Document:

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                                                                    Exhibit 10.3

                      SAVINGS BANK OF THE FINGER LAKES, FSB
              1996 MANAGEMENT RECOGNITION PLAN AND TRUST AGREEMENT

                                    ARTICLE I
                       ESTABLISHMENT OF THE PLAN AND TRUST

     1.01 Savings Bank of the Finger Lakes, FSB (the "Savings Bank") hereby
establishes a Management Recognition Plan (the "Plan") and Trust (the "Trust")
upon the terms and conditions hereinafter stated in this 1996 Management
Recognition Plan and Trust Agreement (the "Agreement").

     1.02 The Trustee hereby accepts this Trust and agreess to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.

                                   ARTICLE II
                               PURPOSE OF THE PLAN

     2.01 The purpose of the Plan is to retain personnel of experience and
ability in key positions by providing Employees of the Savings Bank and of its
subsidiaries with a proprietary interest in the Savings Bank as compensation for
their contributions to the Savings Bank and any other Subsidiaries and as an
incentive to make such contributions in the future.

                                   ARTICLE III
                                   DEFINITIONS

     The following words and phrases when used in this Agreement with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronouns shall
include the feminine pronouns and the singular shall include the plural.

       3.01 "Beneficiary" means the person or persons designated by a Recipient
to receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
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     3.02 "Board" means the Board of Directors of the Savings Bank.

     3.03 "Change in Control" means a change in control of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act, or any successor thereto,
whether or not the Savings Bank in fact is required to comply with Regulation
14A thereunder, except that a "change in control of the Savings Bank" shall not
include any corporate reorganization of the Savings Bank undertaken in
conjunction with the conversion of Finger Lakes Financial Corporation, M.H.C.,
the parent mutual holding company of the Savings Bank, from the mutual to the
stock form.

     3.04 "Code" means the Internal Revenue Code of 1986, as amended.

     3.05 "Committee" means the committee appointed by the Board pursuant to
Article IV hereof. The functions of such committee may be undertaken by any
other committee appointed by the Board.

     3.06 "Common Stock" means shares of the common stock, $0.01 par value per
share, of the Savings Bank.

     3.07 "Disability" means any physical or mental impairment which qualifies
an employee for disability benefits under the applicable long-term disability
plan maintained by the Savings Bank or any Subsidiary or, if no such plan
applies, which would qualify such Employee for disability benefits under the
Federal Social Security System.

     3.08 "Effective Date" means the day upon which the Board adopts this Plan.

     3.09 "Employee" means any person who is employed by the Savings Bank or any
Subsidiary, or is an officer of the Savings Bank or any Subsidiary, including
officers or other employees who may be directors of the Savings Bank.

     3.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

       3.11 "MHC" means Finger Lakes Financial Corporation, a federally
chartered mutual holding company and the holder of a majority of the issued and
outstanding shares of Common Stock.

     3.12 "0TS" means the Office of Thrift Supervision.

     3.13 "Plan Shares" or "Shares" means shares of Common Stock held in the
Trust which may be distributed to a Recipient pursuant to the Plan.

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     3.14 "Plan Share Award" or "Award" means a right granted under this Plan to
receive a distribution of Plan Shares upon completion of the service
requirements described in Article VII

     3.15 "Recipient" means an Employee who receives a Plan Share Award under
the Plan.

     3.16 "Retirement" means a termination of employment which constitutes a
"retirement" under any applicable qualified pension benefit plan maintained by
the Savings Bank or a Subsidiary Company, or, if no such plan is applicable,
which would constitute "retirement" under any qualified pension benefit plan
maintained by the Savings Bank or a Subsidiary Company, if such individual were
a participant in such plan.

     3.17 "Subsidiary" means any subsidiaries of the Savings Bank which, with
the consent of the Board, agree to participate in this Plan.

     3.18 "Trustee" means such firm, entity or persons nominated by the
Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold
legal title to the Plan for the purposes set forth herein.

                                   ARTICLE IV
                           ADMINISTRATION OF THE PLAN

     4.01 Role of the Committee. The Plan shall be administered and interpreted
by the Committee, which shall consist of two or more members of the Board, none
of whom shall be an officer or employee of the Savings Bank and each of whom
shall be a "disinterested person" within the meaning of Rule 16b-3 under the
Exchange Act. The Committee shall have all of the powers allocated to it in this
and other Sections of the Plan. The interpretation and construction by the
Committee of any provisions of the Plan or of any Plan Share Award granted
hereunder shall be final and binding. The Committee shall act by vote or written
consent of a majority of its members. Subject to the express provisions and
limitations of the Plan, the Committee may adopt such rules, regulations and
procedures as it deems appropriate for the conduct of its affairs. The Committee
shall report its actions and decisions with respect to the Plan to the Board at
appropriate times, but in no event less than one time per calendar year. The
Committee shall recommend to the Board a firm or other entity to act as Trustee
in accordance with the provisions of this Plan and Trust and the terms of
Article VIII hereof.

     4.02 Role of the Board. The members of the Committee and the Trustee shall
be appointed or approved by, and will serve at the pleasure of, the Board. The
Board may in its discretion from time to time remove members from, or add
members to, the Committee, and may remove or replace the Trustee, provided that
any directors who are selected as members of the Committee shall not be officers
or employees of the Savings Bank and shall be "disinterested persons" within the
meaning of Rule 16b-3 promulgated under the Exchange Act

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     4.03 Limitation on Liability. No member of the Board or the Committee shall
be liable for any determination made in good faith with respect to the Plan or
any Plan Shares or Plan Share Awards granted under it. If a member of the Board
or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Savings Bank
shall, subject to the requirements of applicable laws and regulations, indemnify
such member against all liabilities and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Savings Bank and any Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.

     4.04 Compliance with Laws and Regulations. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency or stockholders as
may be required.

                                    ARTICLE V
                                  CONTRIBUTIONS

     5.01 Amount and Timing of Contributions. The Board shall determine the
amount (or the method of computing the amount) and timing of any contributions
by the Savings Bank and any Subsidiaries to the Trust established under this
Plan. Such amounts may be paid in cash or in shares of Common Stock and shall be
paid to the Trust at the designated time of contribution. No contributions by
Employees shall be permitted.

     5.02 Investment of Trust Assets; Number of Plan Shares. Subject to Section
8.02 hereof, the Trustee shall invest all of the Trust's assets primarily in
Common Stock. The aggregate number of Plan Shares available for distribution
pursuant to this Plan shall be 23,600 shares of Common Stock, which shares shall
be purchased from the Savings Bank and/or from stockholders thereof by the Trust
with funds contributed by the Savings Bank.

                                   ARTICLE VI
                            ELIGIBILITY; ALLOCATIONS

     6.01 Awards to Emplovees. Plan Share Awards may be made to such Employees
as may be selected by the Committee. In selecting those Employees to whom Plan
Share Awards may be granted and the number of Shares covered by such Awards, the
Committee shall consider the duties, responsibilities and performance of each
respective Employee, his present and potential contributions to the growth and
success of the Savings Bank, his salary and such other factors

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as the Committee shall deem relevant to accomplishing the purposes of the Plan.
The Committee may, but shall not be required to, request the written
recommendation of the Chief Executive Officer of the Savings Bank regarding Plan
Share Awards being considered by the Committee for any Employee other than with
respect to Plan Share Awards being considered for him.

     6.02 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Sections 6.01 that a Plan Share Award is to be issued, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award shall be distributed to the Recipient. The date on
which the Committee so notifies the Recipient shall be considered the date of
grant of the Plan Share Award. The Committee shall maintain records as to all
grants of Plan Share Awards under the Plan.

     6.03 Allocations Not Required to any Specific Employee. Notwithstanding
anything to the contrary in Section 6.01 hereof, no Employee shall have any
right or entitlement to receive a Plan Share Award hereunder, such Awards being
at the total discretion of the Committee.

                                   ARTICLE VII
             EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS

     7.01 Earning Plan Shares; Forfeitures.

     (a) General Rules. Subject to the terms hereof, Plan Share Awards shall be
earned by a Recipient at the rate determined by the Committee on the date of
grant or, with the concurrence of the Recipient, thereafter. Unless otherwise
determined pursuant to this Section 7.01, if the employment of an Employee is
terminated prior to the vesting of a Plan Share Award for any reason (except as
specifically provided in subsections (b), (c) and (d) below), the Recipient
shall forfeit the right to any Shares subject to the Award which have not
theretofore been earned. In the event of a forfeiture of the right to any Shares
subject to an Award, such forfeited Shares shall become available for allocation
pursuant to Section 6.01 hereof as if no Award had been previously granted with
respect to such Shares. No fractional shares shall be distributed pursuant to
this Plan.

     (b) Exception for Terminations Due to Death, Disability or Retirement.
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment or service
with the Savings Bank or any Subsidiary terminates due to death, Disability or
Retirement shall be deemed earned as of the Recipient's last day of employment
with the Savings Bank or any Subsidiary and shall be distributed as soon as
practicable thereafter; provided, however, that Awards shall be distributed in
accordance with Section 7.03(a).

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     (c) Execration after a Change in Control. Notwithstanding the rule
contained in Section 7.01(a), all Plan Shares subject to a Plan Share Award held
by a Recipient shall be deemed earned in the event of a Change in Control.

     (d) Revocation for Misconduct. Notwithstanding anything hereinafter to the
contrary, the Board may by resolution immediately revoke, rescind and terminate
any Plan Share Award, or portion thereof, previously awarded under this Plan, to
the extent Plan Shares have not been distributed hereunder to the Recipient
whether or not yet earned, in the case of an Employee who is discharged from the
employ of the Savings Bank or any Subsidiary for cause (as hereinafter defined).
Termination for cause shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order.

     7.02 Distribution of Dividends. Any cash dividends or stock dividends
declared in respect of each Plan Share held by the Trust will be paid by the
Trust, as soon as practicable after the Trust's receipt thereof, to the
Recipient on whose behalf such Plan Share is then held by the Trust.

     7.03 Distribution of Plan Shares.

     (a) Timing of Distributions: General Rule. Plan Shares shall be distributed
to the Recipient or his Beneficiary, as the case may be, as soon as practicable
after they have been earned, provided, however, that no Plan Shares shall be
distributed to the Recipient or Beneficiary pursuant to a Plan Share Award
within six months from the date on which that Plan Share Award was granted to
such person.

     (b) Form of Distributions. All Plan Shares, together with any Shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned and
distributable. Payments representing cash dividends shall be made in cash.

     (c) Withholding. The Trustee may withhold from any cash payment or Common
Stock distribution made under this Plan sufficient amounts to cover any
applicable withholding and employment taxes, and if the amount of a cash payment
is insufficient, the Trustee may require the Recipient or Beneficiary to pay to
the Trustee the amount required to be withheld as a condition of delivering the
Plan Shares. The Trustee shall pay over to the Savings Bank or any Subsidiary
which employs or employed such Recipient any such amount withheld from or paid
by the Recipient or Beneficiary.

     (d) Restrictions on Seller of Plan Shares. Plan Share Awards may not be
sold, assigned, pledged or otherwise disposed of prior to the time that they are
earned and distributed pursuant to the terms of this Plan. Following
distribution, the Committee may require

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the Recipient or his Beneficiary, as the case may be, to agree not to sell or
otherwise dispose of his distributed Plan Shares except in accordance with all
then applicable Federal and state securities laws, and the Committee may cause a
legend to be placed on the stock certificate(s) representing the distributed
Plan Shares in order to restrict the transfer of the distributed Plan Shares for
such period of time or under such circumstances as the Committee, upon the
advice of counsel, may deem appropriate.

     7.04 Voting of Plan Shares. All Plan Shares which have not yet been earned
and allocated shall be voted by the Trustee in its sole discretion.

                                  ARTICLE VIII
                                      TRUST

     8.01 Trust. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Committee pursuant to the Plan.

     8.02 Management of Trust. Subject to the limitations of Section 9.10, It is
the intent of this Plan and Trust that the Trustee shall have complete authority
and discretion with respect to the arrangement, control and investment of the
Trust, and that the Trustee shall invest all assets of the Trust in Common Stock
to the fullest extent practicable, except to the extent that the Trustee
determine that the holding of monies in cash or cash equivalents is necessary to
meet the obligations of the Trust. In performing their duties, the Trustee shall
have the power to do all things and execute such instruments as may be deemed
necessary or proper, including the following powers:

          (a) To invest up to one hundred percent (100%) of all Trust assets in
     Common Stock without regard to any law now or hereafter in force limiting
     investments for trustees or other fiduciaries. The investment authorized
     herein may constitute the only investment of the Trust, and in making such
     investment, the Trustee is authorized to purchase Common Stock from the
     Savings Bank or from any other source, and such Common Stock so purchased
     may be outstanding, newly issued, or treasury shares.

          (b) To invest any Trust assets not otherwise invested in accordance
     with (a) above, in such deposit accounts, and certificates of deposit
     obligations of the United States Government or its agencies or such other
     investments as shall be considered the equivalent of cash.

          (c) To sell exchange or otherwise dispose of any property at anytime
     held or acquired by the Trust.

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          (d) To cause stocks, bonds or other securities to be registered in the
     name of a nominee, without the addition of words indicating that such
     security is an asset of the Trust (but accurate records shall be maintained
     showing that such security is an asset of the Trust).

          (e) To hold cash without interest in such amounts as may in the
     opinion of the Trustee be reasonable for the proper operation of the Plan
     and Trust.

          (f) To employ brokers, agents, custodians, consultants and
     accountants.

          (g) To hire counsel to render advice with respect to their rights,
     duties and obligations hereunder, and such other legal services or
     representation as they may deem desirable.

          (h) To hold funds and securities representing the amounts to be
     distributed to a Recipient or his Beneficiary as a consequence of a dispute
     as to the disposition thereof, whether in a segregated account or held in
     common with other assets of the Trust.

          (i) To file federal and state income tax returns and to make any and
     all elections and to exercise any and all options given to fiduciaries
     pursuant to the provisions of the Code, as the same may be amended
     hereafter.

     Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.

     8.03 Records and Accounts. The Trustee shall maintain accurate and detailed
records and accounts of all transactions of the Trust, which shall be available
at all reasonable times for inspection by any legally entitled person or entity
to the extent required by applicable law, or any other person determined by the
Committee.

     8.04 Expenses. All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Savings Bank.

     8.05 Indemnification. Subject to the requirements of applicable laws and
regulations, the Savings Bank shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of their duties
hereunder, unless the same shall be due to their gross negligence or willful
misconduct.

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                                   ARTICLE IX
                                  MISCELLANEOUS

     9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares
available for distribution pursuant to the Plan Share Awards and the number of
Shares to which any Plan Share Award relates shall be proportionately adjusted
for any increase or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the effective date of the Plan resulting from any
split, subdivision or consolidation of shares or other capital adjustment, or
other increase or decrease in such shares effected without receipt or payment of
consideration by the Savings Bank.

     9.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan, subject to regulations of the OTS and any
required stockholder approval or any stockholder approval which the Board may
deem to be advisable for any reason, such as for the purpose of obtaining or
retaining any statutory or regulatory benefits under tax, securities or other
laws or satisfying any applicable stock exchange listing requirements. The Board
may not, without the consent of the Recipient, alter or impair his Plan Share
Award except as specifically authorized herein. Upon termination of the Plan,
the Recipient's Plan Share Awards shall be distributed to the Recipient in
accordance with the terms of Article VII hereof. Notwithstanding anything
contained in this Plan to the contrary, the provisions of Articles VI and VII of
this Plan shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules and regulations promulgated under such statutes.
In the event of the termination of the Trust, the Trustee shall contribute all
remaining assets of the Trust to an Employee's trust described in Section 401(a)
of the Code or dispose of the assets of the Trust in any other manner as shall
result in the Savings Bank not being considered to own such assets either
directly or constructively within the meaning of Section 318 of the Code.

     9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not
be transferable by a Recipient, and during the lifetime of the Recipient, Plan
Shares may only be earned by and paid to a Recipient who was notified in writing
of an Award by the Committee pursuant to Section 6.02. No Recipient or
Beneficiary shall have any right in or claim to any assets of the Plan or Trust,
nor shall the Savings Bank or any Subsidiary be subject to any claim for
benefits hereunder.

     9.04 Employment or Service Rights. Neither the Plan nor any grant of a Plan
Share Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in such capacity.

     9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share

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Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to
the time said Plan Shares are actually earned and distributed to him.

     9.06 Government Law. To the extent not governed by Federal law, the Plan
and Trust shall be governed by the laws of the State of New York.

     9.07 Effective Date. This Plan shall be effective as of the Effective Date,
and Awards may be granted hereunder as of or after the Effective Date and as
long as the plan remains in effect. Notwithstanding the foregoing or anything to
the contrary in this Plan, the implementation of this Plan and any Awards
granted pursuant hereto is subject to the and approval of the Savings Bank's
stockholders.

       9.08 Term of Plan. This Plan shall remain in effect until the earlier of
(1) ten (10) years from the Effective Date, (2) termination by the Board, or (3)
the distribution to Recipients and Beneficiaries of all assets of the Trust.

     9.09 Tax Status of Trust. It is intended that the trust established hereby
be treated as an irrevocable non-grantor trust. The Trust shall apply for and
obtain its own Employer Identification Number for purposes of filing federal and
state income tax returns as required by the Code and applicable state and local
law.

     9.10 Savings Clause. Notwithstanding any other provision of the Plan or the
Trust to the contrary, any duty or power granted under the Plan or Trust shall
be absolutely void to the extent that the right to perform such duty or exercise
such power or the performance or exercise thereof would cause the Savings Bank
to be considered the owner of Common Stock held by the Trust under subpart E of
part I of subchapter 3 of the Code relating to grantors and others treated as
substantial owners.

                                      10<PAGE>

                              THIRD AMENDMENT TO
                    FIRST AMENDED AND RESTATED 1994 EMPLOYEE
                         STOCK AND UNIT OPTION PLAN OF
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.

     THIS THIRD AMENDMENT TO FIRST AMENDED AND RESTATED 1994 EMPLOYEE STOCK AND
UNIT OPTION PLAN, dated as of October 25, 1999, is entered into by and among
Charles E. Smith Residential Realty, Inc., a Maryland corporation, for itself
and as general partner of Charles E. Smith Residential Realty L.P. (together the
"Company"), and Smith Realty Company, Consolidated Engineering Services, Inc.,
and Smith Management Construction, Inc. (collectively, the "Operating
Subsidiaries").

     WHEREAS, the 1994 Employee Stock and Unit Option Plan (the "Plan") was
approved by the Board of Directors of Charles E. Smith Residential Realty, Inc.,
for itself and as a general partner of the Charles E. Smith Residential Realty
L.P., by unanimous written consents dated May 25, 1994, June 13, 1994, June 22,
1994, and June 23, 1994, and at a meeting held on July 26, 1994, by the
shareholders of Charles E. Smith Residential Realty, Inc., by unanimous written
consents dated June 17, 1994, June 22, 1994, and June 23, 1994, and by the
partners of Charles E. Smith Residential Realty L.P. by unanimous written
consents dated June 17, 1994, and June 23, 1994, and the Plan, together with the
1994 Employee Restricted Stock and Restricted Unit Plan and Directors Stock
Option Plan, was incorporated in a filing on Form S-8 with the Securities and
Exchange Commission (the "SEC"), which became effective on August 8, 1994;

     WHEREAS, the Board of Directors of the Company duly adopted and approved
(i) the First Amended and Restated 1994 Employee Stock and Unit Option Plan on
November 8, 1994, which was incorporated in a filing on Form 10-K for the year
ended December 31, 1994 and filed with the SEC on March 31, 1995, (ii) the First
Amendment thereto dated as of May 7, 1998, which was incorporated in a filing on
Form S-8 and filed with the SEC on November 17, 1998, and (iii) the Second
Amendment thereto dated as of March 1, 1999;

     WHEREAS, the Company and its stockholders did adopt the Plan for the
benefit of their employees and the employees of Smith Realty Company (formerly
Smith Property Management, Inc.), Consolidated Engineering Services, Inc., and
Smith Management Construction, Inc.;

     WHEREAS, the Board of Directors believes that it would be in the best
interests of the Company to amend Sections 2.13, 3.1, 3.2, 13 and 15.2 of the
Plan to revise the method by which the value of each share of Stock (as defined
in the Plan) subject to the Plan is determined, to facilitate the administration
of the Plan and to provide certain transfer rights with respect to Options (as
defined in the Plan); and

     WHEREAS, the Board of Directors of the Company did approve such amendments
at a meeting of the Board of Directors held on October 25, 1999.

     NOW, THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby amend the Plan, as follows:

                                      E-2

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     1.  Section 2.13 of the Plan is hereby amended so that the first sentence
of Section 2.13 shall read as follows:

          "2.13  'Fair Market Value' means the value of each share of Stock
     subject to the Plan determined as follows: if on the Grant Date or other
     determination date the shares of Stock are listed on an established
     national or regional stock exchange, are admitted to quotation on the
     National Association of Securities Dealers Automated Quotation System, or
     are publicly traded on an established securities market, the Fair Market
     Value of the shares of Stock shall be the closing price of the shares of
     Stock on such exchange or in such market (the highest such closing price if
     there is more than one exchange or market) on the Grant Date (or, if the
     Grant Date is not a trading day, the trading day immediately preceding the
     Grant Date) or such other determination date (or if there is no such
     reported closing price, the Fair Market Value shall be the mean between the
     highest bid and lowest asked prices or between the high and low sales
     prices on the Grant Date or such preceding trading day) or, if no sale of
     the shares of Stock is reported for the Grant Date or such preceding
     trading day, on the next preceding day on which any sale shall have been
     reported."

     2.  Section 3.1 of the Plan is hereby amended by deleting the second
sentence of Section 3.1 in its entirety, so that such Section 3.1 now reads as
follows:

          "3.1  Company Plan.  The Company Plan shall be administered by the
                ------------
     Company Committee.  The Company Committee shall have such powers and
     authorities related to the administration of the Company Plan as are
     consistent with the Company's articles of incorporation and by-laws and
     with applicable law.  The Company Committee shall have the full power and
     authority (subject to any restrictions imposed by the Board of Directors of
     the Company, the Company's articles of incorporation or by-laws or
     applicable law) to take all actions and to make all determinations required
     or provided for under the Company Plan, any Incentive Award granted by the
     Company Committee under the Company Plan and any Agreement entered into in
     connection therewith and shall have the full power and authority to take
     all such other actions and determinations not inconsistent with the
     specific terms and provisions of the Company Plan that the Company
     Committee deems to be necessary or appropriate to the administration of the
     Company Plan, any Incentive Award granted by the Company Committee under
     the Company Plan and any Agreement entered into in connection therewith.
     The interpretation and construction by the Company Committee of any
     provision of the Company Plan, any Incentive Award granted by the Company
     Committee under the Company Plan and any Agreement entered into in
     connection therewith shall be final and conclusive with respect to the
     Optionee."

     3.  Section 3.2 of the Plan is hereby amended by deleting the second
sentence of Section 3.2 in its entirety, so that such Section 3.2 now reads as
follows:

          "3.2  Operating Partnership Plan.  The Operating Partnership Plan
                --------------------------
     shall be administered by the Company Committee.  The Company Committee
     shall have the full power and authority (subject to any restrictions
     imposed on such Committee by Section 3.1 hereof) to take all actions and to
     make all determinations required or provided for under the Operating
     Partnership Plan, any Incentive Award granted by the Company Committee
     under the Operating Partnership Plan and any Agreement entered into in
     connection therewith and shall have the full power and authority to take
     all such other
<PAGE>

     actions and determinations not inconsistent with the specific terms and
     provisions of the Operating Partnership Plan that the Company Committee
     deems to be necessary or appropriate to the administration of the Operating
     Partnership Plan, any Incentive Award granted by the Company Committee
     under the Operating Partnership Plan and any Agreement entered into in
     connection therewith. The interpretation and construction by the Company
     Committee of any provision of the Operating Partnership Plan, any Incentive
     Award granted by the Company Committee under the Operating Partnership Plan
     and any Agreement entered into in connection therewith shall be final and
     conclusive with respect to the Optionee."

     4.  Section 13 of the Plan is deleted in its entirety and a new Section 13
is inserted so that Section 13 shall read as follows:

     "13.  TRANSFERABILITY OF OPTIONS

           1.1  Transferability of Options.  Except as provided in Section 13.2,
                --------------------------
     during the lifetime of an Optionee, only the Optionee (or, in the event of
     legal incapacity or incompetency, the Grantee's guardian or legal
     representative) may exercise an Option.  Except as provided in Section
     13.2, no Option shall be assignable or transferable by the Grantee to whom
     it is granted, other than by will or the laws of descent and distribution.

           13.2  Family Transfers. If authorized in the applicable Option
                ----------------
     Agreem ent, an Optionee may transfer, not for value, all or part of an
     Option which is not an Incentive Option to any Family Member.  For the
     purpose of this Section 13.2, a "not for value" transfer is a transfer
     which is (i) a gift, (ii) a transfer under a domestic relations order in
     settlement of marital property rights, or (iii) a transfer to an entity in
     which more than fifty percent of the voting interests are owned by Family
     Members (or the Optionee) in exchange for an interest in that entity.
     Following a transfer under this Section 13.2, any such Option shall be
     exercisable by the transferee to the extent that the Option would have been
     exercisable by the Optionee, and the Option shall continue to be subject to
     the same terms and conditions as were applicable immediately prior to
     transfer.  Subsequent transfers of transferred Options are prohibited
     except to Family Members of the original Optionee in accordance with this
     Section 13.2 or by will or the laws of descent and distribution.  The event
     of termination of employment of Section 12.3 hereof shall continue to be
     applied with respect to the original Optionee, following which the Option
     shall be exercisable by the transferee only to the extent permitted under,
     and for the periods specified in, Sections 12.3, 12.4, or 12.5.

          For purposes of this Section 13.2, 'Family Member' shall mean a person
     who is a spouse, child, stepchild, grandchild, parent, stepparent,
     grandparent, sibling, niece, nephew, mother-in-law, father-in-law, son-in-
     law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive
     relationships, of the Optionee, any person sharing the Optionee's household
     (other than a tenant or employee), a trust in which these persons have more
     than fifty percent of the beneficial interest, a foundation in which these
     persons (or the Optionee) control the management of assets, and any other
     entity in which these persons (or the Optionee) own more than fifty percent
     of the voting interests."

     5.  Section 15.2 of the Plan is hereby amended by amending Section 15.2 to
read as follows:
<PAGE>

     "15.2  Rule 16b-3.  To the extent any action by the Plan administrators
            ----------
     does not comply with the requirements of Rule 16b-3, it shall be deemed
     inoperative, to the extent permitted by law and deemed advisable by the
     Plan administrators, and shall not affect the validity of the Plan.  In the
     event Rule 16b-3 is revised or replaced, the Board of Directors of the
     Company may exercise discretion to modify this Plan in any respect
     necessary to satisfy the requirements of the revised exemption or its
     replacement."

     6.   All capitalized terms used in this Third Amendment and not otherwise
defined shall have the meanings assigned to them in the Plan. Except as modified
herein, all terms and conditions of the Plan shall remain in full force and
effect, which terms and conditions the parties hereto ratify and affirm.

                      [Page Break Intentionally Inserted]
<PAGE>

IN WITNESS WHEREOF, the undersigned have executed this THIRD AMENDMENT TO FIRST
AMENDED AND RESTATED 1994 EMPLOYEE STOCK AND UNIT OPTION PLAN as of the date
first above written.

CHARLES E. SMITH RESIDENTIAL REALTY, INC., for itself and as general partner of
Charles E. Smith Residential Realty L.P.

BY:  /s/ Ernest A. Gerardi, Jr.
    ---------------------------------------
Ernest A. Gerardi, Jr., President

This Third Amendment to the Plan was duly adopted and approved by the Board of
Directors of the Company at a meeting of the Board of Directors held on October
25, 1999.

 /s/ Robert D. Zimet
------------------------------------
Robert D. Zimet
Secretary of the Company

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