NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 Company officers (122,500 options) and to the twelve Company directors (30,000 options), (combined, the “2004 Options”). The officers’ 2004 Options vest 25% per year over four years and have a term of ten years, subject to earlier expiration upon termination of employment. The directors’ options are exercisable immediately. (See Note 10. Stock Option Plan) The options are assumed to be outstanding for a term calculated as the period of time from grant until the midpoint between the full vesting date and expiration date, (3) Expected Dividend Yield. This rate is a value management determines after considering the Company’s current and historic dividend yield rates,  the Company’s yield in relation to other retail REITs  and the Company’s market yield at the grant date, and (4) Risk-free Interest Rate. This rate is based  upon the market yields of US Treasury obligations  with maturities corresponding to the average expected term of the options at the grant date. The Company recognizes the value of options granted, ratably over the vesting period, as compensation expense included in general and administrative expenses. The Company established a stock option plan in 1993 (the “1993 Plan”) for the purpose of attracting and retaining executive officers and other key personnel. The 1993 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 1993 Plan. The 1993 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. 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”). Following the grant of the 2003 Options, no shares were available for issuance under the 1993 Plan. 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. At the annual meeting of the Company’s stockholders  in 2004, the stockholders approved the adoption of  the 2004 stock plan (the “2004 Plan”) for the purpose of attracting and retaining executive officers, directors and other key personnel. The 2004 Plan provides for grants of options to purchase up to 500,000 shares  of common stock as well as grants of up to 100,000 shares of common stock to directors. The 2004 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. Effective April 26, 2004, the Compensation Committee granted options to purchase a total of 152,500 shares (27,500 shares of incentive stock options and 125,000 shares of nonqualified stock options) to eleven  Saul Centers, Inc. is the sole general partner of the Operating Partnership, owning a 75.9% interest as of December 31, 2004. Minority interests in the Operating Partnership are comprised of limited partnership units owned by The Saul Organization. Minority interests are increased for earnings allocated to limited partnership units and decreased for distributions. Amounts distributed in excess of the limited partners’ share of earnings also increase minority interests, are expensed in the respective period and are classified in the income statement as distributions in excess of earnings. The Compensation Committee has also approved an annual award of shares of the Company’s common stock 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 awarded as of each Annual Meeting of Shareholders, and their issuance may not be deferred. Each director was issued 200, 100 and 100 shares, for the years ended December 31, 2004, 2003 and 2002, respectively. The shares were valued at the closing stock price on the dates the shares were awarded  and included in general and administrative expenses  in the total amounts of $71,000, $29,000 and $25,000, for the years ended December 31, 2004, 2003 and 2002, respectively. Pursuant to the 2004 Plan, the Compensation Committee established a Deferred Compensation  Plan for Directors (the “Plan”) for the benefit of its directors and their beneficiaries. The Plan replaces  the Company’s previous Deferred Compensation  and Stock Plan for Directors. 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, fees earned during a calendar quarter are aggregated and divided by the market price of the common stock on the quarter’s last trading day to determine the number of shares to be allocated to the director. As  of December 31, 2004, 168,000 shares had been credited to the directors’ deferred fee accounts. Minority Interests