Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization, Formation and Structure

Organization

Saul Centers, Inc. (“Saul Centers”) was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 90% of its REIT taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the “Company”. B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.

Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated entities, each of which is controlled by B. Francis Saul II and his family members (collectively, “The Saul Organization”). On August 26, 1993, members of The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the “Operating Partnership”), and two newly formed subsidiary limited partnerships (the “Subsidiary Partnerships”, and collectively with the Operating Partnership, the “Partnerships”), shopping center and office properties, and the management functions related to the transferred properties. Since its formation, the Company has purchased and developed additional properties. The Company is currently developing Broadlands Village, a grocery anchored shopping center in Loudoun County. The Company recently completed development of Ashburn Village IV, an in-line retail and retail pad expansion to the Ashburn Village shopping center. In July 2003 the Company purchased Old Forte Village, a grocery anchored neighborhood shopping center located in Fort Washington, Maryland. In June 2002 the Company purchased Clarendon Center for future redevelopment. In September 2002, the Company purchased 109,642 square feet of retail space known as Kentlands Square. In November 2002 the Company purchased a 19 acre parcel of land in the Lansdowne community in Loudoun County, Virginia. The Company plans to develop the Lansdowne parcel into a grocery anchored neighborhood and community shopping center. As of September 30, 2003, the Company’s properties (the “Current Portfolio Properties”) consisted of 29 operating shopping center properties (the “Shopping Centers”), five predominantly office operating properties (the “Office Properties”) and three development and/or redevelopment properties.

The Company established Saul QRS, Inc., a wholly owned subsidiary of Saul Centers, to facilitate the placement of collateralized mortgage debt. Saul QRS, Inc. was created to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

2. Summary of Significant Accounting Policies

Nature of Operations

The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Washington DC/Baltimore metropolitan area. The Company’s long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate.

Because the properties are located primarily in the Washington, DC/Baltimore metropolitan area, the Company is subject to a concentration of credit risk related to these properties. A majority of the Shopping Centers are anchored by several major tenants. Seventeen of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of September 30, 2003, no single property accounted for more than 8.7% of the total gross leasable area. Only one retail tenant, Giant Food, at 6.0%, accounted for more than 2.6% of the Company’s total revenues for the nine months ended September 30, 2003. No office tenant other than the United States Government, at 4.1%, accounted for more than 1.5% of the Company’s total revenues for the nine months ended September 30, 2003.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation.

Real Estate Investment Properties

These financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, do not report the current value of the Company’s real estate assets. Real estate investment properties are stated at the lower of depreciated cost or fair value less cost to sell. Management believes that these assets have generally appreciated in value and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company’s liabilities as reported in these financial statements.

The Company purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases and customer relationships in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. The Company determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In the case of below market leases, the Company considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal option periods included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Company determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional lease expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

relationship. The Company applied SFAS 141 when it recorded the July 28, 2003 acquisition of Old Forte Village. Approximately $760,000 of the $16,670,000 total cost of the acquisition was allocated as lease intangible assets and included in prepaid expenses at September 30, 2003. The lease intangible assets are being amortized over the remaining periods of the leases acquired.

Real estate investment properties are reviewed for potential impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an event or change in circumstance that indicates an impairment in the value of a real estate investment property, the Company’s policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of that property. If such carrying amount is in excess of the estimated projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. Saul Centers adopted SFAS 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” effective January 1, 2002. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has not recognized an impairment loss in on any of its real estate.

Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Interest expense capitalized during the nine month periods ended September 30, 2003 and 2002, was $860,000 and $386,000, respectively. Once construction is substantially completed and the assets are placed in service, their rental income, direct operating expenses and depreciation are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred.

A project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 33 to 50 years for buildings and up to 20 years for certain other improvements. Leasehold improvements are amortized over the lives of the related leases using the straight-line method.

Accounts Receivable and Accrued Income

Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. Receivables are reviewed monthly and reserves are established when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of $593,000 and $681,000, at September 30, 2003 and December 31, 2002, respectively.

In addition to rents due currently, accounts receivable include $8,168,000 and $6,262,000, at September 30, 2003 and December 31, 2002, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

their respective leases. These amounts are presented after netting allowances of $562,000 and $693,000, respectively, for tenants whose rent payment history or financial condition cast doubt upon the tenant’s ability to perform under its lease obligations.

Lease Acquisition Costs

Certain initial direct costs incurred by the Company in negotiating and consummating a successful lease are capitalized and amortized over the initial base term of the lease. These costs are included in prepaid expenses and total $15,389,000 and $12,140,000, net of accumulated amortization of $6,347,000 and $5,259,000, as of September 30, 2003 and December 31, 2002, respectively. Capitalized leasing costs consist of commissions paid to third party leasing agents as well as internal direct costs such as employee compensation and payroll related fringe benefits directly related to time spent performing leasing related activities. Such activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. Lease acquisition costs also include a portion of an acquired property’s purchase price as discussed previously in “Real Estate Investment Properties.”

Deferred Debt Costs

Deferred debt costs consist of financing fees and costs incurred to obtain long-term financing. These fees and costs are being amortized over the terms of the respective loans or agreements. Deferred debt costs totaled $4,255,000 and $4,125,000, and are presented net of accumulated amortization of $3,219,000 and $2,693,000, at September 30, 2003 and December 31, 2002, respectively.

Revenue Recognition

Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis in accordance with generally accepted accounting principles. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant’s revenues (“percentage rent”) is accrued when a tenant reports sales that exceed a specified breakpoint.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Income Taxes

The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under the Code, commencing with its taxable year ended December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 90% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

Employee Stock Option Plan

The Company established a stock option plan for the purpose of attracting and retaining executive officers and other key personnel. The plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares were made available under the plan. The plan authorizes the Compensation Committee of the Board of Directors to grant options at an exercise price which may not be less than the market value of the common stock on the date the option is granted.

During 1993 and 1994, the Compensation Committee granted options to purchase a total of 180,000 shares (90,000 shares from incentive stock options and 90,000 shares from nonqualified stock options) to five Company officers. The options vested 25% per year over four years, had an exercise price of $20 per share and a term of ten years, subject to earlier expiration upon termination of employment. No compensation expense was recognized as a result of these grants. During the nine months ended September 30, 2003, 93,210 option shares were exercised. As of September 23, 2003, no 1993 and 1994 options remained unexercised .

On May 23, 2003, the Compensation Committee granted options to purchase a total of 220,000 shares (80,000 shares from incentive stock options and 140,000 shares from nonqualified stock options) to six Company officers (the “2003 Options”). The 2003 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The exercise price of $24.91 was the market trading price of the Company’s common stock at the time of the award.

Effective January 2003, the Company adopted the fair value method to value employee stock options using the prospective transition method specified under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company had no options eligible for valuation prior to the grant of the 2003 Options. The fair value of the 2003 Options was determined at the time of the award using the Black-Scholes model, a widely used method for valuing stock based employee compensation, and the following assumptions: expected volatility was determined using the ten year trading history of the Company’s common stock (month-end closing prices), an average expected term outstanding of seven years, expected dividend yield throughout the option term of 7% and risk-free interest rate of 4% based upon an assumed 10-year US Treasury rate. Using the Black-Scholes model, the Company determined the total fair value of the 2003 Options to be $332,000 and recognizes compensation expense monthly during the

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

four years the options vest. Compensation expense attributed to the 2003 Options during the three and nine months ended September 30, 2003 was $20,000 and $29,000, respectively. The 2003 Options are due to expire May 22, 2013 and as of September 30, 2003, none of the 2003 Options are vested.

Deferred Compensation and Stock Plan for Directors

Saul Centers has established a Deferred Compensation and Stock Plan for Directors (the “Plan”) for the benefit of its directors and their beneficiaries. A director may elect to defer all or part of his or her director’s fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock, the number of shares allocated to the director is determined by the market price of the common stock on the day the fee is earned. As of September 30, 2003, 170,000 shares were authorized and registered for use under the Plan, and 145,000 shares had been credited to the directors’ deferred fee accounts.

Beginning in 1999, pursuant to the Plan, 100 shares of the Company’s common stock are awarded annually as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are issued on the date of the Annual Meeting, their issuance may not be deferred and transfer of the shares is restricted for a period of twelve months following the date of issue.

Per Share Data

Per share data is calculated in accordance with SFAS No. 128, “Earnings Per Share.” Per share data for net income (basic and diluted) is computed using weighted average shares of common stock. Convertible limited partnership units and employee stock options are the Company’s potentially dilutive securities. For all periods presented, the convertible limited partnership units are anti-dilutive. The options are currently dilutive because the average share price of the Company’s common stock exceeds the exercise prices. The Company granted 180,000 stock options to five executive officers in 1993 and 1994, of which no shares and 93,210 shares remained unexercised as of September 30, 2003 and December 31, 2002, respectively. The Company granted 220,000 stock options to six executive officers in May 2003, of which all 220,000 shares remained unexercised as of September 30, 2003. The treasury share method was used to measure the effect of the dilution.

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Minority Interests - Holders of Convertible Limited Partner Units in the Operating Partnership

The Saul Organization has a 24.8% limited partnership interest, represented by 5,185,000 convertible limited partnership units in the Operating Partnership, as of September 30, 2003. These convertible limited partnership units are convertible into shares of Saul Centers’ common stock on a one-for-one basis, provided the rights may not be exercised at any time that The Saul Organization beneficially owns, directly or indirectly, in the aggregate more than 24.9% of the outstanding equity securities of Saul Centers. The limited partnership units were not convertible as of September 30, 2003 because the Saul Organization owned in excess of 24.9% of the Company’s equity securities. The impact of The Saul Organization’s 24.8% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. Fully converted partnership units and diluted weighted average shares outstanding for the quarters ended September 30, 2003 and 2002, were 20,883,000 and 20,122,000, respectively. Fully converted partnership units and diluted weighted average shares outstanding for the nine month periods ended September 30, 2003 and 2002, were 20,711,000 and 19,979,000, respectively.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” FIN 45 outlines the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees. It states that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of its obligation. Saul Centers has guaranteed portions of its Partnership debt obligations, all of which are presented on the consolidated financial statements as mortgage notes payable. Saul Centers has guaranteed $71,131,000 of the notes payable which are recourse loans made by the Operating Partnership as of September 30, 2003. The balance of the mortgage notes payable totaling $329,537,000 are non-recourse, however, as is customary when obtaining long term non-recourse financing, borrowers such as Saul Centers make certain representations to lenders, for example, that no fraud exists and the officers are authorized to execute loan documents. Borrowers, including Saul Centers, typically agree to assume obligations arising from reliance upon these representations should a third party suffer damages related to individual mortgages. No additional liabilities were recognized as a result of the adoption of FIN 45, and the Company does not expect the adoption of FIN 45 to have a material impact on its financial condition or results of operations.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which changes the guidelines for consolidation of and disclosure related to unconsolidated entities, if those unconsolidated entities qualify as variable interest entities, as defined in FIN 46. The Company does not have any unconsolidated entities or variable interest entities and therefore the adoption of FIN 46 will not have an impact upon the consolidated financial statements.

3. Construction In Progress

Construction in progress includes the land acquisition costs, predevelopment costs, and development costs of active projects. Predevelopment costs associated with these active projects include closing costs, legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of September 30, 2003 and December 31, 2002 are as follows:

Construction in Progress

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

4. Notes Payable

Notes payable totaled $400,668,000 at September 30, 2003, of which $339,150,000 (84.6%) was fixed rate debt and $61,518,000 (15.4%) was floating rate debt. At September 30, 2003, the Company had a $125,000,000 unsecured revolving credit facility with outstanding borrowings of $49,500,000. The facility matures in August 2005 and requires monthly interest payments at a rate of LIBOR plus a spread of 1.625% to 1.875% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. As of September 30, 2003, borrowings under the facility accrued interest at LIBOR plus 1.75%. Loan availability is determined by operating income from the Company’s unencumbered properties, which, as of September 30, 2003 would have allowed the Company to borrow an additional $33,000,000 for general corporate use. An additional $42,500,000 is available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions.

In January 2003 the Company replaced its $42,000,000 construction loan used to finance the building of Washington Square at Old Town with a $42,500,000 permanent mortgage. The new permanent financing matures in 15 years and requires equal monthly principal and interest payments of $264,000 based upon a 27.5 year amortization period and a 6.01% fixed interest rate. A balloon payment of $27,872,000 will be due at maturity February 2018. In March 2003, the Company executed a $15,000,000 loan to finance the construction of Broadlands Village shopping center. The loan matures in March 2005 and requires monthly interest payments at a rate of LIBOR plus 1.7%. At September 30, 2003, a balance of $12,018,000 was outstanding on the loan. In August 2003, the Company executed a $8,000,000 fixed-rate mortgage loan. The loan accrues interest at an annual rate of 5.51% and matures in December 2011. The loan is collateralized by Ashburn Village shopping center and requires equal monthly principal and interest payments of $49,175 based upon a 25-year amortization schedule and a balloon payment of $6,465,000 at loan maturity.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Notes payable totaled $380,743,000 at December 31, 2002, of which $294,619,000 (77.4%), was fixed rate debt and $86,124,000 (22.6%) was floating rate debt. Outstanding borrowings on the $125,000,000 unsecured revolving credit facility were $46,750,000 at December 31, 2002, with additional borrowing availability of $30,250,000 for general corporate use and $48,000,000 available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions.

At September 30, 2003, the scheduled maturities of all debt, including scheduled principal amortization, for years ending December 31, were as follows:

5. Stockholders’ Equity (Deficit) and Minority Interests

The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles and, accordingly, do not report the current value of the Company’s real estate assets. The Stockholders’ Equity (Deficit) reported on the Consolidated Balance Sheets does not reflect any increase in the value resulting from the difference between the current value and the net book value of the Company’s assets. Therefore, Stockholders’ Equity (Deficit) reported on the Consolidated Balance Sheets does not reflect the market value of stockholders’ investment in the Company.

The Consolidated Statement of Operations for the three months ended September 30, 2003 includes a charge for minority interests of $2,023,000, consisting of $1,747,000 related to The Saul Organization’s share of net income for the quarter, and $276,000 related to distributions to minority interests in excess of allocated net income for the quarter. The minority interests charge for the three months ended September 30, 2002 of $2,017,000 consists of $1,411,000 related to The Saul Organization’s share of net income for the quarter, and $606,000 related to distributions to minority interests in excess of allocated net income for the quarter. The Consolidated Statement of Operations for the nine months ended September 30, 2003 includes a charge for minority interests of $6,063,000, consisting of $4,898,000 related to The Saul Organization’s share of net income for the period, and $1,165,000 related to distributions to minority interests in excess of allocated net income for the period. The minority interests charge for the nine months ended September 30, 2002 of $6,051,000 consists of $5,272,000 related to The Saul Organization’s share of net income for the period, and $779,000 related to distributions to minority interests in excess of allocated net income for the period.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

6. Related Party Transactions

Chevy Chase Bank, an affiliate of The Saul Organization, leases space in 14 of the Company’s properties. Total rental income from Chevy Chase Bank amounted to $1,085,000 and $1,014,000, for the nine months ended September 30, 2003 and 2002, respectively.

The Company utilizes Chevy Chase Bank for its various checking accounts and as of September 30, 2003 had $2,428,000 deposited in short-term interest bearing money market accounts.

The Chairman and Chief Executive Officer, the President and the Chief Accounting Officer of the Company are also officers of various members of The Saul Organization and their management time is shared with The Saul Organization. Their annual compensation is fixed by the Compensation Committee of the Board of Directors.

The Company shares with The Saul Organization on a pro-rata basis certain ancillary functions such as computer hardware, software and support services and certain direct and indirect administrative payroll based on management’s estimate of usage or time incurred, as applicable. Also, The Saul Organization subleases office space to the Company for its corporate headquarters. The terms of all such arrangements with The Saul Organization, including payments related thereto, are reviewed by the Audit Committee of the Board of Directors.

7. Subsequent Events

On July 16, 2003, the Company filed a shelf registration statement (the “Shelf Registration Statement”), with the SEC relating to the future offering of up to an aggregate of $100 million of preferred stock and depositary shares. On November 5, 2003 the Company sold 3,500,000 depositary shares, each representing 1/100th of a share of 8% Series A Cumulative Redeemable Preferred Stock. The depositary shares may be redeemed, in whole or in part, at the $25.00 liquidation preference at the Company’s option on or after November 5, 2008. The depositary shares will pay an annual dividend of $2.00 per share, equivalent to 8% of the $25.00 liquidation preference. The first dividend to be paid on January 15, 2004 will be for less than a full quarter and will cover the period from the first date the Company issues and sells the depositary shares through December 31, 2003. The Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company.

Net proceeds from the issuance, were approximately $84,300,000 million and initially were used to fully repay $52,500,000 outstanding under the Company’s revolving credit facility and the remaining balance was invested in short-term certificates of deposit.

In November 2003, the Company entered into a commitment to borrow $40,000,000 under three new fifteen year, fixed-rate cross-collateralized loans, with an annual interest rate of 5.94% and monthly principal and interest payments calculated using a 25 year amortization period. A balloon payment of $23,579,000 will be due at maturity. The loans will be secured by the Company’s Broadlands Village, The Glen and Kentlands Square shopping centers. Net proceeds after repayment of debt are expected to total approximately $8,000,000 and will be used to fund future developments, expansions or acquisitions, and general corporate uses.

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Saul Centers, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

8. Business Segments

The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies for the segments presented below are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon net operating income for properties in each segment.

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