailed at
least 30 days prior to the date of the transfer to the Indenture Trustee.

                                  ARTICLE NINE
                             SUPPLEMENTAL INDENTURES

         SECTION 9.01. Supplemental Indentures Without Consent of Noteholders.

         Without the consent of the Holders of any Notes, the Trust, when
authorized by a Trustees' Resolution, and the Indenture Trustee, at any time and
from time to time, may enter into one or more indentures supplemental hereto, in
form satisfactory to the Indenture Trustee, for any of the following purposes:

                 (1) to evidence the succession of another voluntary
         association, corporation or other entity to the Trust, and the
         assumption by any such successor of the covenants of the Trust herein
         and in the Notes contained in accordance with the provisions of Article
         8; or

                 (2) to add to the covenants of the Trust or any other obligor
         upon the Notes, for the benefit of the Holders of the Notes, or to
         surrender any right or power herein conferred upon the Trust; or

                 (3) to cure any ambiguity, to correct or supplement any
         provision herein which may be defective or inconsistent with any other
         provision herein, or to make any other provisions with respect to
         matters or questions arising under this Indenture which shall not be
         inconsistent with the provisions of this Indenture, provided such
         action shall not adversely affect in any material respect the interest
         of the Holders of the Notes; or

                 (4) to create, from time to time, Notes in addition to the
         $50,000,000 principal amount of Notes initially issuable hereunder,

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<PAGE>

         which subsequently created Notes shall be identical to the Notes
         initially issuable hereunder, except for interest rate, maturity date
         and issue date; or

                 (5) to modify, amend or supplement this Indenture to such
         extent as shall be necessary to effect the qualification of this
         Indenture or any indenture supplemental hereto entered into pursuant to
         Section 9.01 under the Trust Indenture Act of 1939 as then in effect,
         or under any similar Federal statute hereafter enacted, and to add to
         this Indenture such other provisions as may be expressly permitted by
         TIA, excluding, however, the provisions referred to in Section
         316(a)(2) of TIA, as in effect at the date as of which this Indenture
         was executed or any corresponding provision in any similar Federal
         statute hereafter enacted; or

                 (6) to add any additional Events of Default; or

                 (7) to evidence and provide for the acceptance of the
         appointment of a successor Indenture Trustee under this Indenture.

                 SECTION 9.02. Supplemental Indentures With Consent of
         Noteholders.

         With the consent of the Holders of not less than 66 2/3% in principal
amount of the Outstanding Notes, by Act of said Holders delivered to the Trust
and the Indenture Trustee, the Trust, when authorized by a Trustees' Resolution,
and the Indenture Trustee may enter into an indenture or indentures supplemental
hereto for the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, this Indenture or of modifying in any
manner the rights of the Holders of the Notes under this Indenture; provided,
however, that no such supplemental indenture shall, without the consent of the
Holder of each Outstanding Note affected thereby,

                 (1) change the Stated Maturity of the principal of, or any
         installment of interest on, any Note, or reduce the principal amount
         thereof or the interest thereon or the coin or currency in which any
         Note or the interest thereon is payable, or impair the right to
         institute suit for the enforcement of any such payment on or after the
         Stated Maturity thereof (or, in the case of redemption, on or after the
         Redemption Date), or

                 (2) reduce the percentage in principal amount of the
         Outstanding Notes, the consent of whose Holders is required for any
         such supplemental indenture, or the consent of whose Holders is
         required for any waiver of compliance with certain provisions of this
         Indenture or certain defaults hereunder and their consequences provided
         for in this Indenture, or

                 (3) modify any of the provisions of this Section or Section
         5.13, except to increase any such percentage or to provide that certain
         other provisions of this Indenture cannot be modified or waived without
         the consent of the Holder of each Note affected thereby.

         It shall not be necessary for any Act of Noteholders under this Section
to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.

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<PAGE>

         SECTION 9.03. Execution of Supplemental Indentures.

         In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Indenture Trustee shall be entitled to
receive, and (subject to Section 6.01) shall be fully protected in relying upon,
an Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture. The Indenture Trustee may, but
shall not (except to the extent required in the case of a supplemental indenture
entered into pursuant to Section 9.01(5)) be obligated to, enter into any such
supplemental indenture which affects the Indenture Trustee's own rights, duties
or immunities under this Indenture or otherwise.

         SECTION 9.04. Effect of Supplemental Indentures.

         Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.

         SECTION 9.05. Conformity with Trust Indenture Act.

         Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of TIA as then in effect, if this Indenture shall
then be qualified under TIA.

         SECTION 9.06. Reference in Notes to Supplemental Indentures.

         Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Indenture Trustee, bear a notation in form approved by the Indenture Trustee
as to any matter provided for in such supplemental indenture. If the Trust shall
so determine, new Notes so modified as to conform, in the opinion of the
Indenture Trustee and the Trust, to any such supplemental indenture may be
prepared and executed by the Trust and authenticated and delivered by the
Indenture Trustee in exchange for Outstanding Notes.

                                   ARTICLE TEN
                                    COVENANTS

         SECTION 10.01. Payment of Principal and Interest.

         The Trust will duly and punctually pay, or provide for the payment of,
the principal of (and premium, if any, on) and interest on the Notes in
accordance with the terms of the Notes and this Indenture.

         SECTION 10.02. Maintenance of Office or Agency.

         The Trust will maintain an office or agency in The City of New York
(said jurisdiction being herein called a "Place of Payment"), where Notes may be
presented or surrendered for payment of principal (premium, if any) at maturity
and for transfer or exchange and where notices and demands to or upon the Trust
in respect of the Notes and this Indenture may be served. The Trust initially
appoints U.S. Bank Trust National Association as its agent for such purposes in
The City of New York. The Trust will give prompt written notice to the Indenture
Trustee of the location, and of any change in the location, of such office or
agency. If at any time the Trust shall fail to maintain such office or agency or
shall fail to furnish the Indenture Trustee with the address thereof, such

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<PAGE>

presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Indenture Trustee, and the Trust hereby appoints
the Indenture Trustee its agent to receive all such presentations, surrenders,
notices and demands.

         The Trust may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes may
be presented or surrendered for any or all such purposes and may from time to
time rescind any such designation; provided, however, that no such designation
or rescission shall in any manner relieve the Trust of its obligation to
maintain an office or agency in The City of New York for such purposes. The
Trust will give prompt written notice to the Indenture Trustee of any such
designation or rescission and any change in the location of any such other
office or agency.

         SECTION 10.03. Money for Note Payments to be Held in Trust.

         If the Trust shall at any time act as its own Paying Agent with respect
to the payment of either principal (and premium, if any) or interest, it will,
on or before each applicable due date of the principal of (and premium, if any,
on) or interest on any of the Notes, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal (and
premium, if any) or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided, and will promptly
notify the Indenture Trustee of its failure so to act.

         Whenever the Trust shall have one or more Paying Agents with respect to
the payment of either principal (and premium, if any) or interest, it will,
prior to each applicable due date of the principal of or interest on any Notes,
deposit with a Paying Agent a sum sufficient to pay the principal (and premium,
if any) or interest, so becoming due, such sum to be held in trust for the
benefit of the Persons entitled to such principal, premium or interest, and
(unless such Paying Agent is the Indenture Trustee) the Trust will promptly
notify the Indenture Trustee of its action or failure so to act.

         The Trust will cause each Paying Agent other than the Indenture Trustee
to execute and deliver to the Indenture Trustee an instrument in which such
Paying Agent shall agree with the Indenture Trustee, subject to the provisions
of this Section, that such Paying Agent will

                 (1) hold all sums held by it for the payment of principal of
         (and premium, if any, on) or interest on Notes in trust for the benefit
         of the Persons entitled thereto until such sums shall be paid to such
         Persons or otherwise disposed of as herein provided;

                 (2) give the Indenture Trustee notice of any default by the
         Trust (or any other obligor upon the Notes) in the making of any such
         payment of principal (and premium, if any) or interest; and

                 (3) at any time during the continuance of any such default,
         upon the written request of the Indenture Trustee, forthwith pay to the
         Indenture Trustee all sums so held in trust by such Paying Agent.

         The Trust may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
direct any Paying Agent to pay, to the Indenture Trustee all sums held in trust
by the Trust or such Paying Agent, such sums to be held by the Indenture Trustee
upon the same trusts as those upon which sums were held by the Trust or such
Paying Agent; and, upon such

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<PAGE>

payment by any Paying Agent to the Indenture Trustee such Paying Agent shall be
released from all further liability with respect to such money.

         Any money deposited with the Indenture Trustee or any Paying Agent, or
then held by the Trust, in trust for the payment of the principal of (and
premium, if any, on) or interest on any Note and remaining unclaimed for two
years after such principal (and premium, if any) or interest has become due and
payable shall be paid to the Trust on request or, if with the Indenture Trustee,
on Trust Request, or (if then held by the Trust) shall be discharged from such
trust, and the Holder of such Note shall thereafter, as an unsecured general
creditor, look only to the Trust for payment thereof, and all liability of the
Indenture Trustee or such Paying Agent with respect to such trust money, and all
liability of the Trust as trustee thereof, shall thereupon cease; provided,
however, that the Indenture Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Trust cause to be
published once, in an Authorized Newspaper in the Place of Payment, notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Trust.

         SECTION 10.04. Payment of Taxes and other Claims.

         The Trust will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon it or upon its income, profits or
property, and (2) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a lien upon its property; provided, however, that
the Trust shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.

         SECTION 10.05. Maintenance of Properties.

         The Trust will cause all its properties used or useful in the conduct
of its business to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Trust may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this Section shall prevent the
Trust from discontinuing the operation and maintenance of any of its properties
if such discontinuance is, in the judgment of the Trust, desirable in the
conduct of its business and not disadvantageous in any material respect to the
Noteholders.

         SECTION 10.06. Statement as to Compliance.

         The Trust and each other obligor on the Notes, if any, will deliver to
the Indenture Trustee, within 120 days after the end of each fiscal year, an
officers' certificate from its chief executive officer, principal financial
officer, or principal accounting officer, stating whether or not, to the best
knowledge of the signer thereof, the Trust is in default in the performance and
observance of any of the conditions or covenants of the Indenture, and if the
Trust should be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.

         SECTION 10.07. Existence.

         Subject to Article Eight, the Trust will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence as
a Maryland

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<PAGE>

real estate investment trust, rights (as such) and franchises; provided,
however, that the Trust shall not be required to preserve any right or franchise
if the Trustees shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Trust and that the loss thereof
is not disadvantageous in any material respect to the Noteholders.

         SECTION 10.08. Maintenance of Insurance.

         The Trust will maintain insurance with responsible insurance companies
on its properties and against claims to which it may be exposed to the same
extent as is carried by organizations owning similar properties engaged in a
similar business and in accordance with good business practice or, in lieu
thereof, the Trust will maintain a system of self-insurance which will accord
with the practices of such organizations.

         SECTION 10.09. Waiver of Certain Covenants.

         The Trust may omit in any particular instance to comply with any
covenant or condition set forth in Section 10.04, 10.05, 10.07 or 10.08, if
before or after the time for such compliance the holders of at least a majority
in principal amount of the Notes at the time Outstanding shall, by Act of such
Noteholders, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Trust and
the duties of the Indenture Trustee in respect of any such covenant or condition
shall remain in full force and effect.

                                 ARTICLE ELEVEN
                           REDEMPTION OF CERTAIN NOTES

         SECTION 11.01. Right of Redemption; Redemption Price.

         The Trust may, at its election, redeem any of the Notes having a Stated
Maturity of more than one year from date of issue on any Interest Payment Date
with respect to such Note on or after the first anniversary of the date of issue
of such Note at a Redemption Price (exclusive of the installment of interest due
on the Redemption Date payment of which shall have been made or duly provided
for to the registered Holder on the relevant Record Date) equal to the Principal
Amount of the Note so redeemed.

         SECTION 11.02. Applicability of Article.

         Redemption of Notes at the election of the Trust or otherwise permitted
or required by any provision of this Indenture shall be made in accordance with
such provision and this Article.

         SECTION 11.03. Election to Redeem; Notice to Indenture Trustee.

         In case of any redemption at the election of the Trust of less than all
of the Notes having a Stated Maturity of more than one year from date of issue
and an Interest Payment Date on the Redemption Date, the Trust shall, at least
45 days prior to the Redemption Date fixed by the Trust (unless a shorter notice
shall be satisfactory to the Indenture Trustee), notify the Indenture Trustee of
such Redemption Date and of the Notes selected to be redeemed.

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<PAGE>

         SECTION 11.04. Selection of Notes to be Redeemed.

         If less than all the Notes having a Stated Maturity of more than one
year and the same Interest Payment Date as the Redemption Date are to be
redeemed pursuant to Section 11.01, the particular Notes to be redeemed shall be
selected from the Outstanding Notes not previously called for redemption by such
method as the Trust shall deem appropriate and may include redemption of Notes
with higher interest rates first.

         SECTION 11.05. Notice of Redemption.

         Notice of redemption shall be given by the Trust by first class mail,
postage prepaid, mailed not less than 30 and not more than 60 days prior to the
Redemption Date, to each Holder of Notes to be redeemed at his address appearing
in the Note Register.

         All notices of redemption shall state:

                 (1) the Redemption Date,

                 (2) the Redemption Price,

                 (3) if less than all Notes having a Stated Maturity of more
         than one year from date of issue and the same Interest Payment Date as
         the Redemption Date are to be redeemed, the identification of the Notes
         to be redeemed from the Holder to whom the notice is given,

                 (4) that on the Redemption Date the Redemption Price will
         become due and payable upon each such Note and that interest thereon
         shall cease to accrue on and after said date,

                 (5) the place where such Notes are to be surrendered for
         payment of the Redemption Price, which shall be the office or agency of
         the Trust in the Place of Payment.

         SECTION 11.06. Deposit of Redemption Price.

         Prior to any Redemption Date, the Trust shall deposit with the
Indenture Trustee or with a Paying Agent (or, if the Trust is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 10.03) an
amount sufficient to pay the Redemption Price of all the Notes which are to be
redeemed on that date.

         SECTION 11.07. Notes Payable on Redemption Date.

         Notice of redemption having been given as aforesaid, the Notes so to be
redeemed shall, on the Redemption Date, become due and payable at the Redemption
Price therein specified and from and after such date (if no default is made in
making due provision for the payment of the Redemption Price) such Notes shall
cease to bear interest. Upon surrender of such Notes for redemption in
accordance with said notice, such Notes shall be paid by the Trust at the
Redemption Price. Installments of interest whose Payment Date is on or prior to
the Redemption Date shall be payable to Holders of Notes registered as such on
the relevant Record Dates according to their terms.

         If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Notes.

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<PAGE>

                                 ARTICLE TWELVE
                    IMMUNITY OF ORGANIZERS, HOLDERS OF SHARES
             OF BENEFICIAL INTEREST OF TRUST, OFFICERS AND TRUSTEES

         SECTION 12.01. Exemption from Individual Liability.

         No recourse for the payment of the principal of or interest on any
Note, or under or upon any obligation, covenant or agreement of this Indenture
or of any Note, or because of any indebtedness evidenced thereby, or for any
claim based thereon or otherwise in respect thereof, shall be had against any
organizer, shareholder, officer or Trustee, past, present or future, as such, of
the Trust or of any predecessor or successor, either directly or through the
Trust or any such predecessor or successor, whether by virtue of any
constitution, statute or rule of law or equity, or by the enforcement of any
assessment or penalty or otherwise; it being expressly agreed and understood
that this Indenture and the obligations issued hereunder are enforceable solely
against the Trust property, and that no such personal liability whatever shall
attach to, or is or shall be incurred by, the organizers, holders of shares of
beneficial interest of the Trust, officers or Trustees of the Trust or of any
predecessor or successor, or any of them, as such, because of the creation of
the indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Indenture or in any of the Notes or
implied therefrom, and that any and all such liability is hereby expressly
waived and released by the Indenture Trustee and every Holder of Notes as a
condition of, and as a consideration for, the execution of this Indenture and
the issue of such Notes.

         SECTION 12.02. No Liability Other Than of Trust.

         The covenants and obligations set forth in this Indenture as having
been made by the Trust have been made by the Trustees of the Trust acting as
such Trustees pursuant to the authority vested in them by the Declaration of
Trust. This Indenture has been, and the Notes to be issued hereunder will be,
executed by Trustees or officers of the Trust in their capacities as Trustees or
officers under the Declaration of Trust, and not individually, and, in
accordance with the provisions of the Declaration of Trust, the covenants and
obligations of the Trust or the Trustees contained in any Note and in this
Indenture are not personally binding upon, nor shall resort be had to the
private property of, any of the Trustees or shareholders, officers, employees or
agents of the Trust, but the Trust's property only shall be bound.

                                    * * * * *

         This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.

         IN WITNESS WHEREOF, U.S. Bank Trust National Association has caused
this Indenture to be duly executed and its seal to be hereunto affixed and
attested, and the B. F. Saul Real Estate Investment Trust has caused this
Indenture to be duly executed, and its seal to be hereunto affixed and attested
in Bethesda, Maryland, all as of the day and year first above written.

Attest:                                           U.S. BANK TRUST NATIONAL
                                                  ASSOCIATION

_____________________                             By:___________________________
                                                     [Name]
                                                     [Title]

                                       48

<PAGE>

Attest:                                        B. F. SAUL REAL ESTATE INVESTMENT
                                                     TRUST

_______________________                        By:_____________________________
B. Francis Saul III                               Henry Ravenel, Jr.
Secretary                                         Vice President

State of New York ss.:
County of New York

         On this ____ day of March 2003, before me personally came _________ and
__________ who, being by me duly sworn, did depose and say that they are Vice
President and Corporate Trust Officer of U.S. Bank Trust National Association,
the corporation described in and which executed the foregoing instrument; that
they know the seal of said corporation; that the seal affixed to such instrument
is such corporate seal; that it was so affixed by the authority of the Board of
Directors of said corporation and that they signed their names thereto by like
authority.

                                                         _______________________
                                                         Notary Public

(Notarial Seal)
My Commission Expires ______________

State of Maryland      ss.:
County of Montgomery

         I, ________________, a notary public in and for the County and State
aforesaid, do certify that HENRY RAVENEL, JR. and B. FRANCIS SAUL III, whose
names as Vice President and Secretary, respectively, of B. F. SAUL REAL ESTATE
INVESTMENT TRUST, a Maryland real estate investment trust, are signed to the
writing above, bearing date as of the ___ day of [_____], 2003, have
acknowledged the same before me in my State aforesaid.

         Given under my hand and seal this ___ day of [______], 2003.

                                                         _______________________
                                                         Notary Public

(Notarial Seal)
My Commission Expires ______________

                                       49

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