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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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(Mark One)

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



For the fiscal year ended December 31, 2003



OR



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



For the transition period from
 to



Commission file number 1-14516



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PRENTISS PROPERTIES TRUST

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 75-2661588                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3890 West Northwest Highway, Suite 400, Dallas, Texas          |  | 75220                               
|(Address of Registrants Principal Executive Offices)          |  | (Zip Code)                          



(214) 654-0886

(Registrants telephone number, including area code)



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



|                                                               |  |                                          
|-------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                            |  | Name of each exchange on which registered
|Common Shares of Beneficial Interest, par value $.01 per share |  | New York Stock Exchange, Inc.            
|                                                               | 
|Preferred Share Purchase Rights                                |  | New York Stock Exchange, Inc.            



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



None

(Title of class)



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Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    Yes  x    No ̈



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



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



As of June 30, 2003, the last business day of the registrants most recently completed second fiscal quarter, the
aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,082,078.



As of March 10, 2004, the number of Common Shares of Beneficial Interest outstanding was 44,282,912, and the number of outstanding Participating
Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 3,773,585.



DOCUMENTS INCORPORATED BY REFERENCE



Part III incorporates by reference the Companys Definitive Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 5, 2004.



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PRENTISS PROPERTIES TRUST



INDEX



|                           |  |                                                                                                |  |   
|-------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Item No.                   |  | Form 10-KReportPage                                                                           
|                           | 
|Forward-Looking Statements |  | 3                                                                                             
|                           | 
|PART I                     |  |                                                                                               
|                           |  |                                                                                               
|1.                         |  | Business                                                                                       |  | 4 
|2.                         |  | Properties                                                                                     |  | 10
|3.                         |  | Legal Proceedings                                                                              |  | 18
|4.                         |  | Submission of Matters to a Vote of Security Holders                                            |  | 18
|                           | 
|PART II                    |  |                                                                                               
|                           |  |                                                                                               
|5.                         |  | Market for Companys Common Equity and Related Shareholder Matters                             |  | 19
|6.                         |  | Selected Financial Data                                                                        |  | 21
|7.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 24
|7A.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 61
|8.                         |  | Financial Statements and Supplementary Data                                                    |  | 62
|9.                         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 62
|9A.                        |  | Controls and Procedures                                                                        |  | 62
|                           | 
|PART III                   |  |                                                                                               
|                           |  |                                                                                               
|10.                        |  | Trustees and Executive Officers of the Company                                                 |  | 63
|11.                        |  | Executive Compensation                                                                         |  | 63
|12.                        |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |  | 63
|13.                        |  | Certain Relationships and Related Transactions                                                 |  | 63
|14.                        |  | Principal Accountant Fees and Services                                                         |  | 63
|                           | 
|PART IV                    |  |                                                                                               
|                           |  |                                                                                               
|15.                        |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 63
|                           | 
|Signatures                 |  |                                                                                               



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FORWARD-LOOKING STATEMENTS



This
Form 10-K and the documents incorporated by reference into this Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in
this Form 10-K, words such as anticipate, believe, estimate, expect, intend, predict, project, and similar expressions, as they relate to us or our management,
identify forward-looking statements. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by us and information currently available to us. These forward-looking statements are subject to certain
risks, uncertainties and assumptions, including risks, uncertainties and assumptions related to the following:



| |  | The geographic concentration of our properties;
| | - | -----------------------------------------------



| |  | Our real estate acquisition, redevelopment, development and construction activities;
| | - | ------------------------------------------------------------------------------------



| |  | Factors that could result in the poor operating performance of our properties including tenant defaults and increased costs such as taxes, insurance, utilities and casualty losses
that exceed insurance limits;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Competition in markets where we have properties;
| | - | ------------------------------------------------



| |  | Environmental and Americans with Disabilities Act compliance issues related to our properties;
| | - | ----------------------------------------------------------------------------------------------



| |  | Some of our properties may be subject to uninsured losses;
| | - | ----------------------------------------------------------



| |  | Our properties are illiquid assets;
| | - | -----------------------------------



| |  | Our incurrence of debt and use of variable rate debt and derivative financial instruments;
| | - | ------------------------------------------------------------------------------------------



| |  | Limited ability of shareholders to effect a change of control;
| | - | --------------------------------------------------------------



| |  | Our failure to qualify as a REIT;
| | - | ---------------------------------



| |  | Conflicts of interest;
| | - | ----------------------



| |  | Changes in our investment, financing and borrowing policies without shareholder approval;
| | - | -----------------------------------------------------------------------------------------



| |  | Our dependence on key personnel;
| | - | --------------------------------



| |  | Our third-party property management, leasing, development and construction business and related services;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | The effect of shares available for future sale on the price of common shares; and
| | - | ---------------------------------------------------------------------------------



| |  | Changes in market conditions including market interest rates.
| | - | -------------------------------------------------------------



If one or more of these risks or uncertainties materialize, or if any underlying assumption proves incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should refer to the section
entitled Risk Factors beginning on page 50 of this Form 10-K for a discussion of risk factors that could cause actual results to differ materially from those indicated by the forward-looking statements. You are cautioned not to place
undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-K or the date of any document incorporated by reference into this Form 10-K. We do not undertake any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.



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PART I



|Item 1. | Business
|------- | --------



Overview



We are a
self-administered and self-managed Maryland REIT. We acquire, own, manage, lease, develop and build primarily office properties throughout the United States. We are self-administered in that we provide our own administrative services, such as
accounting, tax and legal, internally through our own employees. We are self-managed in that we internally provide all the management and maintenance services that our properties require through employees, such as, property managers, leasing
professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P. and its subsidiaries, and two management service companies, Prentiss Properties Resources, Inc. and its
subsidiaries and Prentiss Properties Management, L.P. The ownership of the operating partnership was as follows at December 31, 2003:



|                          |  |              |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|------------------------- |  | ------------ |  | ------ | - |  | ------------------------------------ |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | -
|2003 (units in thousands) |  | Common Units |  | %      |   |  | Series D Convertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |  
|Prentiss Properties Trust |  | 42,696       |  | 96.66  | % |  | 3,774                                |  | 100.00 | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | %
|Third Parties             |  | 1,475        |  | 3.34   | % |  |                                     |  | 0.00   | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|Total                     |  | 44,171       |  | 100.00 | % |  | 3,774                                |  | 100.00 | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  



Effective January 1,
2003, our operating partnership acquired for approximately $67,000, the voting stock of Prentiss Properties Resources, Inc., from Ampulla, LLC, a single member limited liability company owned by Michael V. Prentiss, Chairman of the Board of Prentiss
Properties Trust. Prentiss Properties Resources, Inc. was incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services
business serves a broad base of clients, including major financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment groups. Through Prentiss Properties Resources, Inc. we offer a full range
of fee-based services, including property management, leasing, tenant construction, insurance, accounting, tax, acquisition, disposition, facilities management, and corporate and asset management services. Prior to this transaction, we owned a 98%
non-voting interest and accounted for our interest in Prentiss Properties Resources, Inc. using the equity method of accounting. Subsequent to this transaction, the operating partnership owns 100% of Prentiss Properties Resources, Inc. and we
consolidate the accounts of Prentiss Properties Resources, Inc. with and into the accounts of the operating partnership.



As of December 31, 2003, we owned interests in a diversified portfolio of 137 primarily suburban Class A office and suburban industrial properties as
follows:



|                      |  |                    |  |                         
|--------------------- |  | ------------------ |  | ------------------------
|                      |  | Number ofBuildings |  | Net Rentable Square Feet
|                      |  |                    |  | (in millions)           
|Office properties     |  | 106                |  | 15.5                    
|Industrial properties |  | 31                 |  | 2.3                     
|                      |  |                    |  |                         
|Total                 |  | 137                |  | 17.8                    
|                      |  |                    |  |                         



As of December 31,
2003, our properties were 91% leased to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 11.0 million net rentable square feet in office, industrial and other properties for third parties.



Our primary business is the ownership and operation of office
and industrial properties throughout the United States. Our organization which includes approximately 475 employees consists of a corporate office located



4



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in Dallas, Texas and five regional offices each of which operates under the guidance of a member of our senior management
team. The following are the 11 markets in which our properties are located with the first market being the location of each regional office:



|                    |  |                                           
|------------------- |  | ------------------------------------------
|Region              |  | Market                                    
|Mid-Atlantic        |  | Metropolitan Washington, DC               
|Midwest             |  | Chicago, Suburban Detroit                 
|Southwest           |  | Dallas/Fort Worth, Austin, Denver, Houston
|Northern California |  | Oakland, Sacramento                       
|Southern California |  | San Diego, Los Angeles                    



We have determined
that our reportable segments are those that are based on our method of internal reporting, which disaggregates our business based upon our five geographic regions. For revenues, income from continuing operations and total asset information on each
of our segments, see Note (19) to our Consolidated Financial Statements.



Recent Developments



Regus Business Centre
Corp. (RBCC) was a tenant of ours under a lease. The tenant filed Chapter 11 bankruptcy on January 14, 2003 and effective January 14, 2003, the lease was rejected. On January 21, 2004, we received a payment totaling $3.2 million as settlement for
our claims in the bankruptcy.



On January 22, 2004, Prentiss
Office Investors, L.P. was established to acquire office properties in our core markets of Washington D.C./Northern Virginia, Chicago, Dallas/Ft. Worth, Northern California and San Diego/Orange County. The partnership was initially 99.9% owned by
the operating partnership and was seeded by the transfer of several recent acquisitions including, 2291 Wood Oak Drive a single office building containing approximately 228,000 net rentable square feet located in Herndon Virginia, Corporate Lakes
III a single office building containing approximately 124,000 net rentable square feet located in Chicago Illinois, and seven office buildings containing approximately 370,000 net rentable square feet located in Carlsbad California.



Pursuant to a joint venture agreement, effective February 1, 2004, Stichting
Pensioenfonds ABP, a Netherlands based pension fund, acquired a 49% limited partnership interest in Prentiss Office Investors, L.P. for proceeds totaling $68.9 million. The joint venture will be consolidated with and into the accounts of the
operating partnership.



Pursuant to its limited partnership
agreement, Prentiss Office Investors, L.P. will engage in a series of transactions pursuant to which it intends to acquire approximately 15 to 25 Class A office properties over an 18 to 30 month period in the geographic regions within the United
States in which we currently conduct business. Class A office properties will not be acquired after the initial 18-30 month investment period unless our operating partnership, as general partner of Prentiss Office Investors, L.P., and Stichting
Pensioenfonds ABP, as limited partner of Prentiss Office Investors, L.P., mutually agree to amend the limited partnership agreement to provide for a longer investment period. Prentiss Office Investors, L.P. anticipates incurring indebtedness in an
aggregate amount of up to 60.0% of the undepreciated acquisition costs of all of the properties owned by Prentiss Office Investors, L.P. As a result, pursuant to its limited partnership agreement, Prentiss Office Investors, L.P. has the authority to
invest up to $510.0 million during its 18-30 month investment period, which will include equity contributed to Prentiss Office Investors, L.P. and the indebtedness in an aggregate amount up to 60% of the undepreciated acquisition costs of all
properties acquired by the partnership.



On January 28, 2004,
we completed two four-year interest rate swaps in the notional amount of $50.0 million. The interest rate swaps effectively lock in our cost of funds at 3.819% (before the spread over LIBOR) on $50.0 million of our variable rate borrowings. The
interest rate swap agreements are effective beginning October 1, 2004 and mature October 1, 2008.



On February 4, 2004, pursuant to a unit repurchase agreement between our operating partnership and Brandywine Operating Partnership, L.P., we repurchased
from Brandywine Operating Partnership, L.P. our



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outstanding 7.50% Series E Preferred Units and 26,768 common units held by Brandywine Operating Partnership L.P. The
Series E Preferred Units were repurchased at their liquidation value of $10.0 million plus accrued and unpaid dividends of $70,055. The common units were repurchased for $891,803 representing a per unit price of $33.316, calculated as the average of
the daily market price of our common shares for the 10 consecutive trading days prior to the date of repurchase. Concurrent with the repurchase, Brandywine Operating Partnership, L.P. repaid a promissory note in the amount of $8.9 million and
accrued and unpaid interest of $282,308 due to our operating partnership. An amount totaling $1.7 million, representing the difference between the units repurchased and the proceeds from the promissory note was paid by our operating partnership to
Brandywine Operating Partnership, L.P using funds from our revolving credit facility.



On February 19, 2004, we renewed our $300 million revolving credit facility, including an extension of the maturity date from May 23, 2005 to February 19, 2007. The interest rate on the facility will fluctuate based
on our overall leverage with a range between 30-day LIBOR plus 112.5 basis points and 30-day LIBOR plus 160 basis points. The pricing on the renewed facility represents a 12.5 basis point to 15.0 basis point pricing reduction across the leverage
grid. The facility was substantially oversubscribed with initial commitments of $370 million. Banking participants in the revolving credit facility include Bank One as Administrative Agent; Bank of America as Syndication Agent; Commerzbank, EuroHypo
and Societe General as Documentation Agents; PNC Bank, Sun Trust and Union Bank of California as Co-Agents; and Comerica Bank, KeyBank, Mellon Bank, and SouthTrust Bank as Lenders.



Using proceeds from our revolving credit facility, on February 24, 2004, we repurchased the operating partnerships
outstanding 8.30% Series B Cumulative Redeemable Perpetual Preferred Units, for approximately $96.2 million, which included accrued and unpaid dividends of $1.2 million.



On March 2, 2004, we negotiated an interest rate reduction on the $75.0 million unsecured term loan with Commerzbank AG. The
interest rate which is based on overall leverage was reduced from 30-day LIBOR plus 125 to 175 basis points to 30-day LIBOR plus 112.5 to 160 basis points. In addition, the term loan which had an original maturity date of March 16, 2006 was extended
to March 16, 2009.



On March 10, 2004, we completed a five-year
interest rate swap in the notional amount of $30.0 million. The interest rate swap effectively locks in our cost of funds at 3.443% (before the spread over LIBOR) on $30.0 million of our variable rate borrowings. The interest rate swap agreement is
effective beginning October 1, 2004 and matures October 1, 2009.



On June 10, 2002, we entered into a securities sales agreement with Brinson Patrick Securities Corporation which we refer to as the Dribble Plan. Under our Dribble Plan we may sell, with Brinson Patrick acting as our sales agent, up to
3,000,000 of our common shares at the then market price directly to the public. Subsequent to December 31, 2003, we issued 1,186,100 common shares through the Dribble Plan resulting in net proceeds of $39.3 million, or $33.09 per share, after
underwriting discounts. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility. Since the inception of the Dribble Plan, through March 12, 2004, pursuant to the Dribble Plan, we have issued
1,730,200 common shares and as a result, we have 1,269,800 remaining common shares available to issue under the plan.



Business and Growth Strategies



Our primary objective is to maximize shareholder value through increases in distributable cash flow per share and appreciation in the value of our common
shares. We intend to achieve this objective through a combination of external and internal growth, while maintaining a conservative balance sheet and pursuing a strategy of financial flexibility.



External Growth



Acquisitions



Acquisitions are a key component of our external growth strategy. We selectively pursue acquisitions in our core markets when long-term yields make
acquisitions attractive.



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We invest opportunistically and pursue assets that are:



| |  | managed by us and owned by our existing management clients which become available for sale;
| | - | -------------------------------------------------------------------------------------------



| |  | performing at a level believed to be substantially below potential due to identifiable management weaknesses or temporary market conditions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | encumbered by indebtedness that is in default or is not performing;
| | - | -------------------------------------------------------------------



| |  | held or controlled by short-term owners (such as assets held by insurance companies and financial institutions under regulatory pressure to sell);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | contain below market leases, which may be re-leased in the near term to improve cash flow;
| | - | ------------------------------------------------------------------------------------------



| |  | have good long term growth prospect; or
| | - | ---------------------------------------



| |  | are consistent with our product and market strategies.
| | - | ------------------------------------------------------



We believe that we are particularly well-positioned to acquire properties because of our:



| |  | presence in and knowledge of our 11 markets across the United States;
| | - | ---------------------------------------------------------------------



| |  | a diversified base of approximately 1,000 tenants;
| | - | --------------------------------------------------



| |  | existing relationships with 22 different third-party management clients;
| | - | ------------------------------------------------------------------------



| |  | access to capital as a public company, including our revolving credit facility;
| | - | -------------------------------------------------------------------------------



| |  | reputation as a buyer with the ability to execute complicated transactions;
| | - | ---------------------------------------------------------------------------



| |  | fully-integrated operations which allow rapid response to opportunities;
| | - | ------------------------------------------------------------------------



| |  | UPREIT structure, whereby sellers may contribute properties in exchange for units in our operating partnership in a tax deferred transaction; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | relationships with real estate brokers, institutional owners, and third-party management clients, which often allow preferential access to opportunities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



In evaluating potential acquisition opportunities, we rely on the
experience of our employees and on our internal research capabilities in considering a number of factors, including:



| |  | macro-economic issues that impact the market in which the property is located;
| | - | ------------------------------------------------------------------------------



| |  | location and competition in the propertys market;
| | - | --------------------------------------------------



| |  | occupancy of and demand for properties of a similar type in the same market;
| | - | ----------------------------------------------------------------------------



| |  | the construction quality and condition of the property;
| | - | -------------------------------------------------------



| |  | the potential for increased cash flow after benefiting from our renovations, refurbishment and upgrades;
| | - | --------------------------------------------------------------------------------------------------------



| |  | purchase price relative to replacement costs; and
| | - | -------------------------------------------------



| |  | the potential to generate revenue growth at or above levels of economic growth in the propertys market.
| | - | --------------------------------------------------------------------------------------------------------



Further, we believe that our development expertise enables us to identify the
potential for improvement in an acquisition opportunity, which might not be apparent to a buyer without similar expertise.



During the year ended December 31, 2003, we acquired 11 office buildings totaling approximately 1.1 million net rentable square feet. The following table
sets forth the segment, market, month of acquisition, number of buildings, net rentable square feet and acquisition price of the buildings acquired. See Item 2. Properties for additional information relating to our properties.



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|                               |  |                 |  |                  |  |                      |  |                     |  |                             |  |                   |      
|------------------------------ |  | --------------- |  | ---------------- |  | -------------------- |  | ------------------- |  | --------------------------- |  | ----------------- | -----
|Acquired Properties            |  | Segment         |  | Market           |  | Month of Acquisition |  | Number of Buildings |  | Net Rentable Square Feet(1) |  | Acquisition Price
|                               |  |                 |  |                  |  |                      |  |                     |  | (in thousands)              |  | (in millions)    
|Park West C3                   |  | Southwest       |  | Dallas/Ft. Worth |  | Feb. 2003            |  | 1                   |  | 339                         |  | $                 | 28.1 
|410 Warrenville Road           |  | Midwest         |  | Chicago          |  | May 2003             |  | 1                   |  | 60                          |  |                   | 8.7  
|Corporate Lakes III            |  | Midwest         |  | Chicago          |  | June 2003            |  | 1                   |  | 124                         |  |                   | 22.6 
|2291 Wood Oak Drive            |  | Mid-Atlantic    |  | Metro. Wash., DC |  | Aug. 2003            |  | 1                   |  | 228                         |  |                   | 52.2 
|Camino West Corporate Park     |  | Southern Calif. |  | San Diego        |  | Nov. 2003            |  | 1                   |  | 54                          |  |                   | 8.9  
|Carlsbad Airport Plaza         |  | Southern Calif. |  | San Diego        |  | Nov. 2003            |  | 1                   |  | 62                          |  |                   | 10.5 
|La Place Court                 |  | Southern Calif. |  | San Diego        |  | Nov. 2003            |  | 2                   |  | 81                          |  |                   | 13.6 
|Pacific Ridge Corporate Centre |  | Southern Calif. |  | San Diego        |  | Nov. 2003            |  | 2                   |  | 121                         |  |                   | 23.9 
|Pacific View Plaza             |  | Southern Calif. |  | San Diego        |  | Nov. 2003            |  | 1                   |  | 52                          |  |                   | 10.2 
|                               |  |                 |  |                  |  |                      |  |                     |  |                             |  |                   |      
|                               |  |                 |  |                  |  |                      |  | 11                  |  | 1,121                       |  | $                 | 178.7
|                               |  |                 |  |                  |  |                      |  |                     |  |                             |  |                   |      

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|(1) | Net rentable square feet defines the area of a property for which a tenant is required to pay
rent, which includes the actual rentable area plus a portion of the common areas of the property allocated to a tenant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Development



Similar to acquisitions, development is another key component of our external growth strategy. We intend to capitalize on our development capabilities by
selectively developing and redeveloping properties in markets with favorable current and projected long-term growth characteristics and supply-demand imbalances. We control all aspects of the development process, including site selection, project
concept, design and construction, financing, leasing and property management. We intend to develop primarily office properties with levels of pre-leasing appropriate for market conditions.



In evaluating potential development opportunities, we rely on the experience
of our employees and on our internal research capabilities in considering a number of factors, including:



| |  | macro-economic issues that impact the market in which the development is to be located;
| | - | ---------------------------------------------------------------------------------------



| |  | location and competition in the propertys market;
| | - | --------------------------------------------------



| |  | occupancy of and demand for properties of a similar type in the same market; and
| | - | --------------------------------------------------------------------------------



| |  | the potential to generate revenue growth at or above levels of economic growth in the propertys market.
| | - | --------------------------------------------------------------------------------------------------------



Internal Growth



We seek to maximize the profitability of our properties by renewing leases, maintaining high occupancy rates, increasing
rental revenues, and reducing operating costs.



We strive to
achieve increases in rental revenues by negotiating leases that include increases in rent during the lease term, by replacing expiring leases with new leases at higher rental rates and by improving occupancy rates. We also seek to renew existing
leases, which reduces the costs of lease rollovers, reduces rental revenue fluctuations and enhances long-term relationships with national tenants that may have space needs in our other markets.



We strive to achieve reductions in operating costs by performing many
functions, e.g., engineering, tax and legal, in-house instead of hiring third parties and by employing benchmarking and best practices methodologies. Our benchmarking program compares operating costs and efficiencies of each property with other
office and industrial properties. Under the program, we conduct periodic evaluations of key performance indicators at each building and compare the results to a variety of benchmarks, e.g., specific buildings, portfolios, regions and the industry.
Our best practices methodology involves continuously analyzing benchmarking data, investigating properties that perform better than the norm and regularly disseminating and sharing information with respect to the best practices employed at the
better performing properties throughout our management system. By employing these methodologies, we believe that we can continue to capitalize on opportunities to reduce operating costs and operate the properties more efficiently and effectively.



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We use centralized cash management, national alliances with service providers, a sophisticated budgeting
system and state-of-the-art information systems to improve efficiency and increase profits.



Asset managers in each region develop a strategy and marketing position for each property. Each property is evaluated using sophisticated valuation software to determine the overall effect of property-level decisions
such as lease structures and capital expenditures on asset value. Asset managers also work with property managers and engineers to determine where improvements, such as lighting retrofits and energy management system upgrades, will maximize returns.



Third-Party Management



At December 31, 2003, we, through our subsidiaries, managed or performed
property-related services for 133 office, industrial and other properties owned by 22 third-party management clients. These properties are located throughout the United States and contain approximately 11.0 million net rentable square feet.



Our management business serves a broad base of clients,
including major financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment groups. In addition to property management and leasing, we offer our clients a full range of fee-based services,
including tenant construction, leasing, insurance, accounting, tax, acquisition, disposition, facilities management, and corporate and asset management services.



Competition



We operate in five regions: Mid-Atlantic, Midwest, Southwest, Northern California and Southern California and compete with many local, regional and
national competitors in the office and industrial sectors. These five regions comprise 11 markets nationwide. The markets in which we operate are not dominated by any one owner or by us. In each market we compete on a number of factors including
rental rates, tenant concessions, quality and location of buildings, quality of property management, and other economic and non-economic factors. Our competitors may have greater financial resources than are available to us and/or they may be
willing to rent space at lower rental rates or provide greater leasing concessions. Our major competitors in each region include the following companies:



|                    |  |                                                                                                                                                    
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Segment             |  | Competitors                                                                                                                                        
|Mid-Atlantic        |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Vornado Realty Trust                                                        
|                    | 
|Midwest             |  | CarrAmerica Realty Corp., Duke-Weeks Realty Corp., Equity Office Properties, Great Lakes REIT, John Buck Co., Trizec Properties, Inc.              
|                    | 
|Southwest           |  | CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office Properties, Lincoln Property Co., Trammell Crow Co., Trizec Properties, Inc.
|                    | 
|Northern California |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, RREEF, Shorenstein Co.                                                      
|                    | 
|Southern California |  | Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty Corp., RREEF                                                       



9



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##### Index to Financial Statements

Corporate Governance



We have implemented the following corporate governance initiatives to address certain legal requirements promulgated under the Sarbanes-Oxley Act of 2002,
as well as the recently adopted New York Stock Exchange corporate governance listing standards:



| |  | Our board of trustees determined that Ronald G. Steinhart, Dr. Leonard M. Riggs, Jr. and Barry J.C. Parker each qualify as an audit committee financial expert as such
term is defined under Item 401 of Regulation S-K. Our board of trustees has also made an affirmative determination that each of Messrs. Steinhart, Riggs and Parker is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our audit committee established Audit Committee Complaint Procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting
control or auditing matters, including the anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our board of trustees updated our Code of Conduct to comply with the Sarbanes-Oxley Act of 2002 and the recently adopted listing standards of the New York Stock Exchange. Our Code
of Conduct governs business decisions made and actions taken by our trustees, officers and employees. A copy of this Code is available on our website at http:/www.prentissproperties.com and we will disclose on this website any amendment to or wavier
of any provision of the Code applicable to our trustees and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange. A copy of the Code is also available in print to any
shareholder upon written request addressed to Investor Relations, Prentiss Properties Trust, 3890 West Northwest Highway, Suite 400, Dallas, Texas 75220.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our board of trustees established an Ethics Hotline that employees may use to anonymously report possible violations of the Code of Conduct, including concerns regarding
questionable accounting, internal accounting controls or auditing matters.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our board of trustees established and adopted new charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. Each committee is comprised of
three (3) independent trustees, with the exception of the Compensation Committee, which is comprised of two (2) independent trustees. A copy of each of these charters is available on our website at http://www.prentissproperties.com and is
available in print to any shareholder upon written request addressed to Investor Relations, Prentiss Properties Trust, 3890 West Northwest Highway, Suite 400, Dallas, Texas 75220.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our board of trustees adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.prentissproperties.com and is available in print to
any shareholder upon written request addressed to Investor Relations, Prentiss Properties Trust, 3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Available Information



We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the
SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SECs web
site at www.sec.gov. No information from this web page is incorporated by reference herein. Our web site is www.prentissproperties.com. You may also obtain copies of our annual, quarterly and current reports, proxy statements, Code of Conduct, the
Charters of our Audit, Compensation, and Nominating and Corporate Governance Committees of our board of trustees and certain other information filed with the SEC, as well as amendments thereto, free of charge from our web site. These documents are
posted to our web site as soon as reasonably practicable after we have filed or furnished these documents to the SEC.



|Item 2. | Properties
|------- | ----------



At December 31, 2003, we owned interests in 137 properties totaling 17.8 million net rentable square feet with no individual property representing either
10% or more of our total assets at December 31, 2003 or gross revenues for the year ended December 31, 2003. The properties consist of 106 office properties comprising



10



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##### Table of Contents

##### Index to Financial Statements

approximately 15.5 million net rentable square feet and 31 industrial properties comprising approximately 2.3 million net
rentable square feet. As of December 31, 2003, all of these properties are wholly-owned by us (through our subsidiaries), except the following:



| | (1) | the Broadmoor Austin properties, which are held pursuant to a 100% leasehold interest by Broadmoor Austin Associates, a joint venture, in which we own a 50% non-controlling interest
and account for using the equity method of accounting;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | the 1676 International Drive and 8260 Greensboro properties, which are owned by Tysons International Partners, a joint venture, in which we own a 25% non-controlling interest and
account for using the equity method of accounting;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | One Northwestern Plaza, a property in which we own a 100% leasehold interest and consolidate with and into the accounts of our operating partnership; and
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | 6600 Rockledge Drive, a property in which we own a 98.9% leasehold interest and consolidate with and into the accounts of our operating partnership.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------



11



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##### Index to Financial Statements

The following table presents specific information about our properties as of December 31, 2003:



|                             |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |        |                            |    
|---------------------------- |  | ------------ |  | ----------------- |  | ---------------------- |  | ----------------- |  | -------------------------- |  | ---------------------------------------- | ------ | -------------------------- | ---
|Property Name                |  | BuildingType |  | Market            |  | Year(s)Built/Renovated |  | NumberofBuildings |  | Net RentableSquare Feet(C) |  | Total BaseRent for Year Ended12/31/03(D) |        | PercentLeasedAs of12/31/03
|                             |  |              |  |                   |  |                        |  |                   |  | (in thousands)             |  | (in thousands)                           |        |                           
|1676 International Drive(A)  |  | Office       |  | Metro. Wash., DC  |  | 1999                   |  | 1                 |  | 75                         |  | $                                        | 2,092  |                            | 100
|2291 Wood Oak Drive          |  | Office       |  | Metro. Wash., DC  |  | 1999                   |  | 1                 |  | 228                        |  |                                          | 1,602  |                            | 100
|2411 Dulles Corner Road      |  | Office       |  | Metro. Wash., DC  |  | 1990                   |  | 1                 |  | 177                        |  |                                          | 4,160  |                            | 97 
|3130 Fairview Park Drive     |  | Office       |  | Metro. Wash., DC  |  | 1999                   |  | 1                 |  | 183                        |  |                                          | 5,555  |                            | 100
|3141 Fairview Park Drive     |  | Office       |  | Metro. Wash., DC  |  | 1988                   |  | 1                 |  | 192                        |  |                                          | 3,300  |                            | 95 
|4401 Fair Lakes Court        |  | Office       |  | Metro. Wash., DC  |  | 1988                   |  | 1                 |  | 59                         |  |                                          | 1,308  |                            | 73 
|6600 Rockledge Drive         |  | Office       |  | Metro. Wash., DC  |  | 1981                   |  | 1                 |  | 156                        |  |                                          | 4,126  |                            | 100
|7101 Wisconsin Avenue        |  | Office       |  | Metro. Wash., DC  |  | 1975                   |  | 1                 |  | 237                        |  |                                          | 4,379  |                            | 74 
|8260 Greensboro(A)           |  | Office       |  | Metro. Wash., DC  |  | 1980                   |  | 1                 |  | 38                         |  |                                          | 879    |                            | 95 
|8521 Leesburg Pike           |  | Office       |  | Metro. Wash., DC  |  | 1984                   |  | 1                 |  | 145                        |  |                                          | 2,640  |                            | 33 
|12601 Fair Lakes Circle      |  | Office       |  | Metro. Wash., DC  |  | 1995                   |  | 1                 |  | 264                        |  |                                          | 4,892  |                            | 100
|13825 Sunrise Valley Drive   |  | Office       |  | Metro. Wash., DC  |  | 1989                   |  | 1                 |  | 104                        |  |                                          | 2,128  |                            | 100
|Calverton Office Park        |  | Office       |  | Metro. Wash., DC  |  | 1981-1987              |  | 3                 |  | 307                        |  |                                          | 5,129  |                            | 79 
|Campus Point                 |  | Office       |  | Metro. Wash., DC  |  | 1985                   |  | 1                 |  | 172                        |  |                                          | 2,898  |                            | 100
|Fairmont Building            |  | Office       |  | Metro, Wash., DC  |  | 1964/1997              |  | 1                 |  | 122                        |  |                                          | 2,733  |                            | 95 
|Greenwood Center             |  | Office       |  | Metro. Wash., DC  |  | 1985                   |  | 1                 |  | 150                        |  |                                          | 3,525  |                            | 100
|Oakwood Center               |  | Office       |  | Metro, Wash., DC  |  | 1982                   |  | 1                 |  | 128                        |  |                                          | 2,728  |                            | 96 
|Park West at Dulles Corner   |  | Office       |  | Metro, Wash., DC  |  | 1997                   |  | 1                 |  | 152                        |  |                                          | 4,080  |                            | 100
|Plaza 1900                   |  | Office       |  | Metro, Wash., DC  |  | 1989                   |  | 1                 |  | 203                        |  |                                          | 4,358  |                            | 100
|Research Office Center I-III |  | Office       |  | Metro. Wash., DC  |  | 1986-2000              |  | 3                 |  | 439                        |  |                                          | 10,140 |                            | 92 
|Willow Oaks I-III            |  | Office       |  | Metro. Wash., DC  |  | 1986-2002              |  | 3                 |  | 569                        |  |                                          | 8,212  |                            | 77 
|                             |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |        |                            |    
|Total Mid-Atlantic Region    |  |              |  |                   |  |                        |  | 27                |  | 4,100                      |  |                                          | 80,864 |                            |    
|                             |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |        |                            |    
|123 North Wacker Drive       |  | Office       |  | Chicago           |  | 1986                   |  | 1                 |  | 540                        |  |                                          | 7,574  |                            | 88 
|410 Warrenville Road         |  | Office       |  | Chicago           |  | 1999                   |  | 1                 |  | 60                         |  |                                          | 512    |                            | 100
|701 Warrenville Road         |  | Office       |  | Chicago           |  | 1988                   |  | 1                 |  | 67                         |  |                                          | 1,184  |                            | 100
|1717 Deerfield Road          |  | Office       |  | Chicago           |  | 1985                   |  | 1                 |  | 138                        |  |                                          | 842    |                            | 79 
|1800 Sherman Avenue          |  | Office       |  | Chicago           |  | 1986                   |  | 1                 |  | 136                        |  |                                          | 3,213  |                            | 77 
|Bannockburn Centre           |  | Office       |  | Chicago           |  | 1999                   |  | 1                 |  | 257                        |  |                                          | 4,560  |                            | 100
|Corporate Lakes III          |  | Office       |  | Chicago           |  | 1990                   |  | 1                 |  | 124                        |  |                                          | 1,051  |                            | 100
|Corporetum Office Campus     |  | Office       |  | Chicago           |  | 1984-1987              |  | 5                 |  | 324                        |  |                                          | 2,745  |                            | 43 
|OHare Plaza II              |  | Office       |  | Chicago           |  | 1986                   |  | 1                 |  | 236                        |  |                                          | 5,175  |                            | 76 
|One OHare Centre            |  | Office       |  | Chicago           |  | 1984                   |  | 1                 |  | 380                        |  |                                          | 4,467  |                            | 74 
|Salton                       |  | Office       |  | Chicago           |  | 2001                   |  | 1                 |  | 59                         |  |                                          | 1,104  |                            | 100
|Chicago Industrial           |  | Industrial   |  | Chicago           |  | 1987-1988              |  | 4                 |  | 682                        |  |                                          | 2,282  |                            | 100
|One Northwestern Plaza       |  | Office       |  | Sub. Detroit      |  | 1989                   |  | 1                 |  | 242                        |  |                                          | 3,915  |                            | 80 
|                             |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |        |                            |    
|Total Midwest Region         |  |              |  |                   |  |                        |  | 20                |  | 3,245                      |  |                                          | 38,624 |                            |    
|                             |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |        |                            |    
|Barton Skyway I-IV           |  | Office       |  | Austin            |  | 1999-2002              |  | 4                 |  | 787                        |  |                                          | 15,151 |                            | 99 
|Broadmoor Austin(B)          |  | Office       |  | Austin            |  | 1991                   |  | 7                 |  | 556                        |  |                                          | 10,179 |                            | 100
|Cielo Center                 |  | Office       |  | Austin            |  | 1984                   |  | 3                 |  | 271                        |  |                                          | 4,248  |                            | 86 
|Spyglass Point               |  | Office       |  | Austin            |  | 1999                   |  | 1                 |  | 59                         |  |                                          | 964    |                            | 100
|Bachman East & West          |  | Office       |  | Dallas/Fort Worth |  | 1986                   |  | 2                 |  | 196                        |  |                                          | 2,875  |                            | 91 
|Burnett Plaza                |  | Office       |  | Dallas/Fort Worth |  | 1983                   |  | 1                 |  | 1,025                      |  |                                          | 15,497 |                            | 95 
|Cottonwood Office Center     |  | Office       |  | Dallas/Fort Worth |  | 1986                   |  | 3                 |  | 164                        |  |                                          | 2,101  |                            | 98 
|IBM Call Center              |  | Office       |  | Dallas/Fort Worth |  | 1998                   |  | 1                 |  | 150                        |  |                                          | 2,157  |                            | 100
|Lakeview Center              |  | Office       |  | Dallas/Fort Worth |  | 2000                   |  | 1                 |  | 101                        |  |                                          | 1,331  |                            | 100
|Millennium Center            |  | Office       |  | Dallas/Fort Worth |  | 1999                   |  | 1                 |  | 99                         |  |                                          | 1,431  |                            | 100
|Park West C2                 |  | Office       |  | Dallas/Fort Worth |  | 1989                   |  | 1                 |  | 349                        |  |                                          | 8,266  |                            | 96 
|Park West C3                 |  | Office       |  | Dallas/Fort Worth |  | 1985                   |  | 1                 |  | 339                        |  |                                          | 4,112  |                            | 73 
|Park West E1                 |  | Office       |  | Dallas/Fort Worth |  | 1982                   |  | 1                 |  | 183                        |  |                                          | 3,107  |                            | 100
|Park West E2                 |  | Office       |  | Dallas/Fort Worth |  | 1985                   |  | 1                 |  | 201                        |  |                                          | 2,924  |                            | 91 
|Walnut Glen Tower            |  | Office       |  | Dallas/Fort Worth |  | 1985                   |  | 1                 |  | 464                        |  |                                          | 8,374  |                            | 91 



12



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##### Index to Financial Statements

|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|-------------------------------- |  | ------------ |  | ----------------- |  | ---------------------- |  | ----------------- |  | -------------------------- |  | ---------------------------------------- | ------- | -------------------------- | ---
|Property Name                    |  | BuildingType |  | Market            |  | Year(s)Built/Renovated |  | NumberofBuildings |  | Net RentableSquare Feet(C) |  | Total BaseRent for Year Ended12/31/03(D) |         | PercentLeasedAs of12/31/03
|                                 |  |              |  |                   |  |                        |  |                   |  | (in thousands)             |  | (in thousands)                           |         |                           
|WestPoint Office Building        |  | Office       |  | Dallas/Fort Worth |  | 1998                   |  | 1                 |  | 150                        |  |                                          | 2,143   |                            | 78 
|Carrara Place                    |  | Office       |  | Denver            |  | 1982                   |  | 1                 |  | 235                        |  |                                          | 2,504   |                            | 98 
|Highland Court                   |  | Office       |  | Denver            |  | 1986                   |  | 1                 |  | 93                         |  |                                          | 1,323   |                            | 71 
|Orchard Place I & II             |  | Office       |  | Denver            |  | 1980                   |  | 2                 |  | 105                        |  |                                          | 2,049   |                            | 99 
|PacifiCare Building              |  | Office       |  | Denver            |  | 1983                   |  | 1                 |  | 200                        |  |                                          | 2,535   |                            | 78 
|Panorama Point                   |  | Office       |  | Denver            |  | 1983                   |  | 1                 |  | 79                         |  |                                          | 1,052   |                            | 80 
|One Westchase Center             |  | Office       |  | Houston           |  | 1982                   |  | 1                 |  | 466                        |  |                                          | 6,925   |                            | 80 
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Total Southwest Region           |  |              |  |                   |  |                        |  | 37                |  | 6,272                      |  |                                          | 101,248 |                            |    
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Natomas Corporate Center         |  | Office       |  | Sacramento        |  | 1984-1991              |  | 6                 |  | 566                        |  |                                          | 10,837  |                            | 93 
|Lake Merritt Tower I             |  | Office       |  | Oakland           |  | 1990                   |  | 1                 |  | 204                        |  |                                          | 5,792   |                            | 95 
|The Ordway                       |  | Office       |  | Oakland           |  | 1970                   |  | 1                 |  | 531                        |  |                                          | 14,416  |                            | 99 
|World Savings Center             |  | Office       |  | Oakland           |  | 1985                   |  | 1                 |  | 272                        |  |                                          | 6,767   |                            | 98 
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Total Northern California Region |  |              |  |                   |  |                        |  | 9                 |  | 1,573                      |  |                                          | 37,812  |                            |    
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Los Angeles Industrial           |  | Industrial   |  | Los Angeles       |  | 1973-1983              |  | 18                |  | 1,253                      |  |                                          | 7,226   |                            | 100
|Camino West Corporate Park       |  | Office       |  | San Diego         |  | 1991                   |  | 1                 |  | 54                         |  |                                          | 88      |                            | 93 
|Carlsbad Airport Plaza           |  | Office       |  | San Diego         |  | 1987                   |  | 1                 |  | 62                         |  |                                          | 130     |                            | 82 
|Carlsbad Pacific Center I-III    |  | Office       |  | San Diego         |  | 1986-2002              |  | 3                 |  | 130                        |  |                                          | 3,125   |                            | 96 
|Carlsbad Pacifica                |  | Office       |  | San Diego         |  | 1986                   |  | 1                 |  | 49                         |  |                                          | 1,144   |                            | 100
|Del Mar Gateway                  |  | Office       |  | San Diego         |  | 2001                   |  | 1                 |  | 164                        |  |                                          | 5,125   |                            | 100
|Executive Center Del Mar         |  | Office       |  | San Diego         |  | 1998                   |  | 2                 |  | 113                        |  |                                          | 3,171   |                            | 100
|La Place Court                   |  | Office       |  | San Diego         |  | 1988                   |  | 2                 |  | 81                         |  |                                          | 169     |                            | 90 
|Pacific Ridge Corporate Centre   |  | Office       |  | San Diego         |  | 1999                   |  | 2                 |  | 121                        |  |                                          | 322     |                            | 98 
|Pacific View Plaza               |  | Office       |  | San Diego         |  | 1986                   |  | 1                 |  | 52                         |  |                                          | 131     |                            | 94 
|Plaza I & II                     |  | Office       |  | San Diego         |  | 1988-1989              |  | 2                 |  | 89                         |  |                                          | 2,108   |                            | 97 
|The Campus                       |  | Office       |  | San Diego         |  | 1988                   |  | 1                 |  | 45                         |  |                                          | 917     |                            | 98 
|San Diego Industrial             |  | Industrial   |  | San Diego         |  | 1985-1988              |  | 9                 |  | 359                        |  |                                          | 4,126   |                            | 95 
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Total Southern California Region |  |              |  |                   |  |                        |  | 44                |  | 2,572                      |  |                                          | 27,782  |                            |    
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    
|Total Properties                 |  |              |  |                   |  |                        |  | 137               |  | 17,762                     |  | $                                        | 286,330 |                            |    
|                                 |  |              |  |                   |  |                        |  |                   |  |                            |  |                                          |         |                            |    

---

|(A) | We hold a 25% non-controlling interest in Tysons International Partners. Tysons International
Partners owns the 1676 International Drive and 8260 Greensboro properties located in the Metropolitan Washington, D.C. area. Net rentable square feet and total base rent presented above represents our pro rata share. We account for our interest
using the equity method of accounting.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | We hold a 50% non-controlling interest in Broadmoor Austin Associates. Broadmoor Austin
Associates owns an office complex in Austin, Texas, consisting of seven properties. Net rentable square feet and total base rent presented above represents our pro rata share. We account for our interest using the equity method of accounting.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Net rentable square feet defines the area of a property for which a tenant is required to pay
rent, which includes the actual rentable area plus a portion of the common areas of the property allocated to a tenant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Total base rent for the year ended December 31, 2003 includes the fixed rental amount due for
the year ended December 31, 2003 under contractual lease obligations, which excludes (1) lease termination payments; (2) parking rent; (3) future contractual or contingent rent escalations; and (4) additional rent payable by tenants for items such
as common area maintenance, real estate taxes and other expense reimbursements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

At December 31, 2003, including our pro rata share of debt on our joint venture properties, we had $813.3
million of mortgages on our properties, which represents 73.1% of our total outstanding indebtedness. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources for a discussion of mortgage debt related to our properties.



Our properties are leased to local, national and foreign companies engaged in a variety of businesses including, but not limited to, computer systems design, management, insurance, broadcasting and telecommunications,
legal services, and information services. As of December 31, 2003, we had approximately 1,000 tenants, with our largest 20 tenants representing 31% of our total net rentable square feet leased as follows:



|   |  |                                              |  |                            |  |                                      |  
|-- |  | -------------------------------------------- |  | -------------------------- |  | ------------------------------------ | -
|   |  | Tenant                                       |  | Square Feet Leased (000s) |  | Percentage of Company Leased Sq. Ft. |  
|1  |  | IBM                                          |  | 973                        |  | 6                                    | %
|2  |  | Kaiser Foundation Health Plan                |  | 259                        |  | 2                                    | %
|3  |  | Northrop Grumman Corporation                 |  | 267                        |  | 2                                    | %
|4  |  | General Services Administration  U.S. Govt. |  | 308                        |  | 2                                    | %
|5  |  | Verizon Communications                       |  | 291                        |  | 2                                    | %
|6  |  | American Management Systems                  |  | 264                        |  | 2                                    | %
|7  |  | Computer Associates                          |  | 228                        |  | 1                                    | %
|8  |  | Moore North America                          |  | 257                        |  | 2                                    | %
|9  |  | AT & T                                       |  | 205                        |  | 1                                    | %
|10 |  | Aspen Systems Corporation                    |  | 211                        |  | 1                                    | %
|11 |  | Americredit                                  |  | 238                        |  | 1                                    | %
|12 |  | Vignette                                     |  | 205                        |  | 1                                    | %
|13 |  | Burlington Resources                         |  | 199                        |  | 1                                    | %
|14 |  | World Savings & Loan                         |  | 148                        |  | 1                                    | %
|15 |  | Brandes Investments                          |  | 123                        |  | 1                                    | %
|16 |  | Exxon Mobil                                  |  | 205                        |  | 1                                    | %
|17 |  | Thomson Corporation                          |  | 210                        |  | 1                                    | %
|18 |  | Sprint Communications                        |  | 200                        |  | 1                                    | %
|19 |  | National Union Fire Insurance (AIG)          |  | 157                        |  | 1                                    | %
|20 |  | CH2M Hill                                    |  | 118                        |  | 1                                    | %
|   |  |                                              | 
|   |  | Total % of portfolio square feet             |  |                            |  | 31                                   | %
|   |  | Total % of portfolio base rental revenue     |  |                            |  | 34                                   | %



Approximately 61% of
our total leased rentable square footage is under full service gross leases under which tenants typically pay for all real estate taxes and operating expenses above those for an established base year or expense stop. Our remaining square footage is
under triple net and modified gross leases. Triple net and modified gross leases are those where tenants pay not only base rent, but also some or all real estate taxes and operating expenses of the leased property. Tenants generally reimburse us the
full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for on-site monthly employee and visitor parking. We are generally responsible for structural repairs.
Our in-place leases have terms, on average, ranging from five to seven years in length.



14



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##### Table of Contents

##### Index to Financial Statements

The following table sets forth a 10-year schedule of the lease expirations for leases in place at our
properties as of December 31, 2003.



|                    |  |                                               |  |      |        |   |      |   |       |      |  |   |        |   |  |      |        |   |      |   |       |      |  |   |        |   |  |      |       |   |      |   |        |            |  |   |       |   |  |   |       |   |  |   |       |  
|------------------- |  | --------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ------ | ---------- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|Office Properties   |  |                                               |  | 2004 |        |   | 2005 |   |       | 2006 |  |   | 2007   |   |  | 2008 |        |   | 2009 |   |       | 2010 |  |   | 2011   |   |  | 2012 |       |   | 2013 |   |        | Thereafter | 
|Mid-Atlantic Region |  | Square Feet Expiring (000s)                  |  |      | 565    |   |      |   | 244   |      |  |   | 641    |   |  |      | 556    |   |      |   | 308   |      |  |   | 358    |   |  |      | 367   |   |      |   | 427    |            |  |   | 92    |   |  |   | 7     |   |  |   | 106   |  
|                    |  | Square Feet as a % of NRA                     |  |      | 14     | % |      |   | 6     | %    |  |   | 16     | % |  |      | 14     | % |      |   | 8     | %    |  |   | 9      | % |  |      | 9     | % |      |   | 10     | %          |  |   | 2     | % |  |   | 0     | % |  |   | 3     | %
|                    |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 12,075 |   |      | $ | 6,500 |      |  | $ | 16,617 |   |  | $    | 14,001 |   |      | $ | 8,486 |      |  | $ | 10,016 |   |  | $    | 9,382 |   |      | $ | 10,245 |            |  | $ | 3,013 |   |  | $ | 206   |   |  | $ | 2,984 |  
|                    |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 21.37  |   |      | $ | 26.64 |      |  | $ | 25.92  |   |  | $    | 25.18  |   |      | $ | 27.55 |      |  | $ | 27.98  |   |  | $    | 25.56 |   |      | $ | 23.99  |            |  | $ | 32.75 |   |  | $ | 29.43 |   |  | $ | 28.15 |  
|                    |  | Number of Leases Expiring                     |  |      | 34     |   |      |   | 27    |      |  |   | 40     |   |  |      | 29     |   |      |   | 17    |      |  |   | 16     |   |  |      | 11    |   |      |   | 6      |            |  |   | 3     |   |  |   | 1     |   |  |   | 4     |  
|                    |  |                                               |  |      |        |   |      |   |       |      |  |  
|Midwest Region      |  | Square Feet Expiring (000s)                  |  |      | 159    |   |      |   | 157   |      |  |   | 233    |   |  |      | 134    |   |      |   | 115   |      |  |   | 74     |   |  |      | 79    |   |      |   | 376    |            |  |   | 178   |   |  |   | 283   |   |  |   | 260   |  
|                    |  | Square Feet as a % of NRA                     |  |      | 6      | % |      |   | 6     | %    |  |   | 9      | % |  |      | 5      | % |      |   | 4     | %    |  |   | 3      | % |  |      | 3     | % |      |   | 15     | %          |  |   | 7     | % |  |   | 11    | % |  |   | 10    | %
|                    |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 3,864  |   |      | $ | 3,190 |      |  | $ | 5,009  |   |  | $    | 3,413  |   |      | $ | 2,213 |      |  | $ | 1,677  |   |  | $    | 1,715 |   |      | $ | 9,219  |            |  | $ | 4,063 |   |  | $ | 5,650 |   |  | $ | 6,414 |  
|                    |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 24.30  |   |      | $ | 20.32 |      |  | $ | 21.50  |   |  | $    | 25.47  |   |      | $ | 19.24 |      |  | $ | 22.66  |   |  | $    | 21.71 |   |      | $ | 24.52  |            |  | $ | 22.83 |   |  | $ | 19.96 |   |  | $ | 24.67 |  
|                    |  | Number of Leases Expiring                     |  |      | 31     |   |      |   | 24    |      |  |   | 24     |   |  |      | 25     |   |      |   | 22    |      |  |   | 11     |   |  |      | 5     |   |      |   | 7      |            |  |   | 9     |   |  |   | 10    |   |  |   | 15    |  



15



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##### Table of Contents

##### Index to Financial Statements

|                           |  |                                               |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |   |        |   |  |   |        |  
|-------------------------- |  | --------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | ---------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                           |  |                                               |  | 2004 |        |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | 2009 |   |        | 2010 |  |   | 2011   |   |  | 2012 |        |   | 2013 |   |        | Thereafter | 
|Southwest Region           |  | Square Feet Expiring (000s)                  |  |      | 523    |   |      |   | 600    |      |  |   | 629    |   |  |      | 595    |   |      |   | 552    |      |  |   | 696    |   |  |      | 240    |   |      |   | 1,016  |            |  |   | 131    |   |  |   | 337    |   |  |   | 448    |  
|                           |  | Square Feet as a % of NRA                     |  |      | 8      | % |      |   | 10     | %    |  |   | 10     | % |  |      | 9      | % |      |   | 9      | %    |  |   | 11     | % |  |      | 4      | % |      |   | 16     | %          |  |   | 2      | % |  |   | 5      | % |  |   | 7      | %
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 9,081  |   |      | $ | 11,571 |      |  | $ | 12,765 |   |  | $    | 11,078 |   |      | $ | 9,844  |      |  | $ | 15,794 |   |  | $    | 4,029  |   |      | $ | 21,250 |            |  | $ | 2,886  |   |  | $ | 5,783  |   |  | $ | 7,862  |  
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 17.36  |   |      | $ | 19.29  |      |  | $ | 20.29  |   |  | $    | 18.62  |   |      | $ | 17.83  |      |  | $ | 22.69  |   |  | $    | 16.79  |   |      | $ | 20.92  |            |  | $ | 22.03  |   |  | $ | 17.16  |   |  | $ | 17.55  |  
|                           |  | Number of Leases Expiring                     |  |      | 50     |   |      |   | 51     |      |  |   | 47     |   |  |      | 49     |   |      |   | 47     |      |  |   | 24     |   |  |      | 12     |   |      |   | 12     |            |  |   | 4      |   |  |   | 3      |   |  |   | 7      |  
|                           |  |                                               |  |      |        |   |      |   |        |      |  |  
|Northern California Region |  | Square Feet Expiring (000s)                  |  |      | 179    |   |      |   | 155    |      |  |   | 122    |   |  |      | 261    |   |      |   | 157    |      |  |   | 164    |   |  |      | 99     |   |      |   | 312    |            |  |   | 47     |   |  |   | 0      |   |  |   | 16     |  
|                           |  | Square Feet as a % of NRA                     |  |      | 11     | % |      |   | 10     | %    |  |   | 8      | % |  |      | 17     | % |      |   | 10     | %    |  |   | 10     | % |  |      | 6      | % |      |   | 20     | %          |  |   | 3      | % |  |   | 0      | % |  |   | 1      | %
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 4,269  |   |      | $ | 4,087  |      |  | $ | 3,369  |   |  | $    | 7,292  |   |      | $ | 4,540  |      |  | $ | 4,109  |   |  | $    | 3,302  |   |      | $ | 10,263 |            |  | $ | 1,364  |   |  | $ | 0      |   |  | $ | 541    |  
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 23.85  |   |      | $ | 26.37  |      |  | $ | 27.61  |   |  | $    | 27.94  |   |      | $ | 28.92  |      |  | $ | 25.05  |   |  | $    | 33.35  |   |      | $ | 32.89  |            |  | $ | 29.02  |   |  | $ | 0.00   |   |  | $ | 33.81  |  
|                           |  | Number of Leases Expiring                     |  |      | 32     |   |      |   | 22     |      |  |   | 14     |   |  |      | 21     |   |      |   | 12     |      |  |   | 11     |   |  |      | 4      |   |      |   | 1      |            |  |   | 1      |   |  |   | 0      |   |  |   | 1      |  
|                           |  |                                               |  |      |        |   |      |   |        |      |  |  
|Southern California Region |  | Square Feet Expiring (000s)                  |  |      | 169    |   |      |   | 172    |      |  |   | 148    |   |  |      | 116    |   |      |   | 124    |      |  |   | 24     |   |  |      | 33     |   |      |   | 124    |            |  |   | 0      |   |  |   | 12     |   |  |   | 0      |  
|                           |  | Square Feet as a % of NRA                     |  |      | 18     | % |      |   | 18     | %    |  |   | 15     | % |  |      | 12     | % |      |   | 13     | %    |  |   | 3      | % |  |      | 3      | % |      |   | 13     | %          |  |   | 0      | % |  |   | 1      | % |  |   | 0      | %
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 4,277  |   |      | $ | 4,551  |      |  | $ | 3,710  |   |  | $    | 3,051  |   |      | $ | 3,412  |      |  | $ | 744    |   |  | $    | 1,219  |   |      | $ | 4,311  |            |  | $ | 0      |   |  | $ | 469    |   |  | $ | 0      |  
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 25.31  |   |      | $ | 26.46  |      |  | $ | 25.07  |   |  | $    | 26.30  |   |      | $ | 27.52  |      |  | $ | 31.00  |   |  | $    | 36.94  |   |      | $ | 34.77  |            |  | $ | 0.00   |   |  | $ | 39.08  |   |  | $ | 0.00   |  
|                           |  | Number of Leases Expiring                     |  |      | 49     |   |      |   | 41     |      |  |   | 31     |   |  |      | 18     |   |      |   | 13     |      |  |   | 2      |   |  |      | 2      |   |      |   | 1      |            |  |   | 0      |   |  |   | 1      |   |  |   | 0      |  
|                           |  |                                               |  |      |        |   |      |   |        |      |  |  
|Total Office Properties    |  | Square Feet Expiring (000s)                  |  |      | 1,595  |   |      |   | 1,328  |      |  |   | 1,773  |   |  |      | 1,662  |   |      |   | 1,256  |      |  |   | 1,316  |   |  |      | 818    |   |      |   | 2,255  |            |  |   | 448    |   |  |   | 639    |   |  |   | 830    |  
|                           |  | Square Feet as a % of NRA                     |  |      | 10     | % |      |   | 9      | %    |  |   | 11     | % |  |      | 11     | % |      |   | 8      | %    |  |   | 9      | % |  |      | 5      | % |      |   | 15     | %          |  |   | 3      | % |  |   | 4      | % |  |   | 5      | %
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 33,566 |   |      | $ | 29,899 |      |  | $ | 41,470 |   |  | $    | 38,835 |   |      | $ | 28,495 |      |  | $ | 32,340 |   |  | $    | 19,647 |   |      | $ | 55,288 |            |  | $ | 11,326 |   |  | $ | 12,108 |   |  | $ | 17,801 |  
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 21.04  |   |      | $ | 22.51  |      |  | $ | 23.39  |   |  | $    | 23.37  |   |      | $ | 22.69  |      |  | $ | 24.57  |   |  | $    | 24.02  |   |      | $ | 24.52  |            |  | $ | 25.28  |   |  | $ | 18.95  |   |  | $ | 21.45  |  
|                           |  | Number of Leases Expiring                     |  |      | 196    |   |      |   | 165    |      |  |   | 156    |   |  |      | 142    |   |      |   | 111    |      |  |   | 64     |   |  |      | 34     |   |      |   | 27     |            |  |   | 17     |   |  |   | 15     |   |  |   | 27     |  



16



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##### Table of Contents

##### Index to Financial Statements

|                            |  |                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |      |   |      |   |      |            |  |   |      |   |  |   |      |   |  |   |      |  
|--------------------------- |  | --------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ---- | - | ---- | - | ---- | ---------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|Industrial Properties       |  |                                               |  | 2004 |       |   | 2005 |   |       | 2006 |  |   | 2007  |   |  | 2008 |       |   | 2009 |   |       | 2010 |  |   | 2011  |   |  | 2012 |      |   | 2013 |   |      | Thereafter | 
|Midwest Region              |  | Square Feet Expiring (000s)                  |  |      | 136   |   |      |   | 0     |      |  |   | 201   |   |  |      | 28    |   |      |   | 267   |      |  |   | 50    |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  
|                            |  | Square Feet as a % of NRA                     |  |      | 20    | % |      |   | 0     | %    |  |   | 29    | % |  |      | 4     | % |      |   | 39    | %    |  |   | 7     | % |  |      | 0    | % |      |   | 0    | %          |  |   | 0    | % |  |   | 0    | % |  |   | 0    | %
|                            |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 534   |   |      | $ | 0     |      |  | $ | 703   |   |  | $    | 165   |   |      | $ | 988   |      |  | $ | 262   |   |  | $    | 0    |   |      | $ | 0    |            |  | $ | 0    |   |  | $ | 0    |   |  | $ | 0    |  
|                            |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 3.93  |   |      | $ | 0.00  |      |  | $ | 3.50  |   |  | $    | 5.89  |   |      | $ | 3.70  |      |  | $ | 5.24  |   |  | $    | 0.00 |   |      | $ | 0.00 |            |  | $ | 0.00 |   |  | $ | 0.00 |   |  | $ | 0.00 |  
|                            |  | Number of Leases Expiring                     |  |      | 2     |   |      |   | 0     |      |  |   | 2     |   |  |      | 2     |   |      |   | 1     |      |  |   | 1     |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  
|                            |  |                                               |  |      |       |   |      |   |       |      |  |  
|Southern California Region  |  | Square Feet Expiring (000s)                  |  |      | 396   |   |      |   | 381   |      |  |   | 101   |   |  |      | 429   |   |      |   | 184   |      |  |   | 103   |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  
|                            |  | Square Feet as a % of NRA                     |  |      | 25    | % |      |   | 24    | %    |  |   | 6     | % |  |      | 27    | % |      |   | 11    | %    |  |   | 6     | % |  |      | 0    | % |      |   | 0    | %          |  |   | 0    | % |  |   | 0    | % |  |   | 0    | %
|                            |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 2,474 |   |      | $ | 3,127 |      |  | $ | 1,273 |   |  | $    | 2,962 |   |      | $ | 1,403 |      |  | $ | 817   |   |  | $    | 0    |   |      | $ | 0    |            |  | $ | 0    |   |  | $ | 0    |   |  | $ | 0    |  
|                            |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 6.25  |   |      | $ | 8.21  |      |  | $ | 12.60 |   |  | $    | 6.90  |   |      | $ | 7.63  |      |  | $ | 7.93  |   |  | $    | 0.00 |   |      | $ | 0.00 |            |  | $ | 0.00 |   |  | $ | 0.00 |   |  | $ | 0.00 |  
|                            |  | Number of Leases Expiring                     |  |      | 20    |   |      |   | 13    |      |  |   | 5     |   |  |      | 6     |   |      |   | 4     |      |  |   | 3     |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  
|                            |  |                                               |  |      |       |   |      |   |       |      |  |  
|Total Industrial Properties |  | Square Feet Expiring (000s)                  |  |      | 532   |   |      |   | 381   |      |  |   | 302   |   |  |      | 457   |   |      |   | 451   |      |  |   | 153   |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  
|                            |  | Square Feet as a % of NRA                     |  |      | 23    | % |      |   | 17    | %    |  |   | 13    | % |  |      | 20    | % |      |   | 20    | %    |  |   | 7     | % |  |      | 0    | % |      |   | 0    | %          |  |   | 0    | % |  |   | 0    | % |  |   | 0    | %
|                            |  | Annualized Base Rent in Expiring Year (000s) |  | $    | 3,008 |   |      | $ | 3,127 |      |  | $ | 1,976 |   |  | $    | 3,127 |   |      | $ | 2,391 |      |  | $ | 1,079 |   |  | $    | 0    |   |      | $ | 0    |            |  | $ | 0    |   |  | $ | 0    |   |  | $ | 0    |  
|                            |  | Annualized Base Rent PSF in Expiring Year     |  | $    | 5.65  |   |      | $ | 8.21  |      |  | $ | 6.54  |   |  | $    | 6.84  |   |      | $ | 5.30  |      |  | $ | 7.05  |   |  | $    | 0.00 |   |      | $ | 0.00 |            |  | $ | 0.00 |   |  | $ | 0.00 |   |  | $ | 0.00 |  
|                            |  | Number of Leases Expiring                     |  |      | 22    |   |      |   | 13    |      |  |   | 7     |   |  |      | 8     |   |      |   | 5     |      |  |   | 4     |   |  |      | 0    |   |      |   | 0    |            |  |   | 0    |   |  |   | 0    |   |  |   | 0    |  



Insurance



We have and will keep in force comprehensive insurance, including liability,
fire, workers compensation, extended coverage, rental loss and, when available on reasonable commercial terms, flood, wind, earthquake and terrorism insurance, with policy specifications, limits, exclusions and deductibles customarily carried
for similar properties. We currently maintain insurance to cover environmental conditions and business interruption if and when they occur. This policy covers both governmental and third-party claims associated with the covered environmental
conditions. Our real property insurance policies exclude earthquake coverage for properties located within California. As a result, we maintain a separate $100 million blanket earthquake policy on the properties we own in Northern and Southern
California. Our real property insurance policies exclude terrorism coverage. However, we maintain a separate $100 million blanket stand-alone terrorism policy on the properties we own. Certain types of losses, however, generally of a catastrophic
nature, such as acts of war, are either uninsurable or the cost of obtaining insurance is so high that it is more prudent to accept the risk of loss. If more terrorists incidents occur, however, future insurance policies purchased by us may
expressly exclude hostile acts, and it may then become economically unfeasible to obtain insurance covering terrorist attacks. In the event of such terrorist acts or other catastrophic losses, we would expect our insurance premiums to increase
thereafter, which may have an adverse impact on our cash flow. We believe that our properties as of the date of this filing are adequately insured in accordance with industry standards.



17



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##### Table of Contents

##### Index to Financial Statements

|Item 3. | Legal Proceedings
|------- | -----------------



Neither we nor our affiliates (other than in a representative capacity) are presently subject to any material litigation. To our knowledge, no litigation
has been threatened against us or our affiliates other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance and which, in the aggregate, are not expected to have a material
adverse effect on our business or financial condition.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



No matter was submitted to a vote of our security holders during the fourth quarter of 2003 through the solicitation of proxies or otherwise.



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##### Index to Financial Statements

PART II



|Item 5. | Market for Registrants Common Equity and Related Shareholder Matters
|------- | ---------------------------------------------------------------------



Market Information



Our common shares commenced trading on the NYSE on October 17, 1996 under the symbol PP. As of March 10, 2004, the last reported sales price
per common share on the NYSE was $36.11 per common share. The following table sets forth the high and low sales price per common share reported on the NYSE as traded for the periods indicated.



|               |  |       |  |      
|-------------- |  | ----- |  | -----
|Period         |  | High  |  | Low  
|2003           |  |       |  |      
|Fourth Quarter |  | 32.99 |  | 29.58
|Third Quarter  |  | 31.41 |  | 28.79
|Second Quarter |  | 30.09 |  | 26.85
|First Quarter  |  | 28.28 |  | 25.27
|2002           |  |       |  |      
|Fourth Quarter |  | 29.06 |  | 24.71
|Third Quarter  |  | 31.80 |  | 24.15
|Second Quarter |  | 33.05 |  | 29.14
|First Quarter  |  | 29.99 |  | 26.81



Holders



At March 10, 2004, we had approximately 504 holders of record and
approximately 10,440 beneficial owners of our common shares. The number of beneficial owners does not include beneficial owners for whom Cede & Co. or others act as nominee. As of March 10, 2004, all of our 3,773,585 Series D Preferred
Shares, which are convertible into our common shares subject to certain limitations, were held by Security Capital Preferred Growth, Incorporated. In addition, the common units of limited partnership interest in the operating partnership, which are
redeemable for common shares subject to limitations, were held by 20 entities or persons.



Dividends



We have
adopted a policy of paying regular quarterly distributions on our common shares and cash distributions have been paid on our common shares with respect to each such period since our inception. The following table sets forth information regarding the
declaration and payment of distributions by us in 2003 and 2002.



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##### Index to Financial Statements

|                                  |  |                        |  |                         |  |                             |      
|--------------------------------- |  | ---------------------- |  | ----------------------- |  | --------------------------- | -----
|Period Which Distribution Relates |  | DistributionRecordDate |  | DistributionPaymentDate |  | Per ShareDistributionAmount
|2003                              |  |                        |  |                         |  |                             |      
|Fourth Quarter                    |  | 12/26/03               |  | 1/9/04                  |  | $                           | 0.560
|Third Quarter                     |  | 9/30/03                |  | 10/10/03                |  | $                           | 0.560
|Second Quarter                    |  | 6/30/03                |  | 7/11/03                 |  | $                           | 0.560
|First Quarter                     |  | 3/31/03                |  | 4/11/03                 |  | $                           | 0.560
|2002                              |  |                        |  |                         |  |                             |      
|Fourth Quarter                    |  | 12/27/02               |  | 1/10/03                 |  | $                           | 0.560
|Third Quarter                     |  | 9/30/02                |  | 10/11/02                |  | $                           | 0.560
|Second Quarter                    |  | 6/28/02                |  | 7/12/02                 |  | $                           | 0.560
|First Quarter                     |  | 3/29/02                |  | 4/12/02                 |  | $                           | 0.535



For tax purposes, the
foregoing distributions represent an approximate 36.3% and 19.3% return of capital in 2003 and 2002, respectively. In order to maintain our qualification as a REIT, we must make annual distributions to our shareholders of at least 90% of our taxable
income, excluding net capital gains. During the years ended December 31, 2003 and 2002, we declared distributions totaling $2.24 and $2.215 per share, respectively. Under certain circumstances we may be required to make distributions in excess of
cash available for distribution in order to meet such REIT distribution requirements. In such event, we presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions
required to retain our qualification as a REIT for federal income tax purposes.



We declared a cash distribution for the first quarter of 2004 in the amount of $.56 per share, payable on April 9, 2004 to holders of record on March 31, 2004. We currently anticipate that we will maintain at least
the current distribution rate for the immediate future, unless actual results of operations, economic conditions or other factors differ from our current expectations. Future distributions, if any, paid by us will be at the discretion of our board
of trustees and will depend on our cash flow, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our board of trustees deems relevant.



Securities Authorized for Issuance under Equity Compensation Plans



The following table sets forth certain information, as of
December 31, 2003, with respect to all compensation plans previously approved by our security holders, as well as compensation plans not previously approved by our security holders.





|                                                           |  |                                                                                            |     |  |                                                                            |       |     |                                                                                                                                               |           |    
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | --- |  | -------------------------------------------------------------------------- | ----- | --- | --------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|                                                           |  | Number of Securities To be Issued Upon Exercise of Outstanding Options,Warrants and Rights |     |  | Weighted Average Exercise Price of Outstanding Options,Warrants and
Rights |       |     | Number of SecuritiesRemaining Available For Future Issuance Under
Equity Compensation Plans(Excluding SecuritiesReflected in Far Left Column) |          
|Equity compensation plans approved by security holders     |  | 984,456                                                                                    |     |  | $                                                                          | 26.45 |     |                                                                                                                                               | 1,042,213 |    
|Equity compensation plans not approved by security holders |  | 83,047                                                                                     | (A) |  |                                                                            |       | (A) |                                                                                                                                               |           | (A)
|                                                           |  |                                                                                            |    
|Total                                                      |  | 1,067,503                                                                                  |     |  | $                                                                          | 26.45 |     |                                                                                                                                               | 1,042,213 |    
|                                                           |  |                                                                                            |     |  |                                                                            |       |     |                                                                                                                                               |           |    

---

|(A) | Pursuant to our Key Employee Share Option Plan, officers and other selected key employees of our operating partnership or Prentiss Properties Resources, Inc. and its
subsidiaries who earn bonuses have the option of deferring the payment of such bonuses. Such deferred compensation may be used to purchase various mutual funds and/or our common shares. Pursuant to the participants election, we purchase shares
on the open market and place them in a trust for the benefit of such participant. The trust may deliver to the participant shares or
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

##### Index to Financial Statements

the fair market value of such shares beginning six months from the date they were placed in the trust.
The purpose of the deferred compensation plan is to provide a vehicle for the payment of compensation otherwise payable to the participants, in a form that will provide incentives and rewards for meritorious performance and encourage the
recipients continuance as our employees. During the 2000 plan year we provided a discount of 15% on the purchase price of our common shares purchased by participants in the plan. For the 2001, 2002 and 2003 plan years, the deferred
compensation plan did not provide for a discount on our common shares. As of December 31, 2003, the investments included 83,047 of our common shares purchased in the open market.



|Item 6. | Selected Financial Data
|------- | -----------------------



The following section sets forth our selected financial data. The following data should be read in conjunction with our historical Consolidated Financial
Statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.



The selected historical consolidated financial data has been derived from our audited financial statements and notes
thereto.



21



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##### Table of Contents

##### Index to Financial Statements

|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                   |  | Year Ended December 31, |        
|Operating Data: (in thousands, except per
share amounts)                                                                           |  | 2003                    |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Rental income                                                                                                                      |  | $                       | 339,541 |   |      | $ | 333,574 |      |  | $ | 314,516 |   |  | $    | 311,389 |   |  | $ | 274,636 |  
|Service business and other income                                                                                                  |  |                         | 16,816  |   |      |   | 4,386   |      |  |   | 5,042   |   |  |      | 4,555   |   |  |   | 3,325   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total revenues                                                                                                                     |  |                         | 356,357 |   |      |   | 337,960 |      |  |   | 319,558 |   |  |      | 315,944 |   |  |   | 277,961 |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Property operating expenses and real estate taxes                                                                                  |  |                         | 122,581 |   |      |   | 121,313 |      |  |   | 107,130 |   |  |      | 106,671 |   |  |   | 94,607  |  
|General and administrative and personnel costs                                                                                     |  |                         | 10,988  |   |      |   | 10,361  |      |  |   | 10,396  |   |  |      | 9,790   |   |  |   | 8,842   |  
|Expenses of service business                                                                                                       |  |                         | 10,513  |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Interest expense and amortization of financing costs                                                                               |  |                         | 72,098  |   |      |   | 68,913  |      |  |   | 66,446  |   |  |      | 72,727  |   |  |   | 60,473  |  
|Depreciation and amortization                                                                                                      |  |                         | 78,193  |   |      |   | 67,453  |      |  |   | 57,851  |   |  |      | 57,595  |   |  |   | 49,606  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total expenses                                                                                                                     |  |                         | 294,373 |   |      |   | 268,040 |      |  |   | 241,823 |   |  |      | 246,783 |   |  |   | 213,528 |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Merger termination fee, net                                                                                                        |  |                         |        |   |      |   |        |      |  |   | 17,000  |   |  |      | 4,091   |   |  |   |        |  
|Loss on investment in securities                                                                                                   |  |                         |        |   |      |   |        |      |  |   |        |   |  |      | (1,000  | ) |  |   |        |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                         | 61,984  |   |      |   | 69,920  |      |  |   | 94,735  |   |  |      | 72,252  |   |  |   | 64,433  |  
|Minority interests(1)                                                                                                              |  |                         | (10,437 | ) |      |   | (10,717 | )    |  |   | (17,247 | ) |  |      | (15,262 | ) |  |   | (12,374 | )
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                         | 2,555   |   |      |   | 3,154   |      |  |   | 3,131   |   |  |      | 3,843   |   |  |   | 4,294   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations                                                                                                  |  |                         | 54,102  |   |      |   | 62,357  |      |  |   | 80,619  |   |  |      | 60,833  |   |  |   | 56,353  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from discontinued operations                                                                                                |  |                         | 180     |   |      |   | 3,960   |      |  |   | 8,306   |   |  |      | 8,927   |   |  |   | 8,384   |  
|(Loss)/gain from disposition of discontinued operations                                                                            |  |                         | (4,457  | ) |      |   | 8,430   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Minority interests related to discontinued operations                                                                              |  |                         | 157     |   |      |   | (466    | )    |  |   | (354    | ) |  |      | (396    | ) |  |   | (360    | )
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Discontinued operations                                                                                                            |  |                         | (4,120  | ) |      |   | 11,924  |      |  |   | 7,952   |   |  |      | 8,531   |   |  |   | 8,024   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before gain on sale of properties and impairment loss                                                                       |  |                         | 49,982  |   |      |   | 74,281  |      |  |   | 88,571  |   |  |      | 69,364  |   |  |   | 64,377  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gain on sale of properties including land                                                                                          |  |                         | 9,435   |   |      |   |        |      |  |   | 18,660  |   |  |      | 221     |   |  |   | 16,105  |  
|Impairment loss on real estate                                                                                                     |  |                         |        |   |      |   |        |      |  |   | (4,765  | ) |  |      |        |   |  |   |        |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                                                                                                         |  | $                       | 59,417  |   |      | $ | 74,281  |      |  | $ | 102,466 |   |  | $    | 69,585  |   |  | $ | 80,482  |  
|Preferred dividends                                                                                                                |  |                         | (8,452  | ) |      |   | (8,358  | )    |  |   | (7,887  | ) |  |      | (7,151  | ) |  |   | (6,491  | )
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income applicable to common shareholders                                                                                       |  | $                       | 50,965  |   |      | $ | 65,923  |      |  | $ | 94,579  |   |  | $    | 62,434  |   |  | $ | 73,991  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic earnings per common share:                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.37    |   |      | $ | 1.41    |      |  | $ | 2.36    |   |  | $    | 1.48    |   |  | $ | 1.74    |  
|Discontinued operations                                                                                                            |  | $                       | (0.10   | ) |      | $ | 0.31    |      |  | $ | 0.21    |   |  | $    | 0.23    |   |  | $ | 0.21    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income applicable to common shareholders  basic                                                                               |  | $                       | 1.27    |   |      | $ | 1.72    |      |  | $ | 2.57    |   |  | $    | 1.72    |   |  | $ | 1.95    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted average number of common shares outstanding  basic                                                                       |  |                         | 40,068  |   |      |   | 38,409  |      |  |   | 36,736  |   |  |      | 36,273  |   |  |   | 37,875  |  
|Diluted earnings per common share:                                                                                                 |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.37    |   |      | $ | 1.40    |      |  | $ | 2.31    |   |  | $    | 1.48    |   |  | $ | 1.74    |  
|Discontinued operations                                                                                                            |  | $                       | (0.10   | ) |      | $ | 0.31    |      |  | $ | 0.20    |   |  | $    | 0.23    |   |  | $ | 0.19    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income applicable to common shareholders  diluted                                                                             |  | $                       | 1.27    |   |      | $ | 1.71    |      |  | $ | 2.51    |   |  | $    | 1.71    |   |  | $ | 1.93    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted average number of common shares and common share equivalents outstanding  diluted                                        |  |                         | 40,270  |   |      |   | 38,649  |      |  |   | 40,849  |   |  |      | 36,515  |   |  |   | 41,729  |  



22



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##### Table of Contents

##### Index to Financial Statements

|                                                       |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------ |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                       |  | As of or For the Year Ended December 31, |          
|Balance Sheet Data: (in
thousands)                     |  | 2003                                     |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|Operating real estate, before accumulated depreciation |  | $                                        | 2,052,679 |   |      | $ | 1,932,028 |      |  | $ | 1,807,039 |   |  | $    | 1,869,694 |   |  | $ | 1,780,386 |  
|Operating real estate, after accumulated depreciation  |  |                                          | 1,841,735 |   |      |   | 1,753,236 |      |  |   | 1,660,690 |   |  |      | 1,743,064 |   |  |   | 1,688,925 |  
|Cash and cash equivalents                              |  |                                          | 5,945     |   |      |   | 5,080     |      |  |   | 5,845     |   |  |      | 5,452     |   |  |   | 13,313    |  
|Total assets                                           |  |                                          | 2,196,468 |   |      |   | 2,122,289 |      |  |   | 2,030,593 |   |  |      | 2,117,875 |   |  |   | 1,994,663 |  
|Mortgages and notes payable                            |  |                                          | 1,029,035 |   |      |   | 1,011,027 |      |  |   | 907,734   |   |  |      | 1,007,800 |   |  |   | 896,810   |  
|Mandatorily redeemable preferred units                 |  |                                          | 10,000    |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Total liabilities                                      |  |                                          | 1,159,604 |   |      |   | 1,141,731 |      |  |   | 1,024,607 |   |  |      | 1,132,858 |   |  |   | 983,850   |  
|Minority interest                                      |  |                                          | 124,623   |   |      |   | 136,325   |      |  |   | 186,186   |   |  |      | 178,753   |   |  |   | 179,320   |  
|Shareholders equity                                   |  |                                          | 912,241   |   |      |   | 844,233   |      |  |   | 819,800   |   |  |      | 806,264   |   |  |   | 831,493   |  
|                                                       |  |                                          |           |   |     
|Other Data: (in
thousands)                             |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |          
|Cash flow from operations                              |  | $                                        | 133,625   |   |      | $ | 160,611   |      |  | $ | 160,424   |   |  | $    | 161,961   |   |  | $ | 119,664   |  
|Cash flow from investing                               |  |                                          | (142,304  | ) |      |   | (160,505  | )    |  |   | (52,854   | ) |  |      | (173,211  | ) |  |   | (140,377  | )
|Cash flow from financing                               |  |                                          | 9,544     |   |      |   | (871      | )    |  |   | (107,177  | ) |  |      | 3,389     |   |  |   | 28,503    |  
|                                                       |  |                                          |           |   |     
|Distributions declared per common share                |  | $                                        | 2.240     |   |      | $ | 2.215     |      |  | $ | 2.090     |   |  | $    | 1.895     |   |  | $ | 1.720     |  
|Funds from operations(2)                               |  |                                          | 139,246   |   |      |   | 144,911   |      |  |   | 138,814   |   |  |      | 134,311   |   |  |   | 124,665   |  
|                                                       |  |                                          |           |   |     
|Property Data: (square feet in
thousands)              |  |                                          |           |   |      |   |           |      |  |   |           |   |  |      |          
|Number of properties                                   |  |                                          | 137       |   |      |   | 137       |      |  |   | 146       |   |  |      | 181       |   |  |   | 199       |  
|Total net rentable square feet                         |  |                                          | 17,762    |   |      |   | 17,627    |      |  |   | 17,597    |   |  |      | 19,497    |   |  |   | 19,848    |  
|Leased %                                               |  |                                          | 91        | % |      |   | 93        | %    |  |   | 94        | % |  |      | 96        | % |  |   | 96        | %

---

|(1) | Represents limited partners interests in the operating partnership as well as limited partners interests in certain real estate partnerships.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Funds from operations is a widely recognized measure of REIT operating performance. Funds from operations is a non-GAAP financial measure and, as defined by the
National Association of Real Estate Investment Trusts, means net income, computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships, joint ventures and subsidiaries. We believe that funds from operations is helpful to investors and our management as a measure of our operating performance because it excludes
depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and, as a result, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs, providing perspective not immediately apparent from net income. In addition, our management believes that funds from operations provides useful information to the
investment community about our financial performance when compared to other REITs since funds from operations is generally recognized as the industry standard for reporting the operating performance of REITs. However, our funds from operations may
not be comparable to funds from operations reported by other REITs that do not define funds from operations exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, funds from operations should be
examined in conjunction with net income as presented in our consolidated financial statements and notes thereto included elsewhere in this Form 10-K. We believe that net income is the most directly comparable GAAP financial measure to funds from
operations. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of
liquidity or our ability to make distributions. Funds from operations does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our
properties, which are significant economic costs that could materially impact our results of operations. The following is a reconciliation of net income to funds from operations:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Index to Financial Statements

|                                                                           |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                           |  | Year Ended December 31, |        
|Funds from operations (in
thousands)                                       |  | 2003                    |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Net income                                                                 |  | $                       | 59,417  |   |      | $ | 74,281  |      |  | $ | 102,466 |   |  | $    | 69,585  |   |  | $ | 80,482  |  
|Adjustments:                                                               |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate depreciation and amortization(A)                               |  |                         | 79,972  |   |      |   | 73,368  |      |  |   | 64,190  |   |  |      | 63,328  |   |  |   | 54,482  |  
|Real estate depreciation and amortization of unconsolidated joint ventures |  |                         | 2,960   |   |      |   | 3,103   |      |  |   | 3,550   |   |  |      | 2,816   |   |  |   | 2,480   |  
|Minority interests(B)                                                      |  |                         | 1,875   |   |      |   | 2,589   |      |  |   | 4,268   |   |  |      | 2,894   |   |  |   | 3,326   |  
|Merger termination fee, net(C)                                             |  |                         |        |   |      |   |        |      |  |   | (17,000 | ) |  |      | (4,091  | ) |  |   |        |  
|Gain on sale of real estate                                                |  |                         | (4,978  | ) |      |   | (8,430  | )    |  |   | (18,660 | ) |  |      | (221    | ) |  |   | (16,105 | )
|                                                                           |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Funds from operations(D)                                                   |  | $                       | 139,246 |   |      | $ | 144,911 |      |  | $ | 138,814 |   |  | $    | 134,311 |   |  | $ | 124,665 |  
|                                                                           |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

---

|(A) | Includes real estate depreciation and amortization included in continuing operations and real estate depreciation and amortization included in discontinued
operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Represents the minority interests applicable to the common unit holders of the operating partnership.
|--- | -----------------------------------------------------------------------------------------------------

|(C) | Although the fee is not considered an extraordinary item in accordance with generally accepted accounting principles, it is our opinion that it is appropriate to
exclude the fee from funds from operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Impairment losses on real estate are not added back in our reconciliation of net income to funds from operations; therefore, for periods in which impairment losses
are recognized, funds from operations is negatively impacted. We recognized impairment losses of $4.8 million, $2.9 million, and $1.8 million during the years ended December 31, 2001, 2002, and 2003, respectively. Therefore, funds from operations
were negatively impacted for the years ended December 31, 2001, 2002, and 2003 by $4.8 million, $2.9 million, and $1.8 million, respectively. The impairment losses totaling $2.9 million and $1.8 million for the years ended December 31, 2002 and
2003, respectively are included in the line item income from discontinued operations in our consolidated statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The following discussion and analysis of financial condition and results of operations should be read in conjunction with
our Selected Financial Data and our historical Consolidated Financial Statements and related notes thereto. Historical results set forth in our Selected Financial Data and Consolidated Financial Statements should not be taken as an indication of our
future operations.



Overview



We are a self-administered and self-managed Maryland REIT. We acquire, own,
manage, lease, develop and build primarily office properties throughout the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, internally through our own employees. We are
self-managed in that we internally provide all the management and maintenance services that our properties require through employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating
partnership, Prentiss Properties Acquisition Partners, L.P. and its subsidiaries, and two management service companies, Prentiss Properties Resources, Inc. and its subsidiaries and Prentiss Properties Management, L.P.



As of December 31, 2003, we owned interests in a diversified portfolio of 137
primarily suburban Class A office and suburban industrial properties as follows:



24



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##### Index to Financial Statements

|                      |  |                     |  |                         
|--------------------- |  | ------------------- |  | ------------------------
|                      |  | Number of Buildings |  | Net Rentable Square Feet
|                      |  |                     |  | (in millions)           
|Office properties     |  | 106                 |  | 15.5                    
|Industrial properties |  | 31                  |  | 2.3                     
|                      |  |                     |  |                         
|Total                 |  | 137                 |  | 17.8                    
|                      |  |                     |  |                         



As an owner of real
estate, the majority of our income and cash flow is derived from rental income received pursuant to tenant leases for space at our properties; and thus, our earnings would be negatively impacted by a deterioration of our rental income. One or more
factors could result in a deterioration of rental income including (1) our failure to renew or execute new leases as current leases expire, (2) our failure to renew or execute new leases with rental terms at or above the terms of in-place leases,
and (3) tenant defaults.



Our failure to renew or execute new
leases as current leases expire or to execute new leases with rental terms at or above the terms of in-place leases is dependent on factors such as (1) the local economic climate, which may be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics and other factors and (2) local real estate conditions, such as oversupply of office and industrial space or competition within the market.



Our industrys performance is generally predicated on a sustained pattern of job growth. In 2003, while the overall
United States economy began to demonstrate economic growth, there were few indications that the economy was creating jobs at a pace sufficient to generate increased demand for our office space. We continued to operate in a period of weak
fundamentals, evidenced by relatively high vacancy and correspondingly lower rental rates.



As a result of the recent weak economic climate, the office real estate markets have been materially affected. The contraction of office workforces has reduced demand for office space and overall vacancy rates for
office properties increased in all of our markets through 2002 and our operations were adversely impacted. In 2003, vacancy rates appeared to peak in many of our markets and some positive net absorption of space started to occur. Of our four largest
markets, the Northern Virginia/Metropolitan Washington, D.C., Dallas/Fort Worth, Chicago and Austin only Northern Virginia/Metropolitan Washington, D.C.experienced positive net absorption for the year ended December 31, 2003. However, during the
fourth quarter of 2003, the Northern Virginia, suburban Chicago and Austin markets experienced positive net absorption, while Dallas/Fort Worth and Dowtown Chicago experienced negative net absorption. Because vacancy rates remain high in most
markets, we do not expect any material improvement in leasing conditions prior to 2005.



The occupancy in our portfolio of operating properties decreased to 91% at December 31, 2003 compared to 93% at December 31, 2002 and 94% at December 31, 2001. Market rental rates have declined in most markets from
peak levels and there may be additional declines in some markets in 2004. Rental rates on our office space that was re-leased in 2003 and 2002 decreased an average of 9% and 3%, respectively, in comparison to rates that were in effect under expiring
leases.



Our organization consists of a corporate office
located in Dallas, Texas and five regional offices each of which operates under the guidance of a member of our senior management team. The following table presents regional revenues for the year ended December 31, 2003, and the markets in which our
properties are located within each region. The first market represents the location of each regional office.



25



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##### Index to Financial Statements

|                    |  |                |         |        |                                           
|------------------- |  | -------------- | ------- | ------ | ------------------------------------------
|Region              |  | Revenues       |         | Market
|                    |  | (in thousands) |         |       
|                    |  |               
|Mid-Atlantic        |  | $              | 93,193  |        | Metropolitan Washington, DC               
|                    |  |               
|Midwest             |  |                | 60,643  |        | Chicago, Suburban Detroit                 
|                    |  |               
|Southwest           |  |                | 117,990 |        | Dallas/Fort Worth, Austin, Denver, Houston
|                    |  |               
|Northern California |  |                | 47,301  |        | Oakland, Sacramento                       
|                    |  |               
|Southern California |  |                | 32,475  |        | San Diego, Los Angeles                    
|                    |  |               
|                    |  |                |         |        |                                           
|Total               |  | $              | 351,602 |        |                                           
|                    |  |                |         |        |                                           



In addition to the
$351.6 million of regional revenues, during the year ended December 31, 2003, we recognized $4.8 million of revenue consisting primarily of interest income which was not allocated to our regions.



At December 31, 2003, we had 16.2 million square feet of in-place leases
representing 91% of the net rentable square feet of our properties. Our leases range in term from 1 month to 20 years with an average term of 5 to 7 years. The 16.2 million square feet of in-place leases expire as follows:



|           |  |                      |  |       |  
|---------- |  | -------------------- |  | ----- | -
|           |  | Square Feet Expiring |  |       |  
|           |  | (in thousands)       |  |       |  
|2004       |  | 2,127                |  | 13.1  | %
|2005       |  | 1,709                |  | 10.6  | %
|2006       |  | 2,075                |  | 12.8  | %
|2007       |  | 2,119                |  | 13.1  | %
|2008       |  | 1,707                |  | 10.5  | %
|Thereafter |  | 6,459                |  | 39.9  | %
|           |  |                      |  |       |  
|           |  | 16,196               |  | 100.0 | %
|           |  |                      |  |       |  



If one or more tenants
fail to pay their rent due to bankruptcy, weakened financial condition or otherwise, our income, cash flow and ability to make distributions would be negatively impacted. At any time, a tenant may seek the protection of the bankruptcy laws, which
could result in delays in rental payments or in the rejection and termination of such tenant leases.



2003 Real Estate Transactions



During the year ended December 31, 2003, we acquired 11 office buildings totaling approximately 1.1 million net rentable square feet and sold 11 office buildings containing approximately 983,000 net rentable square feet as detailed in the
acquisitions and dispositions sections below.



26



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##### Index to Financial Statements

Acquisitions



|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      
|------------------------------ |  | --------------- |  | ------------------ |  | -------------------- |  | ------------------- |  | ------------------------------------------ |  | ---------------------------------- | -----
|Acquired Properties            |  | Segment         |  | Market             |  | Month of Acquisition |  | Number of Buildings |  | Net Rentable Square Feet(1) (in thousands) |  | Acquisition Price(2) (in millions)
|Park West C3                   |  | Southwest       |  | Dallas/Ft. Worth   |  | Feb. 2003            |  | 1                   |  | 339                                        |  | $                                  | 28.1 
|410 Warrenville Road           |  | Midwest         |  | Chicago            |  | May 2003             |  | 1                   |  | 60                                         |  |                                    | 8.7  
|Corporate Lakes III            |  | Midwest         |  | Chicago            |  | June 2003            |  | 1                   |  | 124                                        |  |                                    | 22.6 
|2291 Wood Oak Drive            |  | Mid-Atlantic    |  | Metro. Wash., D.C. |  | Aug. 2003            |  | 1                   |  | 228                                        |  |                                    | 52.2 
|Camino West Corporate Park     |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 54                                         |  |                                    | 8.9  
|Carlsbad Airport Plaza         |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 62                                         |  |                                    | 10.5 
|La Place Court                 |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 81                                         |  |                                    | 13.6 
|Pacific Ridge Corporate Centre |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 121                                        |  |                                    | 23.9 
|Pacific View Plaza             |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 52                                         |  |                                    | 10.2 
|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      
|                               |  |                 |  |                    |  |                      |  | 11                  |  | 1,121                                      |  | $                                  | 178.7
|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      

---

|(1) | Net rentable square feet defines the area of a property for which a tenant is required to pay
rent, which includes the actual rentable area plus a portion of the common areas of the property allocated to a tenant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Acquisitions were funded with proceeds from our revolving credit facility, property sales as
described below and proceeds generated from the sale of common shares as described below.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 5, 2003, we acquired a parcel of land located adjacent to one of our Northern California properties for gross proceeds of approximately $6.1
million. The acquisition was funded with proceeds from a land sale discussed in the dispositions section below.



Dispositions



|                         |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     
|------------------------ |  | ------------ |  | ------- |  | -------------------- |  | ------------------- |  | --------------------------------------- |  | ------------------------------- | ----
|Properties Sold          |  | Segment      |  | Market  |  | Month of Disposition |  | Number of Buildings |  | Net Rentable Square Feet (in thousands) |  | Gross Proceeds(1) (in millions)
|11811 North Freeway      |  | Southwest    |  | Houston |  | June 2003            |  | 1                   |  | 156                                     |  | $                               | 4.5 
|Westheimer Central Plaza |  | Southwest    |  | Houston |  | June 2003            |  | 1                   |  | 183                                     |  |                                 | 11.5
|Cumberland Office Park   |  | Mid-Atlantic |  | Atlanta |  | July 2003            |  | 9                   |  | 644                                     |  |                                 | 40.1
|                         |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     
|                         |  |              |  |         |  |                      |  | 11                  |  | 983                                     |  | $                               | 56.1
|                         |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     

---

|(1) | Proceeds from property sales were used to repay a portion of the outstanding borrowings under
our revolving credit facility and to fund acquisitions as described above.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 28, 2003, we sold to an unrelated third party a 9.2 acre parcel of land located in the Sacramento, California area. The land was classified as land held for development on our consolidated balance sheet. The
sale resulted in net proceeds of approximately $2.4 million and a gain on sale of $1.1 million. The proceeds from the sale were originally placed in an escrow account pending a 1031 exchange for tax purposes. The proceeds were later used in the May
2003 acquisition of the 410 Warrenville Road property.



On May
28, 2003, we completed a sale/exchange with an unrelated third party of our interest in a 1.5 acre parcel of land located adjacent to one of our Chicago office properties. In the transaction, we exchanged our ownership interest in the land for $1.0
million cash and upon completion of the parking garage to be constructed on the site, we will receive structured parking stalls valued at $3.2 million. The parking stalls will be used by tenants within our office property. The land was classified as
land held for development on our consolidated balance sheet. We recognized a gain on sale from the transaction of $778,000. Proceeds from the transaction were used to repay a portion of the outstanding borrowings under our revolving credit facility.



27



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##### Index to Financial Statements

On December 4, 2003, we sold to an unrelated third party a 2.5 acre parcel of land adjacent to one of our
Northern California properties. The land was classified as land held for development on our consolidated balance sheet. The sale resulted in gross proceeds of approximately $31.5 million. Of the $31.5 million in gross proceeds, $2.5 million was
recorded as a note receivable on our consolidated balance sheet, $2.8 million was placed in an escrow account pending a possible 1031 exchange for tax purposes, $6.1 million was used to purchase a parcel of land as described above, and the balance
was used to repay a portion of the outstanding borrowings under our revolving credit facility.



In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for financial statements issued for fiscal years beginning
after December 15, 2001, income and gain/(loss) for real estate properties sold and real estate properties held for sale are to be reflected in the consolidated statements of income as discontinued operations. Below is a summary of our combined
results of operations from the properties disposed of or held for sale and included in discontinued operations during the periods presented. The summary includes the results of operations before gain/(loss) from disposition of discontinued
operations for the three years ended December 31, 2003.



|                                       |      |                        |        |      |  |   |        |   |  |   |       
|-------------------------------------- | ---- | ---------------------- | ------ | ---- |  | - | ------ | - |  | - | ------
|Discontinued Operations (in
thousands) |      | Year Ended December 31
|                                       | 2003 |                        |        | 2002 |  |   | 2001  
|Rental income                          |      | $                      | 8,341  |      |  | $ | 22,680 |   |  | $ | 24,861
|                                       |      |                        |        |      |  |   |        |   |  |   |       
|Property revenues                      |      |                        | 8,341  |      |  |   | 22,680 |   |  |   | 24,861
|                                       |      |                        |        |      |  |   |        |   |  |   |       
|Property operating and maintenance     |      |                        | 3,670  |      |  |   | 7,818  |   |  |   | 8,126 
|Real estate taxes                      |      |                        | 636    |      |  |   | 2,043  |   |  |   | 2,012 
|Depreciation and amortization          |      |                        | 2,063  |      |  |   | 6,004  |   |  |   | 6,417 
|                                       |      |                        |        |      |  |   |        |   |  |   |       
|Property expenses                      |      |                        | 6,369  |      |  |   | 15,865 |   |  |   | 16,555
|                                       |      |                        |        |      |  |   |        |   |  |   |       
|Loss on impairment of real estate      |      |                        | (1,792 | )    |  |   | (2,855 | ) |  |   |      
|                                       |      |                        |        |      |  |   |        |   |  |   |       
|Income from discontinued operations    |      | $                      | 180    |      |  | $ | 3,960  |   |  | $ | 8,306 
|                                       |      |                        |        |      |  |   |        |   |  |   |       



Development



During the year ended December 31, 2003, we transitioned two office
properties containing in the aggregate 222,000 net rentable square feet from development into operations. The properties include one office property containing 40,000 net rentable square feet in the Carlsbad California area and one office property
containing 182,000 net rentable square feet in the Northern Virginia area. The December 31, 2002 carrying amount of these development projects which totaled $41.4 million was reclassified on our consolidated balance sheet to land, building and
improvements and deferred charges and other assets, net in the amounts $5.7 million, $31.5 million and $4.2 million, respectively.



Critical Accounting Policies and Estimates



Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements. Our consolidated
financial statements include the accounts of Prentiss Properties Trust, our operating partnership and our other consolidated subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.



The significant accounting policies used in the preparation of our consolidated financial statements are fully described in Note (2) to our audited
consolidated financial statements for the year ended December 31, 2003, included elsewhere in this Form 10-K. However, certain of our significant accounting estimates are considered critical accounting estimates because the estimate requires our
management to make assumptions about matters that



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##### Index to Financial Statements

are highly uncertain at the time the estimate is made and different estimates that reasonably could have been used in the
current period, or changes in the estimates that are reasonably likely to occur from period to period, would have a material impact on our financial condition, changes in financial condition or results of operations. The Audit Committee of our board
of trustees has discussed our critical accounting policies with management and with our independent auditors. We consider our critical accounting policies and estimates to be those used in the determination of the reported amounts and disclosure
related to the following:



| | (1) | Impairment of long-lived assets and the long-lived assets to be disposed of;
| | --- | ----------------------------------------------------------------------------



| | (2) | Allowance for doubtful accounts;
| | --- | --------------------------------



| | (3) | Depreciable lives applied to real estate assets and improvements to real estate assets;
| | --- | ---------------------------------------------------------------------------------------



| | (4) | Initial recognition, measurement and allocation of the cost of real estate acquired; and
| | --- | ----------------------------------------------------------------------------------------



| | (5) | Fair value of derivative instruments.
| | --- | -------------------------------------



Impairment of long-lived assets and long-lived assets to be disposed of



Real estate, leasehold improvements and land holdings are classified as long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying amount or fair value, less cost to sell.
With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered. All of our long-lived assets were classified as held and used at December 31, 2003. Our operating
real estate, which comprises the majority of our long-lived assets, had a carrying amount of $1.8 billion at December 31, 2003. A long-lived asset is considered impaired if its carrying amount exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. Upon impairment, we recognize an impairment loss to reduce the carrying value of the long-lived asset to our estimate of fair value. Our estimate of fair value and cash flows to be
generated from our properties requires us to make assumptions related to future occupancy of our properties, future rental rates, tenant concessions, operating expenditures, property taxes, capital improvements, the ability of our tenants to perform
pursuant to their lease obligations, the holding period of our properties and the proceeds to be generated from the eventual sale of our properties. If one or more of our assumptions proves incorrect or if our assumptions change, the recognition of
an impairment loss on one or more properties may be necessary in the future. The recognition of an impairment loss would negatively impact earnings. The table below details impairment losses recognized during the three years ended December 31, 2003:



|                           |  |                         |       |     |      |   |       |      |  |   |      
|-------------------------- |  | ----------------------- | ----- | --- | ---- | - | ----- | ---- |  | - | -----
|                           |  | Year Ended December 31,
|(in thousands)             |  | 2003                    |       |     | 2002 |   |       | 2001
|Impairment loss recognized |  | $                       | 1,792 | (1) |      | $ | 2,855 | (1)  |  | $ | 4,765

---

|(1) | Included in the line item income from discontinued operations in the accompanying
consolidated statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------



Allowance for doubtful
accounts



Accounts receivable are reduced by an allowance
for amounts that we estimate to be uncollectible. Our receivable balance is comprised primarily of accrued rental rate increases to be received over the life of in-place leases as well as rents and operating cost recoveries due from tenants. We
regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. At December 31, 2003, we had total
receivables of $57.4 million and an allowance for doubtful accounts of $10.0 million, resulting in a net receivable balance of $47.4 million. Of the $57.4 million in total receivables, $44.1 million represents accrued rental rate increases to be
received over the life of in-place leases. It is our policy to reserve all outstanding receivables that are 90-days past due along with a portion of the remaining receivable balance that we feel is uncollectible based on our evaluation of the
outstanding receivable balance. In addition, we increase our allowance for doubtful accounts for accrued rental rate increases, if we determine such future rent is uncollectible. Actual results may differ from these estimates under different
assumptions or conditions. If our assumptions, regarding the collectibility of accounts receivable, prove incorrect, we may experience write-offs in excess of our allowance for doubtful accounts which would negatively impact earnings. The table
below presents bad debt expense recognized during the three years ended December 31, 2003, which includes increases or decreases to our allowance for doubtful accounts. The table also presents our allowance for doubtful accounts at each period end.



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##### Index to Financial Statements

|                                                       |  |                         |        |   |      |   |       |      |  |   |        |  
|------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                       |  | Year Ended December 31, |       
|(in thousands)                                         |  | 2003                    |        |   | 2002 |   |       | 2001 | 
|Bad debt expense                                       |  | $                       | 3,563  |   |      | $ | 5,428 |      |  | $ | 766    |  
|Less: Bad debts realized during the period             |  |                         | (1,289 | ) |      |   | (802  | )    |  |   | (1,184 | )
|                                                       |  |                         |        |   |      |   |       |      |  |   |        |  
|Increase/(decrease) in allowance for doubtful accounts |  | $                       | 2,274  |   |      | $ | 4,626 |      |  | $ | (418   | )
|                                                       |  |                         |        |   |      |   |       |      |  |   |        |  
|Allowance for doubtful accounts at period end          |  | $                       | 9,986  |   |      | $ | 7,712 |      |  | $ | 3,086  |  
|                                                       |  |                         |        |   |      |   |       |      |  |   |        |  



Depreciable lives applied to real
estate assets and improvements to real estate assets



Depreciation on buildings and improvements is provided under the straight-line method over an estimated useful life of 30 to 40 years for office buildings and 25 to 30 years for industrial buildings. Significant betterments made to our real
estate assets are capitalized and depreciated over the estimated useful life of the betterment. If our estimate of useful lives proves to be materially incorrect, the depreciation and amortization expense that we currently recognize would also prove
to be materially incorrect. A change in our estimate of useful lives would therefore, result in either an increase or decrease in depreciation and amortization expense and thus, a decrease or increase in earnings. The table below presents real
estate related depreciation and amortization expense included in both income from continuing operations and discontinued operations during the three years ended December 31, 2003:



|                                      |  |                         |        |      |   |        |  |   |       
|------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                      |  | Year Ended December 31,
|(in thousands)                        |  | 2003                    |        | 2002 |   | 2001  
|Depreciation and amortization expense |  | $                       | 79,972 |      | $ | 73,368 |  | $ | 64,190



Initial recognition, measurement
and allocation of the cost of real estate acquired



We
allocate the purchase price of properties acquired to tangible and identified intangible assets acquired based on their fair values in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. These fair
values are derived as follows:



We record above-market and
below-market in-place lease values for acquired properties based on the present value (using a market interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid
pursuant to the in-place leases and (2) managements estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancellable term of the lease for above-market leases and the
initial term plus the term of the fixed rate renewal option, if any for below-market leases. We perform this analysis on a lease (tenant) by lease (tenant) basis. The capitalized above-market lease values are amortized as a reduction to rental
income over the remaining non-cancellable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term plus the term of the fixed rate renewal option, if any, of the
respective leases.



The aggregate value of other intangible
assets (in-place leases) acquired is determined by applying a fair value model. Our estimates of fair value for other intangibles (in-place leases) includes an estimate of carrying costs during the expected lease-up periods for the respective spaces
considering current market conditions, and the costs to execute similar leases. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place we include such items as real estate taxes, insurance and other
operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions. Costs to execute similar leases include leasing commissions, legal and other related costs. The value of in-place leases is
amortized to expense over the remaining non-cancelable term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value would be charged to expense.



Amounts allocated to land are derived from (1) comparable sales of raw land,
(2) floor area ratio (FAR) specifics of the land as compared to other developed properties (average land cost per FAR) and (3) our other local market knowledge.



30



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##### Index to Financial Statements

Amounts allocated to buildings and improvements are calculated and recorded as if the building was vacant
upon purchase as the value associated with any in-place or above or below-market leases are allocated to such as discussed above. Depreciation is computed using the straight-line method over the estimated life of 30 to 40 years for office buildings
and 25 to 30 years for industrial buildings as discussed above.



Statement No. 141 is effective for business combinations for which the date of acquisition is July 1, 2001, or later. Based on our estimates of the fair value of the components of each real estate property acquired between July 1, 2001 and
December 31, 2003, we allocated the purchase price as follows:



|                                            |  |                         |         |      |   |         |      |  |   |       
|------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | ---- |  | - | ------
|                                            |  | Year Ended December 31,
|(in thousands)                              |  | 2003                    |         | 2002 |   |         | 2001
|Land                                        |  | $                       | 33,173  |      | $ | 10,201  |      |  | $ | 3,000 
|Buildings and improvements                  |  | $                       | 107,506 |      | $ | 133,424 |      |  | $ | 15,221
|Tenant Improvements and leasing commissions |  | $                       | 28,159  |      | $ | 21,425  |      |  | $ |      
|Above/(below) market lease value            |  | $                       | 2,408   |      | $ | (2,423  | )    |  | $ |      
|In-place lease value at market              |  | $                       | 7,425   |      | $ |        |      |  | $ |      



Fair value of derivative
instruments



In accordance with Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, beginning January 1, 2001, we record all derivatives on the balance sheet at fair value. The accounting for changes
in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability of expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.



For derivatives designated as fair value hedges, changes in the fair value of
the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other
comprehensive income and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized currently in earnings. We assess the effectiveness
of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as
hedges, changes in fair value are recognized in earnings.



Our
objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps as part of our cash flow hedging strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without the exchange of the underlying principal amount. During 2003, such derivatives were used to hedge
the variable cash flows associated with a portion of our variable-rate debt.



As of December 31, 2003, we did not have any derivatives designated as fair value hedges. Additionally, we do not use derivatives for trading or speculative purposes and currently, we do not have any derivatives that
are not designated as hedges.



To determine the fair value of
our derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, standard market
conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized. Future cash inflows or outflows from our derivative instruments depend upon future borrowing rates. If assumptions about future borrowing rates prove to be materially incorrect, the recorded value of these
agreements could also prove to be materially incorrect. Because we use the derivative instruments to hedge our exposure to variable interest rates, thus effectively fixing a portion of our variable interest rates, changes in future borrowing rates
could result in our interest expense being either higher or lower than might otherwise have been incurred on our variable-rate borrowings had the rates not been fixed. The table below presents the amount by which cash payments made



31



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##### Index to Financial Statements

under our interest rate swap agreements exceeded cash receipts from our agreements during the three years ended December
31, 2003. The table also presents the estimated fair value of our in-place swap agreements at each period end.



|                                                      |  |                         |        |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | Year Ended December 31, |       
|(in thousands)                                        |  | 2003                    |        |   | 2002 |   |         | 2001 | 
|Net cash paid under our interest rate swap agreements |  | $                       | (9,743 | ) |      | $ | (8,232  | )    |  | $ | (3,197  | )
|                                                      |  |                         |       
|Fair value of interest rate swaps                     |  | $                       | (8,074 | ) |      | $ | (16,776 | )    |  | $ | (10,490 | )



32



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##### Table of Contents

##### Index to Financial Statements

Results of Operations



Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002



The table below presents our consolidated statements of income for the years ended December 31, 2003 and 2002:



|                                                                                                                                   |      |                         |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- | ---- | ----------------------- | ------- | ---- |  | - | ------- | -
|Consolidated Statements of Income (in thousands)                                                                                   |      | Year Ended December 31, |        
|                                                                                                                                   | 2003 |                         |         | 2002 | 
|Revenues:                                                                                                                          |      |                         |         |      |  |   |         |  
|Rental income                                                                                                                      |      | $                       | 339,541 |      |  | $ | 333,574 |  
|Service business and other income                                                                                                  |      |                         | 16,816  |      |  |   | 4,386   |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | 356,357 |      |  |   | 337,960 |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Expenses:                                                                                                                          |      |                         |         |      |  |   |         |  
|Property operating and maintenance                                                                                                 |      |                         | 88,305  |      |  |   | 82,893  |  
|Real estate taxes                                                                                                                  |      |                         | 34,276  |      |  |   | 38,420  |  
|General and administrative and personnel costs                                                                                     |      |                         | 10,988  |      |  |   | 10,361  |  
|Expenses of service business                                                                                                       |      |                         | 10,513  |      |  |   |        |  
|Interest expense                                                                                                                   |      |                         | 69,814  |      |  |   | 67,081  |  
|Amortization of deferred financing costs                                                                                           |      |                         | 2,284   |      |  |   | 1,832   |  
|Depreciation and amortization                                                                                                      |      |                         | 78,193  |      |  |   | 67,453  |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | 294,373 |      |  |   | 268,040 |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |      |                         | 61,984  |      |  |   | 69,920  |  
|                                                                                                                                   |      |                        
|Minority interests                                                                                                                 |      |                         | (10,437 | )    |  |   | (10,717 | )
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |      |                         | 2,555   |      |  |   | 3,154   |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Income from continuing operations                                                                                                  |      |                         | 54,102  |      |  |   | 62,357  |  
|                                                                                                                                   |      |                        
|Discontinued operations:                                                                                                           |      |                         |         |      |  |   |         |  
|Income from discontinued operations                                                                                                |      |                         | 180     |      |  |   | 3,960   |  
|(Loss)/gain from disposition of discontinued operations                                                                            |      |                         | (4,457  | )    |  |   | 8,430   |  
|Minority interests related to discontinued operations                                                                              |      |                         | 157     |      |  |   | (466    | )
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | (4,120  | )    |  |   | 11,924  |  
|                                                                                                                                   |      |                        
|Income before gain on sale of land                                                                                                 |      |                         | 49,982  |      |  |   | 74,281  |  
|Gain on sale of land                                                                                                               |      |                         | 9,435   |      |  |   |        |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Net income                                                                                                                         |      | $                       | 59,417  |      |  | $ | 74,281  |  
|Preferred dividends                                                                                                                |      |                         | (8,452  | )    |  |   | (8,358  | )
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Net income applicable to common shareholders                                                                                       |      | $                       | 50,965  |      |  | $ | 65,923  |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  



Included below is a
discussion of the significant events or transactions that have impacted our results of operations when comparing the year ended December 31, 2003 to the year ended December 31, 2002.



Acquisition of Real Estate.Prior to March 2002, we owned a 20% non-controlling interest in the joint venture owning the Burnett
Plaza property, a 1.0 million net rentable square foot office building located in our Southwest Region. Our 20% interest was accounted for using the equity method of accounting and thus, our share of the results of operations from the property were
included in the line item equity in income of joint ventures and unconsolidated subsidiaries on our consolidated statement of income. On March 7, 2002, we purchased from Burnett Plaza  VEF III, L.P., an affiliate of Lend Lease Real
Estate Investments, its 80% interest in the joint venture for a purchase price of approximately $51.2 million and the assumption of their pro rata share of the joint venture debt. Subsequent to this purchase, the results of operations for the
Burnett Plaza property are consolidated into the results of operations of our operating partnership.



33



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##### Table of Contents

##### Index to Financial Statements

In addition to the acquisition of the Burnett Plaza property, between January 1, 2002 and December 31,
2003, we acquired twelve wholly-owned office properties containing in the aggregate approximately 1.4 million net rentable square feet as presented below:



|                               |  |                |  |                    |  |                      |  |                     |  |                                         |  |                                 |      
|------------------------------ |  | -------------- |  | ------------------ |  | -------------------- |  | ------------------- |  | --------------------------------------- |  | ------------------------------- | -----
|Acquired Properties            |  | Segment        |  | Market             |  | Month of Acquisition |  | Number of Buildings |  | Net Rentable Square Feet (in thousands) |  | Acquisition Price (in millions)
|12601 Fair Lakes Circle        |  | Mid-Atlantic   |  | Metro. Wash., D.C. |  | Nov. 2002            |  | 1                   |  | 264                                     |  | $                               | 55.1 
|Park West C3                   |  | Southwest      |  | Dallas/Ft. Worth   |  | Feb. 2003            |  | 1                   |  | 339                                     |  |                                 | 28.1 
|410 Warrenville Road           |  | Midwest        |  | Chicago            |  | May 2003             |  | 1                   |  | 60                                      |  |                                 | 8.7  
|Corporate Lakes III            |  | Midwest        |  | Chicago            |  | June 2003            |  | 1                   |  | 124                                     |  |                                 | 22.6 
|2291 Wood Oak Drive            |  | Mid-Atlantic   |  | Metro. Wash., D.C. |  | Aug. 2003            |  | 1                   |  | 228                                     |  |                                 | 52.2 
|Camino West Corporate Park     |  | SouthernCalif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 54                                      |  |                                 | 8.9  
|Carlsbad Airport Plaza         |  | SouthernCalif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 62                                      |  |                                 | 10.5 
|La Place Court                 |  | SouthernCalif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 81                                      |  |                                 | 13.6 
|Pacific Ridge Corporate Centre |  | SouthernCalif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 121                                     |  |                                 | 23.9 
|Pacific View Plaza             |  | SouthernCalif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 52                                      |  |                                 | 10.2 
|                               |  |                |  |                    |  |                      |  |                     |  |                                         |  |                                 |      
|                               |  |                |  |                    |  |                      |  | 12                  |  | 1,385                                   |  | $                               | 233.8
|                               |  |                |  |                    |  |                      |  |                     |  |                                         |  |                                 |      



Leasing of Development Projects.Our results of operations, for the year ended December 31, 2003, have been bolstered by increased occupancy at three development projects. The projects include approximately 182,000 net rentable square feet in our Mid-Atlantic Region, 223,000
net rentable square feet in our Southwest Region and 40,000 net rentable square feet in our Southern California Region. The projects were approximately 71% leased and rent paying at December 31, 2003.



Real Estate Dispositions. During the period January 1, 2002 through December 31, 2003,
we disposed of seven industrial properties containing 875,000 net rentable square feet and fourteen office properties containing 1.2 million net rentable square feet. The industrial properties were sold on September 10, 2002 and included all of the
industrial properties within our Mid-Atlantic Region. Three office properties containing 194,000 net rentable square feet were sold on October 17, 2002 and represented our only office holdings within the Los Angeles area, a market within our
Southern California Region. Two office properties, containing 339,000 net rentable square feet, within our Southwest region were sold on June 26, 2003. The remaining 644,000 net rentable square feet included the disposition on July 24, 2003 of nine
office properties representing our only properties within the Atlanta area, a market within our Mid-Atlantic region.



Other Significant Real Estate Transactions.On November 22, 1999, we acquired 123 North Wacker, a 540,000 net rentable square foot office property located in our
Midwest Region for a purchase price of approximately $87.3 million. The property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to
convert and market the building for lease as a multi-tenant property. The property, which was vacated as intended incurred significant leasing activity during 2002 and 2003. The property is currently approximately 88% leased compared to 81% leased
at December 31, 2002.



The following is a discussion of the
material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions, as described above, had on one or more line items of our consolidated statements of income when comparing the year
ended December 31, 2003 to the year ended December 31, 2002.



Rental Income. Rental income increased by $6.0 million, or 1.8%, from $333.5 million to $339.5 million. The real estate acquisitions and development properties coming on-line resulted in increases of $21.1 million and $2.3 million,
respectively. The leasing of our 123 North Wacker property resulted in an increase of $2.5 million. The increases were offset by a decrease of $19.9 million from our other properties relating primarily to occupancy and rental rate declines in our
portfolio and a decrease in termination fee income recognized for the year ended December 31, 2003 compared to the year ended December 31, 2002.



34



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##### Table of Contents

##### Index to Financial Statements

Property Operating and Maintenance. Property operating and maintenance costs increased by $5.4 million, or 6.5%,
from $82.9 million to $88.3 million. The real estate acquisitions and development properties coming on-line resulted in increases of $5.6 million and $1.4 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of
$383,000. Property operating and maintenance expenses related to our other properties decreased by $2.0 million. The decrease in property operating and maintenance expenses at our other properties primarily related to the decrease from the year
ended December 31, 2002 to the year ended December 31, 2003 of bad debt expenses recognized at our properties.



Real Estate Taxes. Real estate taxes decreased by $4.1 million, or 10.8%, from $38.4 million to $34.3 million. The real estate acquisitions and development properties coming on-line resulted in increases of
$1.3 million and $59,000, respectively. The increases were offset by decreases of $4.8 million and $757,000 from our other properties and our 123 North Wacker property, respectively. The decrease primarily resulted from real estate tax refunds
received and lower estimates of current year taxes resulting from lower property tax assessments across our portfolio.



Service Business and Other Income/Expenses of Service Business.Service business and other income and the expenses of service business increased as a result of the
acquisition of the remaining interest in Prentiss Properties Resources, Inc. and the resulting consolidation of the accounts with and into the accounts of the operating partnership. During the year ended December 31, 2002, our pro rata share of the
results of operations of Prentiss Properties Resources, Inc. were included in the line item equity in income of joint ventures and unconsolidated subsidiaries in our consolidated statement of income.



Interest Expense. Interest expense increased by $2.7 million, or 4.1%, from $67.1
million to $69.8 million, primarily as a result of an increase in weighted average borrowings outstanding for the year ended December 31, 2003 compared to the year ended December 31, 2002, accompanied by a decrease in capitalized interest from $3.4
million in 2002 to $416,000 in 2003. The increase was partially offset by a decrease in the weighted average interest rate paid on outstanding borrowings from 6.78% in 2002 to 6.61% in 2003.



Depreciation and Amortization. Depreciation and amortization increased by $10.7
million, or 15.9%, from $67.5 million to $78.2 million. The real estate acquisitions and development properties coming on-line resulted in increases of $5.9 million and $2.0 million, respectively. The leasing of our 123 North Wacker property
resulted in an increase of $1.1 million. Other properties increased by $1.7 million which is attributable to the depreciation and amortization expense related to capital expenditures incurred at our properties subsequent to acquisition.



Discontinued Operations. Discontinued operations decreased by $16.0 million, from
$11.9 million to a negative $4.1 million, primarily as a result of the loss from the sale of properties of $4.5 million for the year ended December 31, 2003 compared to a gain on the sale of properties of $8.4 million for the twelve months ended
December 31, 2002. Also contributing to the decrease is the shortened period of time the assets were in our portfolio during 2003 versus 2002.



Gain on Sale of Land. During the year ended December 31, 2003, we disposed of three parcels of land resulting in a gain on sale of $9.4 million.



35



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##### Table of Contents

##### Index to Financial Statements

Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001



The table below presents our consolidated statements of income for the years
ended December 31, 2002 and 2001:



|                                                                                                                                   |      |                         |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- | ---- | ----------------------- | ------- | ---- |  | - | ------- | -
|Consolidated Statements of Income (in thousands)                                                                                   |      | Year Ended December 31, |        
|                                                                                                                                   | 2002 |                         |         | 2001 | 
|Revenues:                                                                                                                          |      |                         |         |      |  |   |         |  
|Rental income                                                                                                                      |      | $                       | 333,574 |      |  | $ | 314,516 |  
|Service business and other income                                                                                                  |      |                         | 4,386   |      |  |   | 5,042   |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | 337,960 |      |  |   | 319,558 |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Expenses:                                                                                                                          |      |                         |         |      |  |   |         |  
|Property operating and maintenance                                                                                                 |      |                         | 82,893  |      |  |   | 70,787  |  
|Real estate taxes                                                                                                                  |      |                         | 38,420  |      |  |   | 36,343  |  
|General and administrative and personnel costs                                                                                     |      |                         | 10,361  |      |  |   | 10,396  |  
|Interest expense                                                                                                                   |      |                         | 67,081  |      |  |   | 64,472  |  
|Amortization of deferred financing costs                                                                                           |      |                         | 1,832   |      |  |   | 1,974   |  
|Depreciation and amortization                                                                                                      |      |                         | 67,453  |      |  |   | 57,851  |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | 268,040 |      |  |   | 241,823 |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Merger termination fee, net                                                                                                        |      |                         |        |      |  |   | 17,000  |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |      |                         | 69,920  |      |  |   | 94,735  |  
|Minority interests                                                                                                                 |      |                         | (10,717 | )    |  |   | (17,247 | )
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |      |                         | 3,154   |      |  |   | 3,131   |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Incoming from continuing operations                                                                                                |      |                         | 62,357  |      |  |   | 80,619  |  
|Discontinued operations:                                                                                                           |      |                         |         |      |  |   |         |  
|Income from discontinued operations                                                                                                |      |                         | 3,960   |      |  |   | 8,306   |  
|Gain from disposition of discontinued operations                                                                                   |      |                         | 8,430   |      |  |   |        |  
|Minority interests related to discontinued operations                                                                              |      |                         | (466    | )    |  |   | (354    | )
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|                                                                                                                                   |      |                         | 11,924  |      |  |   | 7,952   |  
|Income before gain on sale of properties and impairment loss on real estate                                                        |      |                         | 74,281  |      |  |   | 88,571  |  
|Gain on sale of properties                                                                                                         |      |                         |        |      |  |   | 18,660  |  
|Impairment loss on real estate                                                                                                     |      |                         |        |      |  |   | (4,765  | )
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Net income                                                                                                                         |      | $                       | 74,281  |      |  | $ | 102,466 |  
|Preferred dividends                                                                                                                |      |                         | (8,358  | )    |  |   | (7,887  | )
|                                                                                                                                   |      |                         |         |      |  |   |         |  
|Net income applicable to common shareholders                                                                                       |      | $                       | 65,923  |      |  | $ | 94,579  |  
|                                                                                                                                   |      |                         |         |      |  |   |         |  



Included below is a
discussion of the significant events or transactions that have impacted our results of operations when comparing the year ended December 31, 2002 to the year ended December 31, 2001.



Acquisition of Real Estate.Prior to March 2002, we owned a 20% non-controlling interest in the joint venture owning the Burnett
Plaza property, a 1.0 million net rentable square foot office building located in our Southwest Region. Our 20% interest was accounted for using the equity method of accounting and thus, our share of the results of operations from the property were
included in the line item equity in income of joint ventures and unconsolidated subsidiaries on our consolidated statements of income. On March 7, 2002, we purchased from Burnett Plaza  VEF III, L.P., an affiliate of Lend Lease
Real Estate Investments, its 80% interest in the joint venture for a purchase price of approximately $51.2 million and the assumption of their pro rata share of joint venture debt. Subsequent to this purchase, the results of operations for the
Burnett Plaza property are consolidated into the results of operations of our operating partnership.



36



---

##### Table of Contents

##### Index to Financial Statements

In addition to the acquisition of the Burnett Plaza property, between January 1, 2001 and December 31,
2002, we acquired six wholly-owned office properties and an interest in a real estate joint venture owning two office properties.



|                            |  |              |  |                    |  |                      |  |                     |  |                                         |  |                                 |       |  
|--------------------------- |  | ------------ |  | ------------------ |  | -------------------- |  | ------------------- |  | --------------------------------------- |  | ------------------------------- | ----- | -
|Acquired Properties         |  | Segment      |  | Market             |  | Month of Acquisition |  | Number of Buildings |  | Net Rentable Square Feet (in thousands) |  | Acquisition Price (in millions) |      
|1676 International Drive(1) |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 75                                      |  |                                 | (1    | )
|8260 Greensboro(1)          |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 38                                      |  |                                 | (1    | )
|Campus Point                |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 172                                     |  |                                 | (2    | )
|Greenwood                   |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 150                                     |  |                                 | (2    | )
|Oakwood                     |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 128                                     |  |                                 | (2    | )
|Plaza 1900                  |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | April 2001           |  | 1                   |  | 203                                     |  |                                 | (2    | )
|Park West at Dulles         |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | July 2001            |  | 1                   |  | 152                                     |  |                                 | 18.2  |  
|12601 Fair Lakes Circle     |  | Mid-Atlantic |  | Metro. Wash., D.C. |  | Nov. 2002            |  | 1                   |  | 264                                     |  |                                 | 55.1  |  
|                            |  |              |  |                    |  |                      |  |                     |  |                                         |  |                                 |       |  
|                            |  |              |  |                    |  |                      |  | 8                   |  | 1,182                                   |  | $                               | 191.2 |  
|                            |  |              |  |                    |  |                      |  |                     |  |                                         |  |                                 |       |  

---

|(1) | We acquired a 25% interest in the real estate joint venture owning the 1676 International
Drive and 8260 Greensboro properties for total consideration of $10.7 million. The net rentable square feet listed above represents our pro rata share of the total net rentable square feet of the properties.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Campus Point, Greenwood, Oakwood and Plaza 1900 properties were acquired as a portfolio
for total consideration of $107.2 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



Leasing of
Development Projects.Our results of operations, for the year ended December 31, 2002, have been bolstered by the contribution of several development projects. The projects include approximately 182,000 net rentable square feet in our
Mid-Atlantic Region, 59,000 net rentable square feet in our Midwest Region, 396,000 net rentable square feet in our Southwest Region and 40,000 net rentable square feet in our Southern California Region. At December 31, 2002 these projects were
approximately 80% leased and rent paying.



Real Estate Dispositions.
During 2002, we disposed of seven industrial properties containing 875,000 net rentable square feet and three office properties containing 194,000 net rentable square feet. The industrial properties included all of the industrial properties within
our Mid-Atlantic Region. The office properties represented our only office holdings within the Los Angeles area, a market within our Southern California Region. In addition to the properties sold during 2002, during 2001, we disposed of 42
properties containing 2.8 million net rentable square feet. The 42 property dispositions included 1 property containing 243,000 net rentable square feet located in our Mid-Atlantic Region, 5 properties containing 584,000 net rentable square feet in
our Midwest Region, 5 properties containing 301,000 net rentable square feet in our Southern California Region and all of the properties within our Northeast Region which included 31 properties containing 1.7 million net rentable square feet.



Termination of Merger.On September 21, 2000, we entered into a
termination and release agreement which provided for the termination of the agreement and plan of merger dated June 27, 2000, between us, our operating partnership, Mack-Cali Realty Corporation, and Mack-Cali Realty, L.P. As part of the termination
and release agreement, and pursuant to an escrow agreement dated September 21, 2000, Mack-Cali deposited a $25.0 million termination fee in escrow for our benefit.



Redemption/Issuance of Preferred Units.On January 3, 2002, we repurchased all of our outstanding 9.45%, Series C Cumulative
Redeemable Perpetual Preferred Units of our operating partnership for approximately $50.6 million including accrued and unpaid dividends. In April 2001, we issued $10.0 million of 7.50%, Series E Cumulative Preferred Units of our operating
partnership as partial consideration for the acquisition of real estate related assets.



Other Significant Events or Transactions.On November 22, 1999, we acquired 123 North Wacker, a 540,000 net rentable square foot office property located in our Midwest Region for a purchase price of approximately $87.3 million. The
property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to convert and market the building for lease as a multi-tenant property. The
property, which was vacated as intended, was 81% leased at December 31, 2002.



37



---

##### Table of Contents

##### Index to Financial Statements

The following is a discussion of the material changes in our consolidated statements of income and a
discussion of the impact that the significant events or transactions, as described above, had on one or more line items of our consolidated statements of income when comparing the year ended December 31, 2002 to the year ended December 31, 2001.



Rental Income. Rental income increased by $19.1 million, or 6.1%, from
$314.5 million to $333.6 million. The real estate acquisitions and development properties coming on-line resulted in increases of $26.9 million and $9.8 million, respectively. These increases were partially offset by a decrease of $10.4 million
related to property dispositions during the period January 1, 2001 through December 31, 2001, a decrease of $3.6 million related to our 123 North Wacker property and a decrease of $3.6 million from our other properties relating primarily to
occupancy declines in our portfolio.



Property Operating and
Maintenance. Property operating and maintenance costs increased by $12.1 million, or 17.1%, from $70.8 million to $82.9 million. The real estate acquisitions and development properties coming on-line resulted in increases of $6.2 million and
$1.8 million, respectively. These increases were partially offset by a decrease of $2.4 million related to real estate dispositions during the period January 1, 2001 through December 31, 2001 and a decrease of $96,000 related to our 123 North Wacker
property. Property operating and maintenance expenses related to our other properties increased by $6.6 million relating primarily to an increase of $4.6 million in our allowance for doubtful accounts and $1.7 million in property related insurance
during the period. The increase in property related insurance resulted primarily from the premiums paid for terrorism insurance.



Real Estate Taxes. Real estate taxes increased by $2.1 million, or 5.7%, from $36.3 million to $38.4 million. The real estate acquisitions and development
properties coming on-line resulted in increases of $2.9 million and $1.3 million, respectively. These increases were partially offset by a decrease of $699,000 related to real estate dispositions during the period January 1, 2001 through December
31, 2001 and a decrease of $292,000 related to our 123 North Wacker property. Other properties decreased by approximately $1.1 million primarily as a result of the reassessment of certain property values by various taxing authorities.



Interest Expense. Interest expense increased by $2.6 million, or 4.0%, from $64.5
million to $67.1 million, primarily as a result of an increase in weighted average borrowings outstanding from the year ended December 31, 2001 to year ended December 31, 2002, accompanied by a decrease in capitalized interest from $5.2 million in
2001 to $3.4 million in 2002. The increase was partially offset by a decrease in the weighted average interest rate paid on outstanding borrowings from 7.37% in 2001 to 6.78% in 2002.



Depreciation and Amortization. Depreciation and amortization increased by $9.6 million, or 16.6%, from $57.9 million to $67.5
million. The real estate acquisitions and development properties coming on-line resulted in increases of $4.7 million and $2.0 million, respectively. These increases were partially offset by a decrease of $1.9 million related to real estate
dispositions during the period January 1, 2001 through December 31, 2001. Additionally, our depreciation and amortization expense related to our 123 North Wacker property and our other properties increased by $1.4 million and $3.4 million,
respectively which is primarily attributable to increases in depreciation and amortization of leasehold improvements which results from leasing activity incurred subsequent to our acquisition of these properties.



Merger Termination Fee.During the year ended December 31, 2001, we received final
distributions totaling $17.0 million from the Mack-Cali escrow account.



Minority Interests. Minority interests decreased by $6.5 million, or 37.9%, from $17.2 million to $10.7 million, primarily due to the income allocation totaling $4.7 million related to the Series C Cumulative Redeemable Perpetual
Preferred Units that were repurchased in January 2002, as well as the minority interest holders proportionate share of the decrease in net income before discontinued operations and minority interests from $111.8 million for the year ended December
31, 2001 to $73.1 million for the year ended December 31, 2002. The decrease was partially offset by the increase of $188,000 in income allocation resulting from the full year impact in 2002 of the Series E Preferred Units issued in April 2001.



38



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##### Table of Contents

##### Index to Financial Statements

Discontinued Operations. Discontinued operations increased by $4.0 million, from $7.9 million to $11.9 million,
primarily as a result of the gain from the sale of our industrial properties in our Mid-Atlantic Region which totaled $8.5 million, partially offset by a $2.9 million write-down on the Los Angeles office properties, prior to their disposition in
October 2002. The increase was also offset by a decrease resulting from the shortened period of time the assets were in our portfolio during 2002 versus 2001.



Gain on Sale of Properties. Gain on sale of properties decreased by $18.7 million. Prior to the effective date of Statement of Financial Accounting Standards
No. 144, which requires gains and loses on the sale of real estate properties to be included in discontinued operations, gains and losses on our real estate dispositions were included in the line item gain on sale of properties in our
consolidated statement of income. Included as such, during the year ended December 31, 2001, we sold 42 properties totaling 2.8 million net rentable square feet resulting in a gain on sale of $18.7 million.



Impairment Loss on Real Estate.During 2001 we recorded a write-down on our Crescent
Centre property prior to our sale of the property in May 2001.



39



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##### Table of Contents

##### Index to Financial Statements

Liquidity and Capital Resources



Cash and cash equivalents were $5.9 million and $5.1 million at December 31, 2003 and December 31, 2002, respectively. The
increase in cash and cash equivalents is a result of net cash flows provided by operating and financing activities exceeding net cash used in investing activities. Cash flows provided by operating activities totaled $133.6 million for the year ended
December 31, 2003, compared to $160.6 million for the year ended December 31, 2002.



Net cash used in investing activities totaled $142.3 million for the year ended December 31, 2003 compared to $160.5 million for the year ended December 31, 2002. The decrease in net cash used in investing activities
of $18.2 million is due primarily to an increase in cash generated from the sale of real estate of $30.5 million, a decrease of $15.3 million in cash used in the development and redevelopment of real estate, a decrease of $47.0 million of cash used
for the purchase of a mortgage loan in 2002, partially offset by an increase of $67.7 million in cash used to purchase real estate and an increase of $8.0 million used for capital expenditures related to in service properties.



Net cash provided by financing activities totaled $9.5 million for the year
ended December 31, 2003 compared to net cash used of $871,000 for the year ended December 31, 2002. The increase in net cash provided by financing activities of $10.4 million is due primarily to a decrease of $50.5 million of cash used related to
the repurchase of preferred units in 2002, an increase in cash generated from the sale of common shares of $48.2 million, partially offset by a decrease in net borrowings of $85.3 million and an increase of $4.3 million in net cash used for
distributions.



Net cash flow from operations represents the
primary source of liquidity to fund distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. We expect that our revolving credit facility will provide for funding of working capital and revenue enhancing
tenant improvements, unanticipated cash needs as well as acquisitions and development costs. Our principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements and the minimum distributions required to maintain
our REIT qualification under the Internal Revenue Code.



Our
net cash flow from operations is generally derived from rental revenues and operating expense reimbursements from tenants and, to a limited extent, from fees generated by our office and industrial real estate management service business. Our net
cash flow from operations is therefore dependent upon the occupancy level of our properties, the collectibility of rent from our tenants, the level of operating and other expenses, and other factors. Material changes in these factors may adversely
affect our net cash flow from operations. Such changes, in turn, would adversely affect our ability to fund distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. In addition, a material adverse change in
our net cash flow from operations may affect the financial performance covenants under our revolving credit facility. If we fail to meet any of our financial performance covenants, our revolving credit facility may become unavailable to us, or the
interest charged on the revolving credit facility may increase. Either of these circumstances could adversely affect our ability to fund working capital and revenue enhancing tenant improvements, unanticipated cash needs, acquisitions and
development costs.



In order to qualify as a REIT for federal
income tax purposes, we must distribute at least 90% of our taxable income, excluding capital gains. We expect to make distributions to our shareholders primarily based on our cash flow from operations distributed by our operating partnership. We
anticipate that our short-term liquidity needs will be fully funded from cash flows provided by operating activities and, when necessary to fund shortfalls resulting from the timing of collections of accounts receivable in the ordinary course of
business, from our revolving credit facility. In the event that our cash flow needs exceed cash flows provided by operating activities, we may be forced to incur additional debt or sell real estate properties to fund such cash flow needs.



We expect to meet our long-term liquidity requirements for the
funding of activities, such as development, real estate acquisitions, scheduled debt maturities, major renovations, expansions and other revenue enhancing capital improvements through long-term secured and unsecured indebtedness and through the
issuance of additional debt and equity securities. We also intend to use proceeds from our revolving credit facility to fund real estate acquisitions, development, redevelopment, expansions and capital improvements on an interim basis.



40



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##### Index to Financial Statements

Debt Financing



As of December 31, 2003, we had outstanding total indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or
approximately 39.8% of total market capitalization based on a common share price of $32.99 per common share. The amount of indebtedness that we may incur, and the policies with respect thereto, are not limited by our declaration of trust and bylaws,
and are solely within the discretion of our board of trustees, limited only by various financial covenants in our credit agreements. It is our general policy to limit combined indebtedness plus our pro rata share of joint venture debt so that, at
the time such debt is incurred, it does not exceed 50% of our total market capitalization. Our credit agreements limit total indebtedness to 55% of total assets and require an interest coverage ratio of at least 2 to 1.



As of December 31, 2003, we had in place a $300 million unsecured revolving
credit facility with a group of 12 banks which was scheduled to mature in May 2005. Based on overall leverage, the facility had an interest rate between 30-day LIBOR plus 125 basis points and 30-day LIBOR plus 175 basis points. Subsequent to year
end, effective February 19, 2004, the facility was renewed. The facility, as renewed, has an interest rate between 30-day LIBOR plus 112.5 basis points and 30-day LIBOR plus 160 basis points and matures February 19, 2007. We are required to pay an
average unused commitment fee of 20 basis points per annum if the unused portion of the credit facility is greater than $200 million. The fee is reduced to 17.5 basis points per annum if the unused portion is less than or equal to $200 million, but
greater than $100 million. The fee is further reduced to 15 basis points per annum if the unused portion is less than or equal to $100 million. During the year ended December 31, 2003, we had net repayments under our credit facility of $45.0 million
and an outstanding balance of $111.0 million at December 31, 2003 resulting in an available balance of $189.0 million.



On January 30, 2003, we completed a loan modification with Farm Bureau Life Insurance Company for the purpose of swapping the collateral underlying the
loan. The purpose of the modification was to provide us flexibility with respect to hold/sell decisions for the underlying collateral. At the time of the modification, the in-place loan had an outstanding balance of approximately $5.6 million, an
interest rate of 8.38% and a maturity of August 1, 2006. Per the modification, we received an additional $1.6 million of cash borrowings resulting in a modified principal balance of $7.2 million. The loan as modified has an interest rate of 7.75%
per annum and a maturity date of January 1, 2007. The additional proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.



On May 22, 2003, we completed a $100.0 million, 5-year unsecured term loan with a group of lenders headed by Eurohypo AG, as
Administrative Agent. The loan requires interest only payments until maturity. Currently, interest is computed using a rate equal to 30-day LIBOR plus 137.5 basis points. Based on overall leverage, the spread over 30-day LIBOR can fluctuate between
112.5 basis point and 162.5 basis points.



On July 16, 2003, we
completed a loan modification with Eurohypo AG for the purpose of converting a $14.1 million loan from a collateralized obligation to an unsecured obligation. The terms of the loan which include fixed rate interest equal to 7.46% per annum and a
maturity of July 15, 2009 remain unchanged.



On November 3,
2003, using proceeds from our revolving credit facility, we repaid two mortgage loans totaling in the aggregate $25.8 million. The loans totaling $2.7 million and $23.1 million had fixed interest rates of 8.63% and 7.84% per annum and were scheduled
to mature on December 1, 2003 and February 1, 2004, respectively.



On November 10, 2003, we negotiated an interest rate reduction on the $72.1 million mortgage collateralized by our Burnett Plaza property in Fort Worth, Texas. The interest rate was reduced from 30-day LIBOR plus 215 basis points to 30-day
LIBOR plus 150 basis points. In exchange for the pricing reduction, we agreed to pay the principal balance of the loan down by $6.1 million to $66.0 million and agreed to a one year prepayment lockout from the date of the amendment. The paydown was
funded with proceeds from our revolving credit facility. The other terms of the loan which included interest only payments until maturity and a maturity date of July 9, 2005 remain unchanged.



41



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##### Index to Financial Statements

The following table sets forth our mortgages and notes payable, including our pro rata share of joint
venture debt, as of December 31, 2003.



|                                               |  |                |           |              |       |               |                |          |                   
|---------------------------------------------- |  | -------------- | --------- | ------------ | ----- | ------------- | -------------- | -------- | ------------------
|Borrower/Description                           |  | CurrentBalance |           | Amortization |       | Interest Rate |                | Maturity
|                                               |  | (in thousands) |           |              |       |               |                |         
|Broadmoor Austin Associates                    |  |                |           |              |       |               |                |          |                   
|Broadmoor Austin(1)                            |  | $              | 69,276    |              | 16 yr |               | 7.04%          |          | April 10, 2011    
|Burnett Plaza Associates                       |  |                |           |              |       |               |                |          |                   
|Burnett Plaza                                  |  |                | 66,000    |              | None  |               | LIBOR + 1.500% |          | July 9, 2005      
|PL Properties Associates, L.P.                 |  |                |           |              |       |               |                |          |                   
|Park West C2                                   |  |                | 33,472    |              | 30 yr |               | 6.63%          |          | November 10, 2010 
|Prentiss Properties Acquisition Partners, L.P. |  |                |           |              |       |               |                |          |                   
|Collateralized Term Loan(2)                    |  |                | 70,813    |              | 25 yr |               | LIBOR + 1.500% |          | September 30, 2004
|Walnut Glen Tower                              |  |                | 33,545    |              | 30 yr |               | 6.92%          |          | April 1, 2005     
|Revolving Credit Facility                      |  |                | 111,000   |              | None  |               | LIBOR + 1.500% |          | May 23, 2005      
|Unsecured Term Loan  Commerz                  |  |                | 75,000    |              | None  |               | LIBOR + 1.500% |          | March 16, 2006    
|Unsecured Term Loan  EuroHypo I               |  |                | 100,000   |              | None  |               | LIBOR + 1.375% |          | May 22, 2008      
|Highland Court                                 |  |                | 4,488     |              | 25 yr |               | 7.27%          |          | April 1, 2006     
|Plaza I & II                                   |  |                | 7,052     |              | 18 yr |               | 7.75%          |          | January 1, 2007   
|7101 Wisconsin Avenue                          |  |                | 20,386    |              | 30 yr |               | 7.25%          |          | April 1, 2009     
|Unsecured Term Loan  EuroHypo II              |  |                | 14,000    |              | 30 yr |               | 7.46%          |          | July 15, 2009     
|Ordway                                         |  |                | 47,969    |              | 30 yr |               | 7.95%          |          | August 1, 2010    
|World Savings Center                           |  |                | 28,496    |              | 30 yr |               | 7.91%          |          | November 1, 2010  
|One OHare Centre                              |  |                | 39,735    |              | 30 yr |               | 6.80%          |          | January 10, 2011  
|3130 Fairview Park Drive                       |  |                | 22,255    |              | 30 yr |               | 7.00%          |          | April 1, 2011     
|Research Office Center                         |  |                | 43,960    |              | 28 yr |               | 7.64%          |          | October 1, 2011   
|Bannockburn Centre                             |  |                | 26,133    |              | 30 yr |               | 8.05%          |          | June 1, 2012      
|Del Mar Loan                                   |  |                | 43,883    |              | 30 yr |               | 7.41%          |          | June 1, 2013      
|Prentiss Properties Corporetum, L.P.           |  |                |           |              |       |               |                |          |                   
|Corporetum Office Campus                       |  |                | 24,679    |              | 30 yr |               | 7.02%          |          | February 1, 2009  
|Prentiss Properties Natomas, L.P.              |  |                |           |              |       |               |                |          |                   
|Natomas Corporate Center                       |  |                | 36,069    |              | 30 yr |               | 7.02%          |          | February 1, 2009  
|Prentiss Properties Real Estate Fund I, L.P.   |  |                |           |              |       |               |                |          |                   
|PPREFI Portfolio Loan(3)                       |  |                | 180,100   |              | None  |               | 7.58%          |          | February 26, 2007 
|Tysons International Partners                  |  |                |           |              |       |               |                |          |                   
|1676 International Drive(4)                    |  |                | 11,031    |              | 28 yr |               | 7.68%          |          | August 30, 2010   
|8260 Greensboro(4)                             |  |                | 3,948     |              | 28 yr |               | 7.83%          |          | August 30, 2010   
|                                               |  |                |           |              |       |               |                |          |                   
|Total                                          |  | $              | 1,113,290 |              |       |               |                |          |                   
|                                               |  |                |           |              |       |               |                |          |                   

---

|(1) | We own a 50% non-controlling interest in the entity that owns the Broadmoor Austin properties, which interest is accounted for using the equity method of accounting.
The amount shown reflects our proportionate share of the non-recourse mortgage indebtedness collateralized by the properties.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Term Loan is collateralized by the following four properties: Willow Oaks I & II (two properties), 8521 Leesburg Pike and the IBM Call Center.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The PPREFI Portfolio Loan is collateralized by the following 36 properties: the Los Angeles industrial properties (18 properties), the Chicago industrial properties
(four properties), the Cottonwood Office Center (three properties), Park West
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

E1 and E2 (two properties), One Northwestern Plaza, 3141 Fairview Park Drive, 13825 Sunrise Valley Drive,
OHare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court, the WestPoint Office Building and the PacifiCare Building.

|(4) | We own a 25% non-controlling interest in the entity that owns the 1676 International Drive and 8260 Greensboro properties, which interest is accounted for using the
equity method of accounting. The amount shown reflects our proportionate share of the non-recourse mortgage indebtedness collateralized by the properties.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The majority of our fixed rate secured debt contains prepayment provisions based on the greater of a yield maintenance
penalty or 1.0% of the outstanding loan amount. The yield maintenance penalty essentially compensates the lender for the difference between the fixed rate under the loan and the yield that the lender would receive if the lender reinvested the
prepaid loan balance in U.S. Treasury Securities with a similar maturity as the loan.



Under our loan agreements, we are required to satisfy various affirmative and negative covenants, including limitations on total indebtedness, total collateralized indebtedness and cash distributions, as well as
obligations to maintain certain minimum tangible net worth and certain minimum interest coverage ratios. Our credit agreements limit total indebtedness to 55% of total assets and require a debt service coverage ratio of at least 2 to 1. Our credit
agreements provide for a 30-day period to cure a default caused by our failure to punctually and properly perform, observe and comply with the covenants contained therein. The agreements also provide for an additional 75-day period if such failure
is not capable of being cured within 30-days and we are diligently pursuing the cure thereof. We were in compliance with these covenants at December 31, 2003.



Hedging Activities



To manage interest rate risk, we may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying
interest rate exposure. We undertake a variety of borrowings: from revolving credit facilities, to medium- and long-term financings. To manage overall interest rate exposure, we use interest rate instruments, typically interest rate swaps, to
convert a portion of our variable rate debt to fixed rate debt. Interest rate differentials that arise under these swap contracts are recognized as interest expense over the life of the contracts.



We may employ forwards or purchased options to hedge qualifying anticipated
transactions. Gains and losses are deferred and recognized in net income in the same period that the anticipated transaction occurs, expires or is otherwise terminated. During the year ended December 31, 2003, we completed three swap agreements as
detailed below:



|                |  |                        |   |  |                                                   |   |  |                |  |               
|--------------- |  | ---------------------- | - |  | ------------------------------------------------- | - |  | -------------- |  | --------------
|Notional Amount |  | Swap Rate Paid (Fixed) |   |  | Swap Rate Received(Variable) at December 31, 2003 |   |  | Effective Date |  | Maturity Date 
|$ 50 million    |  | 2.270                  | % |  | 1.120                                             | % |  | August 2003    |  | August 2007   
|$ 25 million    |  | 2.277                  | % |  | 1.120                                             | % |  | August 2003    |  | August 2007   
|$ 30 million    |  | 3.857                  | % |  | 1.120                                             | % |  | October 2004   |  | September 2008
|Total           |  |                        |   |  |                                                   |   |  |                |  |               



Beginning on the
effective date, each swap effectively locks in our cost of funds at the swap rate paid (before the spread over LIBOR) on variable rate borrowings in amounts equal to the respective notional amounts above.



43



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##### Table of Contents

##### Index to Financial Statements

The following table summarizes the notional amounts and fair values of our derivative financial
instruments. The notional amount provides an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.



|                |  |                        |   |  |                      |   |  |                                                  |   |  |                |  |                |        |  
|--------------- |  | ---------------------- | - |  | -------------------- | - |  | ------------------------------------------------ | - |  | -------------- |  | -------------- | ------ | -
|Notional Amount |  | Swap Rate Paid (Fixed) |   |  | Effective Fixed Rate |   |  | Swap Rate Received(Variable) atDecember 31, 2003 |   |  | Swap Maturity  |  | Fair Value     |       
|                |  |                        |   |  |                      |   |  |                                                  |   |  |                |  | (in thousands) |       
|$ 50 million    |  | 6.253                  | % |  | 7.753                | % |  | 1.120                                            | % |  | September 2004 |  | $              | (1,877 | )
|$ 60 million    |  | 6.248                  | % |  | 7.748                | % |  | 1.120                                            | % |  | September 2004 |  |                | (2,262 | )
|$ 25 million    |  | 4.345                  | % |  | 5.845                | % |  | 1.120                                            | % |  | July 2005      |  |                | (997   | )
|$ 15 million    |  | 4.345                  | % |  | 5.845                | % |  | 1.120                                            | % |  | July 2005      |  |                | (598   | )
|$ 20 million    |  | 5.985                  | % |  | 7.485                | % |  | 1.120                                            | % |  | March 2006     |  |                | (1,642 | )
|$ 30 million    |  | 5.990                  | % |  | 7.490                | % |  | 1.120                                            | % |  | March 2006     |  |                | (2,466 | )
|$ 50 million    |  | 2.270                  | % |  | 3.645                | % |  | 1.120                                            | % |  | August 2007    |  |                | 1,183  |  
|$ 25 million    |  | 2.277                  | % |  | 3.652                | % |  | 1.120                                            | % |  | August 2007    |  |                | 585    |  
|                |  |                        |   |  |                      |   |  |                                                  |   |  |                |  |                |        |  
|Total           |  |                        |   |  |                      |   |  |                                                  |   |  |                |  | $              | (8,074 | )
|                |  |                        |   |  |                      |   |  |                                                  |   |  |                |  |                |        |  



Capital Improvements



Our properties require periodic investments of capital
for tenant-related capital expenditures and for general capital improvements. The majority of capital required relates to tenant-related capital expenditures and is dependent upon our leasing activity. Our leasing activity is a function of the
percentage of our in-place leases expiring in current and future periods accompanied by our exposure to tenant defaults and our ability to increase the average occupancy of our portfolio. For the year ended December 31, 2003 capital expenditures
related to our in-service properties totaled $35.2 million. We classify capital expenditures for in-service properties as non-incremental and incremental revenue-enhancing capital expenditures representing our estimate of recurring versus
non-recurring capital requirements, respectively. Our non-incremental and incremental capital expenditures for the year ended December 31, 2003 totaled approximately $31.8 million and $3.4 million, respectively.



Equity Financing



During the year ended December 31, 2003, 4,106,627 common shares of beneficial interest, par value $.01, were
issued. The table below details the common shares issued during the period, common shares placed in treasury during the period and the common shares outstanding at December 31, 2003:



|                                                                     |  |            |  
|-------------------------------------------------------------------- |  | ---------- | -
|Common shares outstanding at December 31, 2002                       |  | 38,981,355 |  
|                                                                     | 
|Common shares issued:                                                |  |            |  
|Equity offering(1)                                                   |  | 2,300,000  |  
|Dividend Reinvestment and Share Purchase Plan(2)                     |  | 361,687    |  
|Dribble Plan(3)                                                      |  | 544,100    |  
|Share options exercised                                              |  | 745,558    |  
|1996 Share Incentive Plan                                            |  | 93,250     |  
|Employees Share Purchase Plan                                       |  | 32,065     |  
|Conversion of operating partnership units                            |  | 25,667     |  
|Trustees Share Incentive Plan                                       |  | 4,300      |  
|                                                                     |  |            |  
|                                                                     |  | 4,106,627  |  
|Less common shares placed in treasury:                               |  |            |  
|Common shares surrendered in connection with share options exercised |  | (391,641   | )
|Common shares held pursuant to our Key Employee Share Option Plan    |  | (83,047    | )
|                                                                     |  |            |  
|Common shares outstanding at December 31, 2003                       |  | 42,613,294 |  
|                                                                     |  |            |  



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##### Index to Financial Statements

---

|(1) | During the month of August 2003, we completed the sale of 2.3 million common shares, which included 300,000 common shares to cover the underwriters
over-allotment option, at $28.90 per share, net of underwriting discounts. After deducting underwriting discounts and commissions, we received net proceeds of approximately $66.5 million. The net proceeds of the sale of the common shares were
contributed to the operating partnership in exchange for common units of limited partnership interest in the operating partnership. Initially, proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving
credit facility. Subsequently, we used a portion of the proceeds to acquire the 2291 Wood Oak Drive building described above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We have a Dividend Reinvestment and Share Purchase Plan which allows investors an option to
purchase common shares by making optional cash investments of $100 to $5,000 in a given month for current shareholders or $500 to $5,000 for persons who are not current shareholders. The plan also allows shareholders to purchase our common shares by
reinvesting all or a portion of cash dividends received on either our common or preferred shares. Purchases of greater than $5,000 can be accomplished as a result of us granting a waiver to the $5,000 limit. During the year ended December 31, 2003,
pursuant to our Dividend Reinvestment and Share Purchase Plan, we issued 361,687 common shares resulting in net proceeds of $11.1 million. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On June 10, 2002, we entered into a securities sales agreement with Brinson Patrick
Securities Corporation which we refer to as the Dribble Plan. Under our Dribble Plan we may sell, with Brinson Patrick acting as our sales agent, up to 3,000,000 of our common shares at the then market price directly to the public. Such sales, which
may occur in future periods from time to time pursuant to the agreement, will increase our net cash provided by financing activities during the period in which they occur, subject to offsetting amounts related to other activities during such period.
During the year ended December 31, 2003, we issued 544,100 common shares through the Dribble Plan resulting in net proceeds of $17.1 million. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit
facility.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Arrangements



Effective January 1, 2003, our operating partnership acquired for
approximately $67,000, the voting stock of Prentiss Properties Resources, Inc. from Ampulla, LLC, a single member limited liability company owned by Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust. Prentiss Properties
Resources, Inc. was incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services business serves a broad base of clients,
including major financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment groups. Through Prentiss Properties Resources, Inc. we offer a full range of fee-based services, including
property management, leasing, tenant construction, insurance, accounting, tax, acquisition, disposition, facilities management, and corporate and asset management services. Prior to this transaction, we accounted for our interest in Prentiss
Properties Resources, Inc. using the equity method of accounting. Subsequent to this transaction, the operating partnership owns 100% of Prentiss Properties Resources, Inc. and we consolidate the accounts of Prentiss Properties Resources, Inc. with
and into the accounts of the operating partnership.



At
December 31, 2003 we had the following off-balance sheet arrangements: (1) a non-controlling 50% interest in Broadmoor Austin Associates, a real estate joint venture; (2) a 25% non-controlling interest in Tysons International Partners, a real estate
joint venture; and (3) a 1% non-controlling interest in certain real estate assets.



Our investment in unconsolidated joint ventures represents less than .7% of our total assets as of December 31, 2003 and approximately 2.1% of our cash flow from operations for the year ended December 31, 2003. Our
investments, however, do provide us with several benefits including increased market share, important customer relations and a possible capital source to fund future real estate projects.



Broadmoor Austin Associates and Tysons International Partners represent real estate joint ventures which own and operate
office properties in Austin, Texas and Tysons Corner, Virginia, respectively. We act as managing venture partner and have the authority to conduct the business affairs of each joint venture, subject to approval and



45



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##### Table of Contents

##### Index to Financial Statements

veto rights of the other venture partner. We account for our interest in these joint ventures using the equity method of
accounting. Our 1% interest in other real estate assets represents a carried interest that is accounted for using the cost method of accounting.



The following information summarizes the financial position at December 31, 2003 for the investments in which we held an interest at December 31, 2003:



|                                              |  |              |         |               |   |              |  |   |                      |   |  |   |       
|--------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------ |  | - | -------------------- | - |  | - | ------
|Summary of Financial Position: (in thousands) |  | Total Assets |         | Total Debt(1) |   | Total Equity |  |   | Companys Investment
|                                              |  |              |        
|Broadmoor Austin Associates                   |  | $            | 103,334 |               | $ | 138,552      |  | $ | (35,991              | ) |  | $ | 3,882 
|Tysons International Partners                 |  |              | 95,186  |               |   | 59,914       |  |   | 34,213               |   |  |   | 9,226 
|Other Investments                             |  |              |        |               |   |             |  |   |                     |   |  |   | 1,107 
|                                              |  |              |         |               |   |              |  |   |                      |   |  |   |       
|                                              |  |              |         |               |   |              |  |   |                      |   |  | $ | 14,215
|                                              |  |              |         |               |   |              |  |   |                      |   |  |   |       

---

|(1) | The mortgage debt, all of which is non-recourse, is collateralized by the individual real estate property or properties within each venture, the net book value of
which totaled $171.7 million at December 31, 2003. Our pro rata share of the non- recourse mortgage debt totaled $84.3 million at December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following information summarizes the results of operations for the year ended December 31, 2003 for investments which
impacted our 2003 results of operations:



|                                      |  |               |        |            |   |                                      |  |   |      
|------------------------------------- |  | ------------- | ------ | ---------- | - | ------------------------------------ |  | - | -----
|Summary of Operations: (in thousands) |  | Total Revenue |        | Net Income |   | Companys Share of Net Income/(Loss)
|                                      |  |              
|Broadmoor Austin Associates           |  | $             | 20,093 |            | $ | 4,586                                |  | $ | 2,293
|Tysons International Partners         |  |               | 12,960 |            |   | 1,052                                |  |   | 262  
|                                      |  |               |        |            |   |                                      |  |   |      
|                                      |  |               |        |            |   |                                      |  | $ | 2,555
|                                      |  |               |        |            |   |                                      |  |   |      



Contractual Obligations and
Commercial Commitments



We have contractual obligations
including mortgages and notes payable and ground lease obligations. The table below presents, as of December 31, 2003, our future scheduled principal repayments of mortgages and notes payable and ground lease obligations, including our pro rata
share of debt and ground lease obligations of our of joint venture properties:



|                                       |  |                        |           |      |   |           |  |           |         |            |   |         |  |   |        
|-------------------------------------- |  | ---------------------- | --------- | ---- | - | --------- |  | --------- | ------- | ---------- | - | ------- |  | - | -------
|                                       |  | Payments Due by Period
|Contractual Obligations (in
thousands) |  | Total                  |           | 2004 |   | 2005/2006 |  | 2007/2008 |         | Thereafter
|Mortgages and notes payable            |  | $                      | 1,113,290 |      | $ | 80,105    |  | $         | 308,936 |            | $ | 308,501 |  | $ | 415,748
|Capital lease obligations              |  |                        |          |      |   |          |  |           |        |            |   |        |  |   |       
|Ground leases                          |  |                        | 31,010    |      |   | 468       |  |           | 1,074   |            |   | 1,094   |  |   | 28,374 
|Unconditional purchase obligations     |  |                        |          |      |   |          |  |           |        |            |   |        |  |   |       
|Other long-term obligations            |  |                        |          |      |   |          |  |           |        |            |   |        |  |   |       
|                                       |  |                        |           |      |   |           |  |           |         |            |   |         |  |   |        
|Total contractual cash obligations     |  | $                      | 1,144,300 |      | $ | 80,573    |  | $         | 310,010 |            | $ | 309,595 |  | $ | 444,122
|                                       |  |                        |           |      |   |           |  |           |         |            |   |         |  |   |        



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##### Index to Financial Statements

In connection with the disposition of a real estate property in May 2001, we entered into a financial
guarantee with a maximum future potential payment of $1.4 million. The financial guarantee, provided to the third party purchaser, guaranteed payment of an amount not to exceed the $1.4 million potential maximum if certain tenants, as defined in the
purchase and sale agreement, fail to extend either their leases beyond the maturities of their current in-place leases or to perform according to their in-place leases. An amount totaling $1.0 million was considered probable at the date of
disposition and therefore, accrued during the year ended December 31, 2001. Pursuant to the financial guarantee, during the year ended December 31, 2003, we paid an amount totaling $1.0 million to the third party purchaser.



As a condition of the purchase and sale and as security for our guarantee, we
provided to the title company at closing, two irrevocable letters of credit, totaling $1.4 million, drawn on a financial institution and identifying the purchaser as beneficiary. One letter of credit totaling $1.0 million expired in 2003. The
remaining balance on the second letter of credit totaling $252,000 at December 31, 2003 expires as follows:



|                                            |  |                                  |     |      |   |           |  |           |     |            |   |  |  
|------------------------------------------- |  | -------------------------------- | --- | ---- | - | --------- |  | --------- | --- | ---------- | - |  | -
|                                            |  | Commitment Expiration Per Period
|Other Commercial Commitments (in
thousands) |  | Total AmountsCommitted           |     | 2004 |   | 2005/2006 |  | 2007/2008 |     | Thereafter
|Lines of credit                             |  |                                  |    |      |   |          |  |           |    |            |  |  | 
|Standby letters of credit                   |  | $                                | 252 |      | $ | 63        |  | $         | 189 |            |  |  | 
|Guarantees                                  |  |                                  |    |      |   |          |  |           |    |            |  |  | 
|Standby repurchase obligations              |  |                                  |    |      |   |          |  |           |    |            |  |  | 
|Other commercial commitments                |  |                                  |    |      |   |          |  |           |    |            |  |  | 
|                                            |  |                                  |     |      |   |           |  |           |     |            |   |  |  
|Total commercial commitments                |  | $                                | 252 |      | $ | 63        |  | $         | 189 |            |  |  | 
|                                            |  |                                  |     |      |   |           |  |           |     |            |   |  |  



Funds from Operations



Funds from operations is a widely recognized measure of
REIT operating performance. Funds from operations is a non-GAAP financial measure and, as defined by the National Association of Real Estate Investment Trusts, means net income, computed in accordance with GAAP excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures and subsidiaries. We believe that funds from operations is
helpful to investors and our management as a measure of our operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and, as a result, when compared year over
year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective not immediately apparent from net income.
In addition, our management believes that funds from operations provides useful information to the investment community about our financial performance when compared to other REITs since funds from operations is generally recognized as the industry
standard for reporting the operating performance of REITs. However, our funds from operations may not be comparable to funds from operations reported by other REITs that do not define funds from operations exactly as we do. We believe that in order
to facilitate a clear understanding of our operating results, funds from operations should be examined in conjunction with net income as presented in our consolidated financial statements and notes thereto included elsewhere in this Form 10-K. We
believe that net income is the most directly comparable GAAP financial measure to funds from operations. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions. Funds from operations does not reflect either depreciation and amortization costs or the level of capital
expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs that could materially impact our results of operations. The following is a reconciliation of net income to funds
from operations:



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##### Table of Contents

##### Index to Financial Statements

|                                                                           |      |                         |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- | ---- | ----------------------- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|Funds from operations (in
thousands)                                       |      | Year Ended December 31, |        
|                                                                           | 2003 |                         |         | 2002 |  |   | 2001    |  
|Net income                                                                 |      | $                       | 59,417  |      |  | $ | 74,281  |   |  | $ | 102,466 |  
|Adjustments:                                                               |      |                         |         |      |  |   |         |   |  |   |         |  
|Real estate depreciation and amortization(1)                               |      |                         | 79,972  |      |  |   | 73,368  |   |  |   | 64,190  |  
|Real estate depreciation and amortization of unconsolidated joint ventures |      |                         | 2,960   |      |  |   | 3,103   |   |  |   | 3,550   |  
|Minority interests(2)                                                      |      |                         | 1,875   |      |  |   | 2,589   |   |  |   | 4,268   |  
|Merger termination fee, net(3)                                             |      |                         |        |      |  |   |        |   |  |   | (17,000 | )
|Gain on sale of real estate                                                |      |                         | (4,978  | )    |  |   | (8,430  | ) |  |   | (18,660 | )
|                                                                           |      |                         |         |      |  |   |         |   |  |   |         |  
|Funds from operations(4)                                                   |      | $                       | 139,246 |      |  | $ | 144,911 |   |  | $ | 138,814 |  
|                                                                           |      |                         |         |      |  |   |         |   |  |   |         |  

---

|(1) | Includes real estate depreciation and amortization included in continuing operations and real estate depreciation and amortization included in discontinued
operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the minority interests applicable to the common unit holders of the operating partnership.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | Although the fee is not considered an extraordinary item in accordance with generally
accepted accounting principles, it is our opinion that it is appropriate to exclude the fee from funds from operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Impairment losses on real estate are not added back in our reconciliation of net income to
funds from operations; therefore, for periods in which impairment losses are recognized, funds from operations is negatively impacted. We recognized impairment losses of $4.8 million, $2.9 million, and $1.8 million during the years ended December
31, 2001, 2002 and 2003, respectively. Therefore, funds from operations were negatively impacted for the years ended December 31, 2001, 2002, and 2003 by $4.8 million, $2.9 million, and $1.8 million, respectively. The impairment losses totaling $2.9
million and $1.8 million for the years ended December 31, 2002 and 2003, respectively are included in the line item income from discontinued operations in our consolidated statements of income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Funds from operations decreased by $5.7 million for the year ended December 31, 2003 from the year ended December 31, 2002 and increased by $6.1 million
for the year ended December 31, 2002 from the year ended December 31, 2001 as a result of the factors discussed in the analysis of operating results.



Recently Issued Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. In
December 2003, the Financial Standards Board issued a revision to FASB Interpretation No. 46, FASB Interpretation No. 46(R). The Interpretation, as revised, requires consolidation of an entity by an enterprise if that enterprise will absorb a
majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. An entity subject to this Interpretation is called a variable interest entity. The disclosure
provisions of this Interpretation, as revised, are effective for financial statements issued after December 31, 2003. Per this Interpretation, as revised, a public entity, that is not a small business issuer, with a variable interest entity to which
the provisions of the Interpretation have not been applied as of December 24, 2003, shall apply this Interpretation no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of
this Interpretation, a public entity, that is not a small business issuer, shall apply this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after
December 15, 2003.



At December 31, 2002, our operating
partnership held a 98% non-voting interest in Prentiss Properties Resources, Inc. which we accounted for using the equity method of accounting.



Prentiss Properties Resources, Inc. was incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our
operating partnership and third-party clients. The management services business serves a broad base of clients, including major financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment
groups. Through Prentiss Properties Resources, Inc. we offer a full range of fee-based services, including property management, leasing, tenant construction, insurance, accounting, tax, acquisition, disposition, facilities management, and corporate
and asset management services. At December 31, 2002 Prentiss Properties Resources, Inc. had net assets totaling $6.5 million. Our investment totaled $6.3 million representing our maximum exposure to loss as a result of our involvement with Prentiss
Properties Resources, Inc.



48



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##### Index to Financial Statements

Effective January 1, 2003, we acquired the remaining outstanding interest in Prentiss Properties
Resources, Inc. for consideration of approximately $67,000. As a result of this transaction, effective January 1, 2003, the accounts of Prentiss Properties Resources, Inc. are consolidated with and into the accounts of our operating partnership. Had
this transaction not occurred, Prentiss Properties Resources, Inc. would have been subject to consolidation as prescribed in the revised Interpretation.



We are currently evaluating whether our equity investments in Broadmoor Austin Associates and Tysons International Partners qualify as variable interest
entities and if so, determining whether we are the primary beneficiary, thus requiring consolidation. In addition, we are evaluating whether the provisions of this Interpretation will have a material impact on our financial condition and results of
operations.



In May 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is to be
implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Certain
provisions of the statement that were to be initially effective for financial instruments entered into or modified after May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003 were deferred
indefinitely by the Financial Accounting Standards Board. As a result of the deferred provisions, which are discussed in FASB Staff Position 150-3, companies are not required to recognize non-controlling interests of a limited-life subsidiary as a
liability in the consolidated financial statements. In evaluating the provisions of the statement that were not deferred, due to the redemption provisions of our Series E Preferred Units, we determined that our Series E Preferred Units qualify as a
mandatorily redeemable financial instrument and; thus, should be classified as a liability and measured at fair value in our consolidated balance sheet at December 31, 2003. We determined that the fair value of the Series E Preferred Units equaled
the $10.0 million carrying amount at December 31, 2003 and as a result the reclassification had no impact on current period earnings.



Application of and Changes in Law Regarding Ownership of Subsidiaries and Qualifications as a REIT



For federal income tax purposes, we were organized and have operated in conformity with the requirements for qualification
as a REIT under the Internal Revenue Code of 1986, as amended, beginning with our taxable year ending December 31, 1996 and through the date hereof. The Internal Revenue Code sets forth various income, asset, ownership, and distribution tests with
respect to which a REIT must comply in order to maintain its status as a REIT. Although the Internal Revenue Service, based upon its interpretation of the relevant judicial and administrative authorities, may take the position that a REIT has failed
a particular qualification test, the facts and circumstances upon which such a determination would be based are controlled by the REIT. To the extent that a REIT does not comply with a particular test, the decision to take an action that would
prevent compliance or to not take an action that would have allowed compliance will be directly within the control of the REIT. We are unaware of any instance in which a REIT has lost its qualification as a REIT due to the failure of one of the
statutory qualification tests under the Internal Revenue Code. We believe that our current and proposed method of operation will enable us to continue to qualify as a REIT.



The REIT Modernization Act effective for 2001 and later years, contains several provisions affecting REITs. The REIT
Modernization Act allows a subsidiary to perform services for tenants without disqualifying the rents received (as under prior law). These subsidiaries, called Taxable REIT Subsidiaries, are subject to taxation and are limited in the amount of debt
and rental payments between the REIT and the Taxable REIT Subsidiaries. The fair market value of all Taxable REIT Subsidiaries securities cannot exceed 20% of the REITs fair market value. Existing subsidiaries could be grandfathered in a
one-time tax-free conversion. They are not subject to these limitations, unless engaging in a new line of business or increasing assets. If either of these events occurs, new restrictions on debt and rental payments will apply to these entities as
well. The REIT Modernization Act also reduced the REIT taxable income distribution requirement from 95% to 90%.



49



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##### Table of Contents

##### Index to Financial Statements

Inflation



Most of the leases on our properties require tenants to pay increases in operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on us of the adverse effects of inflation. Leases also vary in term from one month to 20 years, further reducing the impact on us of the adverse effects of inflation.



RISK FACTORS



An investment in us involves various risks. The following describes factors that in some cases may have affected, and in the future could affect, our
actual operating results and could cause such results to differ materially from those in any forward-looking statements. This list is not necessarily exhaustive, and new risk factors emerge from time to time. We cannot assure you that the factors
described below are all of the material risks to us at any specific point in time. You should carefully consider the following factors which qualify in their entirety each forward-looking statement.



Risks Related to General Business Operations



The geographic concentration of our properties in markets which are in economic decline
could have a material adverse effect on operating performance.



Properties located in the Mid-Atlantic, Midwest, Southwest, Northern California and Southern California provided approximately 26%, 17%, 34%, 13% and 9%, respectively, of total rental income for the year ended December 31, 2003. Like other
real estate markets, these commercial real estate markets have experienced economic downturns in the past, and future declines in any of these economies or real estate markets could adversely affect our cash available for distribution. Our financial
performance and ability to make distributions to our shareholders are, therefore, particularly sensitive to the economic conditions in these markets. The local economic climate, which may be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics and other factors, and local real estate conditions, such as oversupply of or reduced demand for office, industrial and other competing commercial properties, may affect our revenues and the value of our
properties, including properties to be acquired or developed. We cannot assure you that these local economies will grow in the future.



Our acquisition of new properties which lack operating history with us give rise to difficulties in predicting revenue potential.



From time to time, we acquire office properties. These acquisitions could
fail to perform in accordance with expectations. If we fail to accurately estimate occupancy levels, operating costs or costs of improvements to bring an acquired property up to the standards established for its intended market position, the
operating performance of the property may be below our expectations. Acquired properties may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered. We cannot assure you that the operating
performance of acquired properties will increase or be maintained under our management.



During 2003, we acquired approximately 1.1 million square feet of office property for gross consideration of approximately $178.7 million. Some of these properties have had relatively short or no operating history
under our management; therefore, we have had limited control over the operation of these buildings. Our ability to manage our growth effectively will require us to integrate successfully our new acquisitions into our existing management structure.



Our redevelopment, development and construction activities may give rise to
unexpected costs and can make it difficult to predict revenue potential.



We redevelop, develop and construct primarily office buildings. The risks associated with these activities include:



| |  | abandonment of redevelopment or development opportunities resulting in a loss of invested capital;
| | - | --------------------------------------------------------------------------------------------------



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##### Table of Contents

##### Index to Financial Statements

| |  | construction costs of a property exceeding original estimates potentially resulting in yields on invested capital lower than expected;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| |  | occupancy rates and rents at a newly renovated or completed property may not be sufficient to make the property profitable;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| |  | financing may not be available on favorable terms for redevelopment or development of a property possibly increasing the projected cost of the project;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | permanent financing may not be available on favorable terms to replace short-term construction loans and construction and lease-up may not be completed on schedule, resulting in
increased interest expense and construction costs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations may not be obtained or may not be obtained on a timely basis resulting
in possible delays, decreased profitability and increased management time and attention; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increased management time required for such activities may divert their attention from other aspects of our business.
| | - | ---------------------------------------------------------------------------------------------------------------------



These risks and potential costs may adversely affect our results of
operations.



Cost increases or revenue decreases can adversely affect
property yields and values.



The yields available from
equity investments in real estate depend in large part on the amount of income generated and expenses incurred. If our properties do not generate revenues sufficient to meet operating expenses, including debt service, tenant improvements, leasing
commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs, and our cash flow and ability to make distributions to our shareholders will be adversely affected.



Factors which may affect our revenues and the value of our properties
include:



| |  | the national, state and local economic climate and real estate conditions, such as oversupply of or reduced demand for space and changes in market rental rates;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the perceptions of prospective tenants of the safety, convenience and attractiveness of our properties;
| | - | -------------------------------------------------------------------------------------------------------



| |  | our ability to provide adequate management, maintenance and insurance, including coverages for earthquakes and terrorist acts;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to collect on a timely basis all rent from tenants;
| | - | ---------------------------------------------------------------



| |  | the expense of periodically renovating, repairing and reletting spaces;
| | - | -----------------------------------------------------------------------



| |  | increasing operating costs, including real estate taxes and utilities, which may or may not be passed through to tenants; and
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | our compliance with the laws, changes in the tax laws, fluctuations in interest rates and the availability of financing.
| | - | ------------------------------------------------------------------------------------------------------------------------



Certain significant expenditures associated with our properties, such as
mortgage payments, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental revenues from our properties.



Tenant defaults and bankruptcy could cause rent collection difficulties.



The risk that some of our tenants may declare bankruptcy is higher because
of the recent decline in the economy. A significant portion of our income is derived from rental income on our properties. As of December 31, 2003, we had approximately 1,000 tenants, with the following 9 tenants representing approximately 21% of
our aggregate annualized base rent and approximately 17% of our total net rentable square footage: International Business Machines, Kaiser Foundation Health Plan, Northrop Grumman Corporation, General Services Administration, Verizon Communications,
American Management Systems, Computer Associates, Moore North America and AT&T. Currently, we derive approximately 34% of our total annualized base rental revenue from tenants in the computer systems design, broadcasting, telecommunications,
management, scientific, technical and insurance industries. As a result, our distributable cash flow and ability to make expected distributions to our shareholders could be adversely affected if any of these industries is materially adversely
affected by the economy



51



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##### Table of Contents

##### Index to Financial Statements

or if a significant number of our tenants fail to pay their rent due to bankruptcy, weakened financial condition or
otherwise. Our leases generally do not contain restrictions designed to ensure the creditworthiness of our tenants. From time to time a tenant may experience a downturn in its business. Such a downturn may weaken its financial condition, and it may
stop paying rent when due. In addition, at any time, a tenant may seek the protection of the bankruptcy laws, which could result in delays in rental payments or in the rejection and termination of such tenant leases. These events would cause a
reduction in our cash flow and the amounts available for distributions to our shareholders. We cannot assure you that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner.



Property maintenance
costs may escalate beyond our ability to recover such costs through rents.



Our properties are subject to increases in operating expenses, such as cleaning; electricity; heating, ventilation and air conditioning; elevator repair and maintenance; insurance and administrative costs; and other
general costs associated with security, landscaping, and repairs and maintenance. Due to the terrorist acts of September 11, 2001, we have experienced increases in insurance premiums. While our tenants generally are obligated to pay a portion of the
escalating costs, there can be no assurance that our tenants will agree to pay such costs upon renewal or that new tenants will agree to pay such costs. If operating expenses increase, the local rental market may limit the extent to which rents may
be increased to meet increased expenses without decreasing occupancy rates. Our ability to make distributions to our shareholders could be adversely affected if operating expenses increase without a corresponding increase in revenues.



Non-renewal of leases and non-reletting of space could adversely affect our rental
revenues.



We are subject to several risks upon expiration
of leases for space located at our properties. The leases may not be renewed, the space may not be relet or the terms of renewal or reletting, including the costs of required renovations, may be less favorable than current lease terms. Leases on a
total of approximately 12.0% of the total net rentable square feet in our properties will expire during 2003. If we are unable to relet promptly or renew the leases for a particular property or properties or if the rental rates upon such renewal or
reletting are significantly lower than expected rates or if our budgets for these purposes prove to be inadequate, then our cash flow and ability to make expected distributions to our shareholders may be adversely affected.



Some of our competitors in markets in which we have properties may have newer,
better-located or better-capitalized properties.



Numerous
office and industrial properties compete with our properties in attracting tenants to lease space. In each market we compete on a number of factors including rental rates, tenant concession allowances, quality and location of buildings, quality of
property management and other economic and non-economic factors. Our competitors may have greater financial resources than are available to us and/or they may be willing to rent space at lower rental rates or provide greater leasing concessions. Our
major competitors in each market include the following companies:



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##### Index to Financial Statements

|                    |  |                                                                                                                                                    
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Segment             |  | Competitors                                                                                                                                        
|                    | 
|Mid-Atlantic        |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Vornado Realty Trust                                                        
|                    | 
|Midwest             |  | CarrAmerica Realty Corp., Duke-Weeks Realty Corp., Equity Office Properties, Great Lakes REIT, John Buck Co., Trizec Properties, Inc.              
|                    | 
|Southwest           |  | CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office Properties, Lincoln Property Co., Trammell Crow Co., Trizec Properties, Inc.
|                    | 
|Northern California |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, RREEF, Shorenstein Co.                                                      
|                    | 
|Southern California |  | Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty Corp., RREEF                                                       



This competition could
have an adverse effect on our operating performance because some of these competing properties may be newer, better-located or better-capitalized than our properties.



Properties with environmental problems could cause us to incur clean-up costs or other liabilities.



Various federal, state and local environmental laws, ordinances, and
regulations impose liability upon a current or previous owner or operator of real property for the costs of removal or remediation of contamination caused by hazardous or toxic substances or other wastes at the property. These laws often impose
liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances or other waste. In addition, the presence of property contamination, or the failure to remediate contamination at a
property properly, may adversely affect a partys ability to borrow using the real property as collateral. Persons who generate or arrange for the disposal or treatment of hazardous or toxic substances or other wastes may also be liable for the
costs of removal or remediation of contamination at a disposal or treatment facility, whether or not such facility is or ever was owned or operated by them. Environmental laws and common law principles also impose liability upon a party for the
release of and exposure to environmental contamination, including asbestos-containing materials into the air, and third parties may use these laws to seek recovery from owners or operators of property for personal injury or property damage
associated with environmental contamination, including asbestos-containing materials.



As the owner of the properties, we may be liable for these types of costs. We obtain environmental site assessments on all of our properties prior to their acquisition. The purpose of environmental site assessments is
to identify potential recognized environmental conditions that may be associated with a property. For a number of our properties, the environmental site assessments also referenced prior Phase II environmental site assessments which involved
subsurface sampling and analysis on such properties.



The
previously-mentioned environmental site assessments have not revealed any potential recognized environmental conditions that we believe could have a material adverse effect on our business, assets or results of operations. However, it is possible
that the previously-mentioned environmental site assessments relating to any one of our properties do not reveal all adverse environmental conditions. In addition, there could be environmental conditions that were created at a property after the
applicable environmental site assessment was completed.



Effective January 1, 2003, we renewed our insurance which covers environmental conditions and business interruption if and when they occur. This policy covers both governmental and third-party claims associated with the covered
environmental conditions. Our limits for loss under the policy are $10.0 million per occurrence and $10.0 million in the aggregate. We cannot assure you that these coverages will be sufficient to cover all costs of environmental issues that could
arise.



53



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##### Table of Contents

##### Index to Financial Statements

Americans with Disabilities Act compliance could lead to unanticipated costs.



The Americans with Disabilities Act of 1990 requires specified public
accommodations to meet federal requirements governing accessibility for persons with disabilities related to access and use by disabled persons. Compliance with the Americans with Disabilities Act could require modifications to our properties.
Non-compliance could result in, among other things, various penalties including injunctive relief and monetary damages. Although we have no basis for believing that our properties are not in compliance with the requirements of the Americans with
Disabilities Act, if we were required to make unanticipated expenditures to comply with the Americans with Disabilities Act, our cash flow and the amounts available for distributions to our shareholders may be adversely affected.



Some of our properties may be subject to uninsured losses such as from earthquakes or acts
of terrorism.



We carry comprehensive liability, fire,
flood and, where appropriate, extended coverage and rental loss insurance with respect to our properties, with policy specifications, exclusions, deductibles and insured limits customarily carried for similar properties. There are, however, certain
types of losses, such as from wars, that may be either uninsurable or the cost of obtaining insurance would be so high that it would be more prudent to accept the risk of loss. We currently maintain a separate $100 million blanket earthquake policy
on the properties we own in Northern and Southern California and a separate $100 million blanket terrorism policy on all our properties. Should an uninsured loss or a loss in excess of insured limits occur, we could lose both capital invested in a
property as well as the anticipated future revenue from the property but would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss would adversely affect our business, financial condition
and results of operations.



If another terrorist incident
occurs, however, insurance policies purchased by us may expressly exclude hostile acts, and it may be impossible to obtain insurance covering terrorist attacks. In the event of such terrorist acts or other catastrophic losses, we may not be able to
purchase policies in the future with coverage limits and deductibles similar to those that are currently in place and if such event occurs, we would expect our insurance premiums to increase thereafter.



Property ownership through partnerships and joint ventures could subject us to the
contrary business objectives of our partners or co-venturers.



Through Prentiss Properties Acquisition Partners, L.P., our operating partnership, we own non-controlling interests in real estate, including: (1) a non-controlling 50% interest in the Broadmoor Austin Associates and (2) a 25%
non-controlling interest in Tysons International Partners, which in the aggregate represented approximately $2.6 million, or 4.3% of our net income for the year ended December 31, 2003. Our pro rata share of mortgage debt related to these
unconsolidated interests is approximately $84.3 million, or 7.6% of our total debt outstanding, as of December 31, 2003. Through these interests, we act as managing venture partner and have the authority to conduct business affairs of each joint
venture, subject to approval and veto rights of the other venture partner.



We may also participate with other entities in property ownership or in providing property-related services through joint ventures or partnerships. Partnership or joint venture investments may involve risks such as
the following:



| |  | our partners or co-venturers might become bankrupt;
| | - | ---------------------------------------------------



| |  | our partners or co-venturers might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our partners or co-venturers may be in a position to take action contrary to our instructions or make requests contrary to our policies or objectives.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



We will, however, seek to maintain sufficient control of such partnerships or
joint ventures to achieve our business objectives. Although our organizational documents do not limit the amount of available funds that we may invest in partnerships or joint ventures, our revolving credit facility requires lender consent for
certain investments in land, development projects and joint ventures.



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On January 22, 2004, Prentiss Office Investors, L.P. was established to acquire office properties in our
core markets of Washington D.C./Northern Virginia, Chicago, Dallas/Ft. Worth, Northern California and San Diego/Orange County. The partnership was initially 99.9% owned by the operating partnership and was seeded by the transfer of several recent
acquisitions including, 2291 Wood Oak Drive a single office building containing approximately 228,000 net rentable square feet located in Herndon Virginia, Corporate Lakes III a single office building containing approximately 124,000 net rentable
square feet located in Chicago Illinois, and seven office buildings containing approximately 370,000 net rentable square feet located in Carlsbad California.



Pursuant to a joint venture agreement, effective February 1, 2004, Stichting Pensioenfonds ABP, a Netherlands based pension fund, acquired a 49% limited
partnership interest in Prentiss Office Investors, L.P. for proceeds totaling $68.9 million. The joint venture will be consolidated with and into the accounts of the operating partnership.



Pursuant to its limited partnership agreement, Prentiss Office Investors,
L.P. will engage in a series of transactions pursuant to which it intends to acquire approximately 15 to 25 Class A office properties over an 18 to 30 month period in the geographic regions within the United States in which we currently conduct
business. Class A office properties will not be acquired after the initial 18-30 month investment period unless our operating partnership, as general partner of Prentiss Office Investors, L.P., and Stichting Pensioenfonds ABP, as limited partner of
Prentiss Office Investors, L.P., mutually agree to amend the limited partnership agreement to provide for a longer investment period. Prentiss Office Investors, L.P. anticipates incurring indebtedness in an aggregate amount of up to 60.0% of the
undepreciated acquisition costs of all of the properties owned by Prentiss Office Investors, L.P. As a result, pursuant to its limited partnership agreement, Prentiss Office Investors, L.P. has the authority to invest up to $510.0 million during its
18-30 month investment period, which will include equity contributed to Prentiss Office Investors, L.P. and the indebtedness in an aggregate amount up to 60% of the undepreciated acquisition costs of all properties acquired by the partnership.



In the future, we may acquire limited partnership interests in
property partnerships without partnership management responsibility or co-venturer interests or co-general partnership interests in property partnerships with shared responsibility for managing the affairs of the property partnership or joint
venture. In these instances, we will not be in a position to exercise sole decision-making authority regarding the property partnership or joint venture.



Our properties are illiquid assets.



Our investments in properties are relatively illiquid. This illiquidity will tend to limit our ability to vary our portfolio promptly in response to
changes in economic or other conditions. Some of our properties are mortgaged to secure payment of indebtedness. If we were unable to meet our mortgage payments, the lender could foreclose on the properties and we could incur a loss. In addition, if
we wished to dispose of one or more of the mortgaged properties, we might not be able to obtain a release of the lien on the mortgaged property. If a lender forecloses on a mortgaged property or if a mortgage lien prevents us from selling a
property, our cash flow available for distribution to our security holders could decline.



Our incurrence of debt could have a material adverse effect on operating performance.



If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as the issuance of new
equity capital, we expect that our cash flow will not be sufficient in all years to pay distributions at expected levels and to repay all maturing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in
higher interest rates upon refinancing, the interest expense relating to such refinanced indebtedness would increase. This increase would adversely affect our cash flow and the amounts available for distributions to our shareholders. If a property
is mortgaged to collateralize payment of indebtedness and we are unable to meet mortgage payments, the property could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value.



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Our use of variable rate debt and derivative financial instruments may cause an increase in debt service.



We have incurred and may incur in the future indebtedness
that bears interest at variable rates. Variable rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect our cash flow and the amounts available for distributions to our shareholders.



As of December 31, 2003, we had $422.8 million of floating
rate debt out of total debt, including our pro rata share of joint venture debt, of $1.1 billion. We enter into interest rate swap agreements in the ordinary course of our business to hedge or modify our exposures to interest rate fluctuations. Of
the floating rate debt, $275.0 million was swapped to fixed rate debt through various interest rate protection contracts with maturity dates ranging from September 2004 to September 2008. While our use of these derivatives is intended to allow us to
better manage certain risks, it is possible that, over time, mis-matches may arise with respect to the derivatives and the cash market instruments they are intended to hedge. Discrepancies can also arise between the derivative and cash markets.
Derivatives also have risks that are similar in type to the risks of the cash market instrument on which their values are based. For example, in times of market stress, sharp price movements or reductions in liquidity in the cash markets may be
related to comparable or even greater price movements and reductions in liquidity in the derivative markets. Further, the risks associated with derivatives are potentially greater than those associated with the related cash market instruments
because of the additional complexity and potential for leverage. In addition, derivatives may create credit risks, as well as legal, operational and other risks beyond those associated with the underlying cash market instruments on which their
values are based. Credit risk involves the risk that a counterparty on a derivative transaction will not fulfill its contractual obligations. In an effort to limit credit risk, we have a policy that requires the counterparty to the transaction to
have a credit rating no lower than A- by a nationally recognized rating agency at the time we enter into a derivative transaction. There can be no assurance, however, that our hedging strategy or techniques and policies for minimizing credit and
other risks associated with our hedging activity will be effective, that our profitability will not be adversely affected during any period of changes in interest rates or that the costs of hedging will not exceed the benefits.



If we are unable to replace construction loans with permanent refinancing, we may have to
sell the development properties at a loss.



If new
developments are financed through construction loans or if acquisitions are financed with short-term bridge loans in anticipation of later, permanent financing, there is a risk that upon completion of construction or the maturity of the bridge
loans, permanent financing may not be available or may be available only on disadvantageous terms. As of December 31, 2003, we were not a party to any construction loan commitments. In the event that we enter into such financing arrangements and
upon maturity are unable to obtain permanent financing for these properties on favorable terms, we could be forced to sell such properties at a loss or the properties could be foreclosed upon by the lender and result in loss of income and asset
value.



We depend on our direct and indirect subsidiaries dividends
and distributions, and these subsidiaries creditors and preferred security holders are entitled to payment of amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or distributions to us.



Substantially all of our assets consist of our partnership interests in
Prentiss Properties Acquisition Partners, L.P., our operating partnership. Our operating partnership holds substantially all of its properties and assets through subsidiaries. Our operating partnership, therefore, depends for substantially all of
its revenue on cash distributions to it by its subsidiaries. The creditors of each subsidiary are entitled to payment of the subsidiarys obligations to them, when due and payable, before distributions may be made by the subsidiary to our
operating partnership. Thus, our operating partnerships ability to make distributions to its unit holders depends on its subsidiaries ability to satisfy their obligations to their creditors and make distributions to our operating
partnership. In addition, the right of our operating partnership unit holders to participate in any distribution of the assets of any of our operating partnerships direct or indirect subsidiaries upon the liquidation, reorganization or
insolvency of the subsidiary, and any consequent right of our operating partnership unit holders to participate in those assets, will be subject to the claims of the creditors and preferred security holders, if any, of the subsidiary. Furthermore,
the holders of preferred units of our operating partnership are entitled to receive preferred distributions before payment of distributions to holders of operating partnership common units, including us. Thus, our ability to pay dividends to holders
of our common shares depends on our operating partnerships ability first to satisfy its obligations to its creditors and make



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distributions payable to holders of preferred units and then to make distributions to us. At December 31, 2003, we had
two outstanding series of preferred units of our operating partnership which were not held by us. These preferred units, the Series B Preferred Units and Series E Preferred Units, have preference over our common shares. The Series B Preferred Units
have a total liquidation value of approximately $95 million, and the Series E Preferred Units have a total liquidation value of approximately $10 million. In addition, our shareholders will have the right to participate in any distribution of the
assets of any of our direct or indirect subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary, and consequently to participate in those assets, only after the claims of the creditors, including trade creditors, and
preferred security holders, if any, of the subsidiary are satisfied. Subsequent to December 31, 2003, we redeemed both our Series B Preferred Units and our Series E Preferred Units at par value plus accrued and unpaid dividends.



Risks Related to Our Company



Our shareholders ability to effect a change of control may be limited.



We have a shareholder rights plan.



In February 1998, we adopted a shareholder rights plan and declared a
dividend of one purchase right for each common share of beneficial interest. The purchase rights may have the effect of delaying, inhibiting or preventing a transaction or a change in control of us that might involve a premium price for the common
shares or otherwise be in the best interest of our shareholders. The purchase rights can cause substantial dilution to a person or group that acquires 10% or more of our outstanding common shares unless the purchase rights have been redeemed by our
board of trustees. However, because the purchase rights are redeemable by our board of trustees, the purchase rights should not interfere with any merger or other business combination approved by our board of trustees.



We have an ownership limitation.



In order to maintain our qualification as a REIT under the Internal Revenue
Code of 1986, as amended, no more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals during the last half of our taxable year, other than our 1996 taxable year. To
ensure that we will not fail to qualify as a REIT, our declaration of trust authorizes our board of trustees to take such actions as are necessary and desirable to preserve our qualification as a REIT. In addition, our declaration of trust has an
ownership limitation which provides that no person may own, directly or indirectly, more than 8.5% of the number of outstanding common shares, other than Michael V. Prentiss, who currently may own up to 15% of the number of outstanding common
shares, or more than 9.8% of the number of outstanding preferred shares of beneficial interest of any series. The board of trustees, upon receipt of a ruling from the IRS, an opinion of counsel or other evidence satisfactory to our board of
trustees, may exempt a proposed transferee from the ownership limitation. The board of trustees may not grant an exemption from the ownership limitation to any proposed transferee if such exemption would result in the termination of our status as a
REIT. The ownership limitation may have the effect of delaying, inhibiting or preventing a transaction or a change in control that might involve a premium price for the common shares or otherwise be in the best interests of our shareholders.



We have a staggered board.



Our board of trustees is divided into three classes, each with a three-year
term, thus, only a portion of our board of trustees stand for election at each annual meeting. The staggered terms of trustees may reduce the possibility of a tender offer or an attempt to change control of us, even though a tender offer or change
in control might be in the best interest of our shareholders.



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The board of trustees can issue additional shares.



Our declaration of trust authorizes our board of trustees to:



| |  | amend our declaration of trust, without shareholder approval, to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial
interest of any class that we have the authority to issue;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | issue additional authorized but unissued preferred or common shares; and
| | - | ------------------------------------------------------------------------



| |  | classify or reclassify any unissued common shares or preferred shares and to set the preferences, rights and other terms of such classified or unclassified shares.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



These provisions may have the effect of
delaying, deferring or preventing a transaction or a change in control that might involve a premium price for the common shares or otherwise be in the best interest of our shareholders.



Our status as a REIT is dependent on compliance with federal income tax requirements.



We have operated and intend to continue to operate as a REIT for federal
income tax purposes. We have not requested, and do not expect to request, a ruling from the IRS (1) that the operating partnership and each of its non-corporate subsidiaries have been and will be classified as partnerships for federal income tax
purposes or (2) that we qualify as a REIT. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code, with limited judicial and administrative guidance available, to facts and
circumstances that may be subject to differing interpretations for federal income tax purposes.



While we have operated and intend to continue to operate as a REIT for federal income tax purposes, if the IRS were to successfully challenge the tax
status of the operating partnership or a non-corporate subsidiary as a partnership, or if we fail to qualify as a REIT for any taxable year, we would be subject to federal income tax at regular corporate rates. Unless entitled to relief under the
Internal Revenue Code, we also would be disqualified from treatment as a REIT for the four taxable years following the disqualification year. As a result, cash available for distribution would be reduced for each of the years involved.



Although we intend to continue to operate as a REIT, future economic,
market, legal, tax or other considerations may cause our board of trustees, with the consent of our shareholders holding at least a majority of all the outstanding common shares, to revoke the REIT election.



We have minimum distribution requirements that could require us to incur additional debt.



To qualify as a REIT prior to 2001, we were required to
distribute at least 95% of our net taxable income to our shareholders, excluding any net capital gain. As a result of the REIT Modernization Act, the distribution requirement was reduced to 90% for 2001 and future years. In addition, to avoid a 4%
non-deductible excise tax, we must also distribute annually at least the sum of the following:



| |  | 85% of our ordinary income for that year,
| | - | -----------------------------------------



| |  | 95% of our capital gain net income for that year, and
| | - | -----------------------------------------------------



| |  | 100% of our undistributed taxable income from prior years.
| | - | ----------------------------------------------------------



We have exceeded the distribution requirements in every year and we expect to comply with the distribution requirements. If unfavorable market conditions
exist, we may have to borrow funds on a short-term basis to meet the REIT distribution requirements. If such unfavorable conditions occurred, we might not be able to fund all future capital needs with income from operations, and might have to rely
on third-party sources of capital, which may or may not be available on favorable terms.



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Changes in tax laws could affect our REIT status.



At any time, future legislation or administrative or judicial decisions or actions could affect our tax treatment or
qualification as a REIT including tax liability, possibly with retroactive effect. While we do not anticipate any such decisions or actions, the rules dealing with federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department. We cannot predict whether, when, in what forms, or with what effective dates, the tax laws applicable to us or an investment in us might be changed.



Conflicts of interests in our business could result in decisions not in your best
interest.



Prentiss principals could have differing objectives from
other shareholders upon the sale, refinancing or prepayment of indebtedness of properties.



Messrs. Prentiss and August, our senior executive officers, and their affiliates may have unrealized taxable gain associated with their units of limited
partnership interest in the operating partnership. Messrs. Prentiss and August may suffer different and more adverse tax consequences than our other shareholders upon the sale or refinancing of properties that were contributed to the operating
partnership by Messrs. Prentiss and August. Therefore, Messrs. Prentiss and August and our other shareholders may have different objectives regarding the appropriate pricing and timing of any sale or refinancing of properties. While we, through
Prentiss Properties I, Inc., the general partner of the operating partnership, have the exclusive authority as to whether and on what terms to sell or refinance an individual property, Messrs. Prentiss and August may influence us not to sell, or
refinance or prepay the indebtedness associated with properties even though such a transaction might otherwise be to our financial advantage, or may influence us to refinance properties with a high level of debt.



Our policies with respect to conflicts of interests may not eliminate the influence of
conflicts.



We have adopted policies intended to
minimize conflicts of interest. For example, our bylaws provide that all transactions in which executive officers or trustees have a conflicting interest with us may be subject to approval by a majority of our trustees that are not affiliated with
any of our affiliates or by the holders of a majority of the common shares held by disinterested shareholders. We have implemented a code of business conduct governing the conduct of all employees which further reduces the potential for conflicts of
interest. There can be no assurance that our policies will be successful in eliminating the influence of conflicts. Decisions could be made that might fail to reflect fully the interests of all our shareholders. Our declaration of trust includes a
provision permitting each individual trustee to engage in the type of business activities conducted by us without first presenting any investment opportunities to us, even though such investment opportunities may be within the scope of our
investment policies.



Our board of trustees may change policies and incur
debt without shareholder approval.



Our board of
trustees determines our investment, financing, borrowing and distribution policies, and our policies with respect to all other activities, including growth, capitalization and operations. Our board of trustees has adopted a policy limiting our total
combined indebtedness plus our pro rata share of joint venture debt to 50% or less of our total market capitalization, but our organizational documents do not contain any limitation on the amount of indebtedness we may incur. Although our board of
trustees has no present intention to do so, these policies may be amended or revised at any time and from time to time at the discretion of our board of trustees, limited only by various restrictions in our credit agreements, without a vote of our
shareholders. Our credit agreements limit total indebtedness to 55% of total assets and require a debt service coverage ratio of at least 2 to 1. A change in our investment, financing, borrowing and distribution policies could adversely affect our
financial condition, results of operations or the market price of our common shares.



We are dependent on the services of Michael V. Prentiss and Thomas F. August.



We are dependent on the efforts of our chairman and chief executive officer, Messrs. Prentiss and August. The loss of their services could have an adverse
effect on our operations. Each of Messrs. Prentiss and August has



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##### Index to Financial Statements

entered into an employment agreement which will expire in January 2009 and May 2004, respectively. Messrs. Prentiss and
August have agreed in their employment agreements that for a period of two years after they are no longer employed by us they will not enter into employment with any company which is in a business that is competitive to our business. If this
provision, or if similar provisions in other employment agreements with our other employees, is determined to not be binding on Messrs. Prentiss or August, or any other employee, those persons would be able to enter into employment with companies
which compete with us immediately after those persons ceased to be employed by us.



Our third-party property management, leasing, development and construction business and related services involve relationships which may be subject to early termination or a lack of control.



Through our operating partnership, Prentiss Properties Resources, Inc., and
Prentiss Properties Management, L.P., we engage in the business of management, leasing, development and construction of properties owned by third parties. Risks associated with these activities include the following:



| |  | related contracts, which are typically cancelable upon 30-days notice or upon specific events, including sale of the property, may be terminated by the property owner or may be lost
in connection with a sale of such property;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | contracts may not be renewed upon expiration or may not be renewed on terms consistent with current terms; and
| | - | --------------------------------------------------------------------------------------------------------------



| |  | rental revenues upon which management, leasing and development fees are based may decline as a result of general real estate market conditions or specific market factors affecting
properties that we manage, lease or develop, resulting in decreased management, leasing or development fee income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have shares available for future sale that could adversely affect the price of our common shares.



Under our declaration of trust, our board of trustees has the authority to do the following:



| |  | amend our declaration of trust, without shareholder approval, to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial
interest of any class, including common shares, that we have the authority to issue; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | issue additional authorized but unissued common shares or preferred shares.
| | - | ---------------------------------------------------------------------------



As of December 31, 2003, we have authorized 100,000,000 common shares, of which 57,303,659 common shares are either unissued or held in treasury for
purposes other than the Key Employee Share Option Plan. In addition, we have granted options to purchase 4,235,066 common shares to executives officers, employees and trustees, of which options to purchase 984,456 common shares remain outstanding.
We have reserved a total of 3,773,585 common shares and 1,474,899 common shares for issuance upon conversion of the Series D Preferred Shares and common units, respectively. Sales or issuances of a substantial number of common shares, or the
perception that such sales could occur could adversely affect prevailing market prices of the common shares and dilute the percentage ownership held by our shareholders.



Limited partners of our operating partnership have the right to receive, in our or the general partners discretion,
either cash or one common share, in exchange for each limited partnership unit they now hold, if and to the extent they tender such units for redemption. As of December 31, 2003, there were 1,474,899 common units of our operating partnership
outstanding and held by partners other than Prentiss Properties Trust, and, if we or the general partner elect to redeem such units for common shares, these common units are exchangeable for 1,474,899 common shares. We are party to registration
rights agreements under which we are required to register the issuance of common shares which we may issue upon the redemption by the holders of units of limited partnership interest in our operating partnership. We can make no prediction concerning
the effect that such issuance or future sales of any such common shares will have on market prices.



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Changes in market conditions could hurt the market price of our shares.



The value of our common shares depends on various market conditions, which
may change from time to time. Among the market conditions that may affect the value of our common shares are the extent of institutional investor interest in us; the reputation of REITs generally and the attractiveness of their equity securities in
comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities; our financial condition and performance; and general financial market conditions. In addition, the stock market in recent
years has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies.



Increased market rates may hurt the value of our shares.



We believe that investors consider the distribution rate on REIT shares, expressed as a percentage of the price of the shares, relative to market interest
rates as an important factor in deciding whether to buy or sell the shares. If market interest rates go up, prospective purchasers of REIT shares may expect a higher distribution rate. Higher interest rates would not, however, result in more funds
for us to distribute and in fact, would likely increase our borrowing costs and might decrease our funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to decline.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



Our primary market risk exposure is to changes in interest rates as a result of our revolving credit facility and long-term debt. At December 31, 2003, we
had outstanding total indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 39.8% of total market capitalization based on a common share price of $32.99 per common share. Our interest rate
risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings
through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangement. In addition, we may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps
and floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.
Approximately 62.0% of our outstanding debt was subject to fixed rates with a weighted average interest rate of 7.43% at December 31, 2003. Of the remaining $422.8 million, or 38.0%, representing our variable rate debt, $275.0 million was
effectively locked at an interest rate before the spread over LIBOR, of 4.66% through our interest rate swap agreements. We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate
fluctuations.



The following table provides information about
our financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations outstanding at December 31, 2003, the table presents principal cash flows and related weighted
average interest rates for the debt outstanding during the periods. The debt outstanding as presented in the table includes our pro rata share of joint venture debt. For interest rate swaps, the table presents notional amounts that expire and
weighted average interest rates for in-place swaps during the period. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on 30-day LIBOR as of December 31,
2003. The fair value of our fixed rate debt indicates the estimated principal amount of debt having similar debt service requirements, which could have been borrowed by us at December 31, 2003. The rate assumed in the fair value calculation of fixed
rate debt is equal to 5.0%, representing our estimated borrowing rate for fixed rate debt instruments similar in term to those outstanding at December 31, 2003. The fair value of our variable to fixed interest rate swaps indicates the estimated
amount that would have been paid by us had they been terminated at December 31, 2003.



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|                          |  |                                       |         |   |      |   |         |      |  |   |        |   |  |      |         |   |            |   |         |       |  |            |         |   |  |   |         |  |   |         |  
|------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------- | - | ---------- | - | ------- | ----- |  | ---------- | ------- | - |  | - | ------- |  | - | ------- | -
|                          |  | Expected Maturity Date (in thousands) |         |   |      |   |         |     
|                          |  | 2004                                  |         |   | 2005 |   |         | 2006 |  |   | 2007   |   |  | 2008 |         |   | Thereafter |   |         | Total |  | Fair Value |        
|Liabilities               |  |                                       |         |   |      |   |         |      |  |   |        |   |  |      |         |   |            |   |         |       |  |            |         |   |  |   |         |  |   |         |  
|Long-Term Debt:           |  |                                       |         |   |      |   |         |      |  |   |        |   |  |      |         |   |            |   |         |       |  |            |         |   |  |   |         |  |   |         |  
|Fixed Rate                |  | $                                     | 9,292   |   |      | $ | 42,625  |      |  | $ | 14,311 |   |  | $    | 197,143 |   |            | $ | 11,358  |       |  | $          | 415,748 |   |  | $ | 690,477 |  | $ | 767,560 |  
|Average Interest Rate     |  |                                       | 7.43    | % |      |   | 7.45    | %    |  |   | 7.46   | % |  |      | 7.39    | % |            |   | 7.37    | %     |  |            | 7.43    | % |  |   |        |  |   |        |  
|Variable Rate             |  | $                                     | 70,813  |   |      | $ | 177,000 |      |  | $ | 75,000 |   |  |      |        |   |            | $ | 100,000 |       |  |            |        |   |  | $ | 422,813 |  | $ | 422,813 |  
|Average Interest Rate     |  |                                       | 2.63    | % |      |   | 2.61    | %    |  |   | 2.55   | % |  |      | 2.53    | % |            |   | 2.53    | %     |  |            |        |   |  |   |        |  |   |        |  
|                          |  |                                       |         |   |      |   |         |     
|Interest Rate Derivatives |  |                                       |         |   |      |   |         |      |  |   |        |   |  |      |         |   |            |   |         |       |  |            |         |   |  |   |         |  |   |         |  
|Interest Rate Swaps:      |  |                                       |         |   |      |   |         |      |  |   |        |   |  |      |         |   |            |   |         |       |  |            |         |   |  |   |         |  |   |         |  
|Variable to Fixed         |  | $                                     | 110,000 |   |      | $ | 40,000  |      |  | $ | 50,000 |   |  | $    | 75,000  |   |            | $ | 30,000  |       |  |            |        |   |  |   |        |  | $ | (8,074  | )
|Avg. Pay Rate             |  |                                       | 4.66    | % |      |   | 3.84    | %    |  |   | 2.96   | % |  |      | 2.92    | % |            |   | 3.86    | %     |  |            |        |   |  |   |        |  |   |        |  
|Avg. Receive Rate         |  |                                       | 1.12    | % |      |   | 1.12    | %    |  |   | 1.12   | % |  |      | 1.12    | % |            |   | 1.12    | %     |  |            |        |   |  |   |        |  |   |        |  



The table incorporates
only those exposures that exist as of December 31, 2003 and does not consider exposures or positions which could arise after that date. In addition, because firm commitments are not represented in the table above, the information presented therein
has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that
time. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. At December 31, 2003, our variable rate debt outstanding was approximately $422.8 million with an average interest rate of approximately
2.59%. Exclusive of our interest rate swap agreements, if 30-day LIBOR increased 100 basis points, total interest expense would increase approximately $4.2 million. The total extent of market risk is not quantifiable or predictable because of the
variability of future interest rates and our financing requirements.



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



Financial Statements and the Financial Statement Schedule appear at page F-1 to page F-44 of this Form 10-K.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|------- | -------------------------------------------------------------------------------------



None



|Item 9A. | Controls and Procedures
|-------- | -----------------------



As of December 31, 2003, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 15d-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms.



There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



62



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##### Table of Contents

##### Index to Financial Statements

PART III



|Item 10. | Trustees and Executive Officers of the Company
|-------- | ----------------------------------------------



The information required by this item is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held
on May 5, 2004.



|Item 11. | Executive Compensation
|-------- | ----------------------



The information required by this item is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held
on May 5, 2004.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
|-------- | ----------------------------------------------------------------------------------------------



The information required by this item is incorporated by reference from our definitive proxy statement for our annual
meeting of shareholders to be held on May 5, 2004.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



The information required by this item is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held
on May 5, 2004.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information required by this item is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held
on May 5, 2004.



PART IV



|Item 15. | Exhibits, Financial Statement Schedule and Reports on Form 8-K
|-------- | --------------------------------------------------------------



|(a) | Financial Statements, Financial Statement Schedule and Exhibits
|--- | ---------------------------------------------------------------



| | (1) | Financial Statements
| | --- | --------------------



Report of Independent Auditors



Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002



Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001



Consolidated Statements of Changes in Shareholders
Equity for the years ended December 31, 2003, 2002 and 2001



Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001



Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001



63



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##### Table of Contents

##### Index to Financial Statements

Notes to Consolidated Financial Statements



| | (2) | Financial Statement Schedules
| | --- | -----------------------------



Report of Independent Auditors



Schedule II: Valuation and Qualifying Accounts



Schedule III: Real Estate and Accumulated Depreciation



| | (3) | Exhibits
| | --- | --------



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | 
|3.1*        |  | Amended and Restated Declaration of Trust of the Registrant (Form of filed as Exhibit 3.1 to our Registration Statement on Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated
by reference herein).                                                                                                                                                                                                                                                        
|            | 
|3.2         |  | Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to our Form 10-Q, filed on May 15, 2002, File No. 001-14516).                                                                                                                                                                                                                                                                                                                                          
|            | 
|3.3         |  | Amendment No. 1 to the Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.3 to our Form 10-Q, filed on May 15, 2002, File No. 001-14516).                                                                                                                                                                                                                                                                                                                   
|            | 
|3.4         |  | Amendment No. 2 to the Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.4 to our Form 10-Q filed on November 12, 2003, File No. 001-14516).                                                                                                                                                                                                                                                                                                               
|            | 
|3.5         |  | Articles Supplementary, dated February 17, 1998, Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Junior Participating Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest, Series B, and Fixing Distribution and Other Preferences and Rights of Such Shares (filed as an Exhibit to our Registration Statement on Form 8-A, filed on February 17, 1998, File No. 000-23813 and
incorporated by reference herein).
|            | 
|3.6         |  | Articles Supplementary, dated June 25, 1998, Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Shares (included as Exhibit 3.5 to our Form 10-Q, filed on August 12, 1998, File No. 001-14516).                                                                                         
|            | 
|3.7         |  | Articles Supplementary, dated March 20, 2001 (filed as Exhibit 3.6 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by reference
herein).                                                                                                                                                                                                                                                                                            
|            | 
|3.8         |  | Articles Supplementary Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Series D Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest
and Fixing Distribution and Other Preferences and Rights of such Shares, dated March 20, 2001 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by reference herein).                                              
|            | 
|3.9         |  | Articles Supplementary, dated January 4, 2002 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference
herein).                                                                                                                                                                                                                                                                                           
|            | 
|3.10*       |  | Articles Supplementary, dated February 24, 2004, declassifying the Series B Cumulative Redeemable Perpetual Preferred Shares.                                                                                                                                                                                                                                                                                                                                              





64



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##### Table of Contents

##### Index to Financial Statements

|     |  |                                                                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Form of Common Share Certificate (filed as Exhibit 4.1 to our Registration Statement on Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by reference
herein).                                                                                                                             
|     | 
|4.2  |  | Amended and Restated Rights Agreement, dated January 22, 2002, between Prentiss Properties Trust and EquiServe Trust Company, N.A., as Rights Agent (filed as Exhibit 1 to Amendment No. 2 to
our Registration Statement on Form 8-A, filed on February 6, 2002, File No. 000-014516).                       
|     | 
|4.3  |  | First Amendment dated June 26, 2002 to the Amended and Restated Rights Agreement between Prentiss Properties Trust and Equiserve Trust Company, N.A. as Rights Agent (filed as Exhibit 2 to
Amendment No. 3 to our Registration Statement on Form 8-A, filed on June 27, 2002. File No. 001-014516).         
|     | 
|4.4  |  | Second Amendment, dated October 21, 2003, to the Amended and Restated Rights Agreement between Prentiss Properties Trust and Equiserve Trust Company, N.A. as Rights Agent (filed as Exhibit 3
to Amendment No. 4 to our Registration Statement on Form 8-A, filed on January 26, 2004. File No. 001-014516).
|     | 
|4.5  |  | Form of Rights Certificate (included as Exhibit A to the Rights Agreement (Exhibit 4.2)).                                                                                                                                                                                                                    
|     | 
|4.6  |  | Form of Series D Preferred Share Certificate (filed as Exhibit 4.4 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by reference
herein).                                                                                                                              
|     | 
|10.1 |  | 1996 Share Incentive Plan (filed as Exhibit 10.25 to Amendment No. 1 to our Registration Statement on Form S-11, File No. 333-09863, and incorporated by reference herein).                                                                                                                                  
|     | 
|10.2 |  | First Amendment, effective as of May 6, 1997, to the 1996 Share Incentive Plan (filed as Exhibit 4.6 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28, 1999, and
incorporated by reference herein).                                                                            
|     | 
|10.3 |  | Second Amendment, effective as of May 5, 1998, to the 1996 Share Incentive Plan (filed as Exhibit 4.7 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28, 1999, and
incorporated by reference herein).                                                                           
|     | 
|10.4 |  | Third Amendment, effective as of May 9, 2001, to the 1996 Share Incentive Plan (filed as Exhibit 4.5 to our Registration Statement on Form S-8, File No. 333-68520, filed on August 28, 2001,
and incorporated by reference herein).                                                                         
|     | 
|10.5 |  | Amendment No. 4, effective as of October 15, 1996, to the 1996 Share Incentive Plan. (filed as Exhibit no. 10.5 to our Report on Form 10Q, filed November 14, 2002, File No.
001-14516).                                                                                                                     
|     | 
|10.6 |  | Amendment No. 5, effective as of October 23, 2002, to the 1996 Share Incentive Plan. (filed as Exhibit no. 10.6 to our Report on Form 10Q, filed November 14, 2002, File No.
001-14516).                                                                                                                     
|     | 
|10.7 |  | Amended and Restated Trustees Share Incentive Plan, effective as of May 15, 2002 (filed as Exhibit 4.12 to our Registration Statement on Form S-8, File No. 333-97045, filed on July 24,
2002, and incorporated by reference herein).                                                                       
|     | 
|10.8 |  | Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Trustees Share Incentive Plan. (filed as Exhibit no. 10.8 to our Report on Form 10Q, filed November 14,
2002, File No. 001-14516).                                                                                           





65



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##### Index to Financial Statements

|       |  |                                                                                                                                                                                                                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9   |  | Trustees Share Incentive Plan (filed as Exhibit 4.8 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28, 1999, and incorporated by reference
herein).                                                                                                                                                        
|       | 
|10.10  |  | First Amendment, effective as of May 5, 1998, to the Trustees Share Incentive Plan (filed as Exhibit 4.9 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28,
1999, and incorporated by reference herein).                                                                                                  
|       | 
|10.11  |  | Second Amendment, effective as of March 1, 1999, to the Trustees Share Incentive Plan (filed as Exhibit 4.10 to our Registration Statement on Form S-8, File No. 333-79623, filed on May
28, 1999, and incorporated by reference herein).                                                                                              
|       | 
|10.12  |  | Third Amendment, effective as of May 10, 2000, to the Trustees Share Incentive Plan (filed as Exhibit 10.8 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and
incorporated by reference herein).                                                                                                                
|       | 
|10.13  |  | Form of Stock Option Agreement (filed as Exhibit 10.9 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                      
|       | 
|10.14  |  | Amended and Restated Share Purchase Plan, dated as of July 1, 2000 (filed as Exhibit 10.10 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference
herein).                                                                                                                                 
|       | 
|10.15  |  | Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Share Purchase Plan. (filed as Exhibit no. 10.15 to our Report on Form 10Q, filed November 14, 2002, File No.
001-14516).                                                                                                                                
|       | 
|10.16  |  | Key Employee Share Option Plan (filed as Exhibit 10.11 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                     
|       | 
|10.17  |  | Prentiss Properties Employee Savings Plan (filed as Exhibit 10.12 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                          
|       | 
|10.18* |  | Third Amended and Restated Employment Agreement, dated January 1, 2004 by and between Michael V. Prentiss and Prentiss Properties Trust.                                                                                                                                                                                                
|       | 
|10.19  |  | Amended and Restated Employment Agreement, dated May 10, 2000, by and between Thomas F. August and Prentiss Properties Trust (filed as Exhibit 10.21 to our Report on Form 10-K, filed on March
27, 2001, and incorporated herein by reference).                                                                                        
|       | 
|10.20  |  | Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P., dated as of October 1, 2001 (filed as Exhibit 10.15 to our Report on Form 10-K,
filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                         
|       | 
|10.21  |  | First Amendment, dated as of December 18, 2001, to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P., dated as of December 18,
2001 (filed as Exhibit 10.16 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).
|       | 
|10.22  |  | Second Amendment, dated as of January 3, 2002, to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P., dated as of October 1,
2001 (filed as Exhibit 10.17 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).   





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##### Index to Financial Statements

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23  |  | Third Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.40 to our Report on Form 10-K, filed
March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                              
|       | 
|10.24  |  | Fourth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.20 to our Report on Form 10-Q, filed
August 14, 2002, File No. 001-14516).                                                                                                                                                                  
|       | 
|10.25  |  | Fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 99.1 to our Form 8-K, File No.
001-14516, filed on August 14, 2003).                                                                                                                                                                            
|       | 
|10.26  |  | Sixth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.2 to our Form 10-Q, File No.
001-14516, filed on November 12, 2003).                                                                                                                                                                         
|       | 
|10.27* |  | Seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P.                                                                                                                                                                                                                                                                 
|       | 
|10.28* |  | Eighth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P.                                                                                                                                                                                                                                                                  
|       | 
|10.29* |  | Series E Cumulative Redeemable Preferred Partnership Units Repurchase Agreement, dated February 4, 2004, by and between Prentiss Properties Acquisition Partners, L.P. and Brandywine Operating
Partnership, L.P.                                                                                                                                                                                      
|       | 
|10.30* |  | Series B Preferred Unit Redemption Agreement, dated February 24, 2004, by and between Prentiss Properties Acquisition Partners, L.P., Belrose Realty Corporation, Belmar Realty Corporation,
Belport Realty Corporation and Belshire Realty Corporation.                                                                                                                                               
|       | 
|10.31  |  | Credit Agreement, dated May 22, 2003, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Eurohypo AG, New York Branch, as Administrative Agent, Bank One, NA, as Syndication
Agent, and other lenders as named therein, (filed as Exhibit 10.2 to our Form 10-Q, File No. 001-14516, filed on August 14, 2003).                                                                        
|       | 
|10.32  |  | Stock Purchase Agreement, dated January 1, 2003, by and between Prentiss Properties Acquisition Partners, L.P. and Ampulla LLC, a single member Limited Liability Company, owned by Michael V.
Prentiss, Chairman of the Board of Prentiss Properties Trust, (filed as Exhibit 10.3 to our Form 10-Q, File No. 001-14516, filed on August 14, 2003).                                                   
|       | 
|10.33  |  | Exchange Agreement, dated as of March 20, 2001, by and among Prentiss Properties Trust, Prentiss Properties Acquisition Partners, L.P. and Security Capital Preferred Growth Incorporated
(filed as Exhibit 10.14 to our Report on Form 10-K, filed on March 27, 2001, and incorporated herein by reference).                                                                                          
|       | 
|10.34  |  | Registration Rights Agreement, dated as of March 20, 2001, by and among Prentiss Properties Trust and Security Capital Preferred Growth Incorporated (filed as Exhibit 10.15 to our Report on
Form 10-K, filed on March 27, 2001, and incorporated by reference herein).                                                                                                                               
|       | 
|10.35  |  | Credit Agreement, dated May 23, 2000, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Bank One, N.A., as Administrator, Bank of America, N.A., as Syndication Agent,
Dresdner Bank, AG as Documentation Agent and each of the Lenders that are signatory therein (filed as Exhibit 10.22 to our Report on Form 10-K, filed on March 27, 2001, and incorporated by reference herein).





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##### Index to Financial Statements

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.36  |  | Credit Agreement, dated March 16, 2001, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Commerzbank AG, New York Branch, as Administrative Agent, Sole Arranger and Sole
Book Runner, Fleet National Bank, as Syndication Agent, LaSalle Bank National Association, as Documentation Agent and each of the Lenders named therein (filed as Exhibit 10.21 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and
incorporated by reference herein).
|       | 
|10.37  |  | First Amendment, dated as of November 28, 2000, to the Credit Agreement, dated September 30, 1999, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Bank One, N.A., as
Administrative Agent, Mellon Bank and Union Bank of California as co-documentation agents (filed as Exhibit 10.23 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                 
|       | 
|10.38* |  | Second Amended and Restated Credit Agreement, dated as of February 19, 2004, by and among Prentiss Properties Acquisition Partners, L.P., Bank One, NA, Bank of America, N.A., Dresdner Bank
AG, Commerzbank AG, Societe Generale Southwest Agency and the lenders named therein.                                                                                                                                                                                                       
|       | 
|10.39  |  | Loan Agreement, dated as of June 30, 1999, by and between Prentiss Properties Acquisition Partners, L.P. and Robert K. Wiberg (filed as Exhibit 10.30 to our Report on Form 10-K, filed March
27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                      
|       | 
|10.40  |  | Loan Agreement, dated as of June 30, 1999, by and between Prentiss Properties Acquisition Partners, L.P. and Lawrence Krueger (filed as Exhibit 10.31 to our Report on Form 10-K, filed March
27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                      
|       | 
|10.41  |  | Loan Agreement, dated as of June 30, 1999, by and between Prentiss Properties Acquisition Partners, L.P. and Michael A. Ernst (filed as Exhibit 10.32 to our Report on Form 10-K, filed March
27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                      
|       | 
|10.42  |  | Loan Agreement, dated as of June 30, 1999, by and between Prentiss Properties Acquisition Partners, L.P. and Christopher M. Hipps (filed as Exhibit 10.33 to our Report on Form 10-K, filed
March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                  
|       | 
|10.43  |  | Loan Agreement, dated as of June 30, 1999, by and between Prentiss Properties Acquisition Partners, L.P. and Daniel Cushing (filed as Exhibit 10.34 to our Report on Form 10-K, filed March 27,
2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                        
|       | 
|10.44  |  | Promissory Note, dated as of June 1, 1999, by and between Prentiss Properties Limited, Inc. and Christopher M. Hipps (filed as Exhibit 10.35 to our Report on Form 10-K, filed March 27, 2002,
File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                               
|       | 
|10.45  |  | Promissory Note, dated as of January 1, 2002, by and between Prentiss Properties Limited, Inc. and Daniel Cushing (filed as Exhibit 10.36 to our Report on Form 10-K, filed March 27, 2002,
File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                                  
|       | 
|10.46  |  | Promissory Note, dated as of June 14, 2002, by and among Prentiss Properties Limited, Inc. and Daniel Cushing. (filed as Exhibit 10.45 to our Report on Form 10-K, filed March 28, 2003, File
No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                                     
|       | 
|10.47  |  | Purchase Agreement, dated February 25, 2002, by and among Prentiss Properties Trust, Prentiss Properties Acquisition Partners, L.P., Prentiss Properties I, Inc. and Salomon
Smith                                                                                                                                                                                                                                                                                                      





68



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##### Index to Financial Statements

|       |  |                                                                                                                                                                                                                                                                  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | Barney Inc. (filed as Exhibit 10.38 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).                                                                                                                 
|       | 
|10.48  |  | Registration Rights Agreement, dated February 25, 2002, by and among Prentiss Properties Trust and Salomon Smith Barney Inc. (filed as Exhibit 10.39 to our Report on Form 10-K, filed March
27, 2002, File No. 001-14516, and incorporated by reference herein).
|       | 
|10.49  |  | Sales Agreement between us and Brinson Patrick Securities Corporation, dated June 10, 2002 (filed as Exhibit 1.1 to our Post Effective Amendment No. 2 to Form S-3, File No. 333-49433, filed
on July 26, 2002).                                                 
|       | 
|10.50* |  | Amended and Restated Limited Partnership Agreement of Prentiss Office Investors, L.P., dated January 29, 2004.                                                                                                                                                   
|       | 
|21.1*  |  | List of Subsidiaries.                                                                                                                                                                                                                                            
|       | 
|23.1*  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                           
|       | 
|31.1*  |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              
|       | 
|31.2*  |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              
|       | 
|32.1*  |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              
|       | 
|32.2*  |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              

---

|* | Filed herewith.
|- | ---------------



|(b) | Reports on Form 8-K
|--- | -------------------



On October 15, 2003, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K. The Current Report on Form 8-K
relates to our earnings release for the quarter ended September 30, 2003.



69



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##### Index to Financial Statements

PRENTISS PROPERTIES TRUST



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|FINANCIAL STATEMENTS                                                                                            |  | PAGE
|                                                                                                                | 
|Report of Independent Auditors                                                                                  |  | F-2 
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002                                       |  | F-3 
|                                                                                                                | 
|Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001                          |  | F-4 
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2003, 2002 and 2001 |  | F-5 
|                                                                                                                | 
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001            |  | F-6 
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                      |  | F-7 
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F-8 
|                                                                                                                | 
|FINANCIAL STATEMENT SCHEDULES                                                                                   |  |     
|                                                                                                                | 
|Report of Independent Auditors                                                                                  |  | F-40
|                                                                                                                | 
|Schedule II: Valuation and Qualifying Accounts                                                                  |  | F-41
|                                                                                                                | 
|Schedule III: Real Estate and Accumulated Depreciation                                                          |  | F-42



F-1



---

##### Table of Contents

##### Index to Financial Statements

REPORT OF INDEPENDENT AUDITORS



To the Board of
Trustees and Shareholders

of Prentiss Properties Trust:



In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position
of Prentiss Properties Trust and its subsidiaries (the Company) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note (2) to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure and effective July 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.



/s/ PricewaterhouseCoopers LLP



Dallas, Texas

March 10, 2004





F-2



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS



(in
thousands, except share and per share amounts)



|                                                              |  |              |           |   |      |   |           |  
|------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                              |  | December 31, |          
|                                                              |  | 2003         |           |   | 2002 |  
|ASSETS                                                        |  |              |           |   |      |   |           |  
|Operating real estate:                                        |  |              |           |   |      |   |           |  
|Land                                                          |  | $            | 325,623   |   |      | $ | 300,460   |  
|Buildings and improvements                                    |  |              | 1,727,056 |   |      |   | 1,631,568 |  
|Less: accumulated depreciation                                |  |              | (210,944  | ) |      |   | (178,792  | )
|                                                              |  |              |           |   |      |   |           |  
|                                                              |  |              | 1,841,735 |   |      |   | 1,753,236 |  
|Construction in progress                                      |  |              |          |   |      |   | 41,352    |  
|Land held for development                                     |  |              | 47,202    |   |      |   | 65,377    |  
|Deferred charges and other assets, net                        |  |              | 207,795   |   |      |   | 169,373   |  
|Notes receivable                                              |  |              | 15,904    |   |      |   | 13,354    |  
|Accounts receivable, net                                      |  |              | 47,412    |   |      |   | 39,024    |  
|Cash and cash equivalents                                     |  |              | 5,945     |   |      |   | 5,080     |  
|Escrowed cash                                                 |  |              | 11,913    |   |      |   | 10,483    |  
|Investments in securities and insurance contracts             |  |              | 2,579     |   |      |   | 3,927     |  
|Investments in joint ventures and unconsolidated subsidiaries |  |              | 14,215    |   |      |   | 21,083    |  
|Interest rate hedges                                          |  |              | 1,768     |   |      |   |          |  
|                                                              |  |              |           |   |      |   |           |  
|Total assets                                                  |  | $            | 2,196,468 |   |      | $ | 2,122,289 |  
|                                                              |  |              |           |   |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                          |  |              |           |   |      |   |           |  
|Mortgages and notes payable                                   |  | $            | 1,029,035 |   |      | $ | 1,011,027 |  
|Interest rate hedges                                          |  |              | 9,842     |   |      |   | 16,776    |  
|Accounts payable and other liabilities                        |  |              | 81,741    |   |      |   | 79,626    |  
|Mandatorily redeemable preferred units                        |  |              | 10,000    |   |      |   |          |  
|Other payables (affiliates)                                   |  |              |          |   |      |   | 7,355     |  
|Distributions payable                                         |  |              | 28,986    |   |      |   | 26,947    |  
|                                                              |  |              |           |   |      |   |           |  
|Total liabilities                                             |  |              | 1,159,604 |   |      |   | 1,141,731 |  
|                                                              |  |              |           |   |      |   |           |  
|                                                              |  |             
|Minority interest in operating partnership                    |  |              | 123,058   |   |      |   | 133,649   |  
|                                                              |  |              |           |   |      |   |           |  
|Minority interest in real estate partnerships                 |  |              | 1,565     |   |      |   | 2,676     |  
|                                                              |  |              |           |   |      |   |           |  



Commitments and contingencies



|                                                                                                                                                                                                                            |  |   |           |   |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- | - |  | - | --------- | -
|Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585 shares issued and outstanding                                                                                                                      |  |   | 100,000   |   |  |   | 100,000   |  
|Common shares $.01 par value, 100,000,000 shares authorized, 45,772,383 and 43,965,756 (includes 3,159,089 and 4,984,401 shares held in
treasury) shares issued and outstanding at December 31, 2003 and 2002, respectively |  |   | 458       |   |  |   | 439       |  
|Additional paid-in capital                                                                                                                                                                                                  |  |   | 942,644   |   |  |   | 882,897   |  
|Common shares in treasury at cost, 3,159,089 and 4,984,401 shares at December 31, 2003 and 2002, respectively                                                                                                               |  |   | (78,000   | ) |  |   | (118,476  | )
|Unearned compensation                                                                                                                                                                                                       |  |   | (2,176    | ) |  |   | (1,479    | )
|Accumulated other comprehensive income                                                                                                                                                                                      |  |   | (7,198    | ) |  |   | (15,768   | )
|Distributions in excess of earnings                                                                                                                                                                                         |  |   | (43,487   | ) |  |   | (3,380    | )
|                                                                                                                                                                                                                            |  |   |           |   |  |   |           |  
|Total shareholders equity                                                                                                                                                                                                  |  |   | 912,241   |   |  |   | 844,233   |  
|                                                                                                                                                                                                                            |  |   |           |   |  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                  |  | $ | 2,196,468 |   |  | $ | 2,122,289 |  
|                                                                                                                                                                                                                            |  |   |           |   |  |   |           |  



The accompanying notes
are an integral part of these consolidated financial statements.



F-3



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF INCOME



(in thousands, except per share amounts)



|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                   |  | Year Ended December 31, |        
|                                                                                                                                   |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Revenues:                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Rental income                                                                                                                      |  | $                       | 339,541 |   |      | $ | 333,574 |      |  | $ | 314,516 |  
|Service business and other income                                                                                                  |  |                         | 16,816  |   |      |   | 4,386   |      |  |   | 5,042   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                   |  |                         | 356,357 |   |      |   | 337,960 |      |  |   | 319,558 |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Expenses:                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Property operating and maintenance                                                                                                 |  |                         | 88,305  |   |      |   | 82,893  |      |  |   | 70,787  |  
|Real estate taxes                                                                                                                  |  |                         | 34,276  |   |      |   | 38,420  |      |  |   | 36,343  |  
|General and administrative and personnel costs                                                                                     |  |                         | 10,988  |   |      |   | 10,361  |      |  |   | 10,396  |  
|Expenses of service business                                                                                                       |  |                         | 10,513  |   |      |   |        |      |  |   |        |  
|Interest expense                                                                                                                   |  |                         | 69,814  |   |      |   | 67,081  |      |  |   | 64,472  |  
|Amortization of deferred financing costs                                                                                           |  |                         | 2,284   |   |      |   | 1,832   |      |  |   | 1,974   |  
|Depreciation and amortization                                                                                                      |  |                         | 78,193  |   |      |   | 67,453  |      |  |   | 57,851  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                   |  |                         | 294,373 |   |      |   | 268,040 |      |  |   | 241,823 |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Merger termination fee, net                                                                                                        |  |                         |        |   |      |   |        |      |  |   | 17,000  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                         | 61,984  |   |      |   | 69,920  |      |  |   | 94,735  |  
|Minority interests                                                                                                                 |  |                         | (10,437 | ) |      |   | (10,717 | )    |  |   | (17,247 | )
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                         | 2,555   |   |      |   | 3,154   |      |  |   | 3,131   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                                                                                  |  |                         | 54,102  |   |      |   | 62,357  |      |  |   | 80,619  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Discontinued operations:                                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from discontinued operations                                                                                                |  |                         | 180     |   |      |   | 3,960   |      |  |   | 8,306   |  
|(Loss)/gain from disposition of discontinued operations                                                                            |  |                         | (4,457  | ) |      |   | 8,430   |      |  |   |        |  
|Minority interests related to discontinued operations                                                                              |  |                         | 157     |   |      |   | (466    | )    |  |   | (354    | )
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                   |  |                         | (4,120  | ) |      |   | 11,924  |      |  |   | 7,952   |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income before gain on sale of properties and impairment loss of real estate                                                        |  |                         | 49,982  |   |      |   | 74,281  |      |  |   | 88,571  |  
|Gain on sale of properties including land                                                                                          |  |                         | 9,435   |   |      |   |        |      |  |   | 18,660  |  
|Impairment loss on real estate                                                                                                     |  |                         |        |   |      |   |        |      |  |   | (4,765  | )
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                                         |  | $                       | 59,417  |   |      | $ | 74,281  |      |  | $ | 102,466 |  
|Preferred dividends                                                                                                                |  |                         | (8,452  | ) |      |   | (8,358  | )    |  |   | (7,887  | )
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income applicable to common shareholders                                                                                       |  | $                       | 50,965  |   |      | $ | 65,923  |      |  | $ | 94,579  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic earnings per common share:                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.37    |   |      | $ | 1.41    |      |  | $ | 2.36    |  
|Discontinued operations                                                                                                            |  | $                       | (0.10   | ) |      | $ | 0.31    |      |  | $ | 0.21    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income applicable to common shareholdersbasic                                                                                 |  | $                       | 1.27    |   |      | $ | 1.72    |      |  | $ | 2.57    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Weighted average number of common shares outstandingbasic                                                                         |  |                         | 40,068  |   |      |   | 38,409  |      |  |   | 36,736  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Diluted earnings per common share:                                                                                                 |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.37    |   |      | $ | 1.40    |      |  | $ | 2.31    |  
|Discontinued operations                                                                                                            |  | $                       | (0.10   | ) |      | $ | 0.31    |      |  | $ | 0.20    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income applicable to common shareholdersdiluted                                                                               |  | $                       | 1.27    |   |      | $ | 1.71    |      |  | $ | 2.51    |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Weighted average number of common shares and common share equivalentsoutstandingdiluted                                           |  |                         | 40,270  |   |      |   | 38,649  |      |  |   | 40,849  |  
|                                                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



F-4



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS EQUITY



For the Three Years Ending December 31, 2003

(dollars in thousands, except per share data)



|                                                                |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ----- | ------- | - | --------------- | - | ------------ |  | ------------------------ | --- | ----------------------- | - | ------- | -------------------- | - | -------- | ----------------------------------- |  | - | -------------------------------------------------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Total |         |   | Preferredshares |   | Commonshares |  | Additionalpaid-incapital |     | Commonshares intreasury |   |         | Unearnedcompensation |   |          | Accumulatedothercomprehensiveincome |  |   | (Distributions in excess of earnings)/ retained earnings |  
|Balance at December 31, 2000                                    |  | $     | 806,264 |   |                 | $ | 100,000      |  | $                        | 407 |                         | $ | 802,818 |                      | $ | (92,636  | )                                   |  | $ | (3,186                                                   | ) |  |   |         |   |  | $ | (1,139  | )
|Issuance of 1,329,383 common shares                             |  |       | 28,294  |   |                 |   |              |  |                          | 13  |                         |   | 28,281  |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Restricted share grants (89,700 common shares)                  |  |       | 784     |   |                 |   |              |  |                          | 1   |                         |   | 2,215   |                      |   |          |                                     |  |   | (1,432                                                   | ) |  |   |         |   |  |   |         |  
|Amortization of share grants                                    |  |       | 1,810   |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   | 1,810                                                    |   |  |   |         |   |  |   |         |  
|Share grants forfeited (12,244 shares)                          |  |       |        |   |                 |   |              |  |                          |     |                         |   |         |                      |   | (252     | )                                   |  |   | 252                                                      |   |  |   |         |   |  |   |         |  
|Purchase of 974,394 treasury shares                             |  |       | (25,340 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   | (25,340  | )                                   |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Distributions declared ($2.09 per common share)                 |  |       | (76,936 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (76,936 | )
|Preferred distributions declared ($2.09 per preferred share)    |  |       | (7,887  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (7,887  | )
|Unrealized gain on inv. in securities                           |  |       | 366     |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  | $ | 366     |   |  |   |         |  
|Unrealized loss on interest rate hedges:                        |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Cumulative transition adjustment                                |  |       | (2,513  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | (2,513  | ) |  |   |         |  
|Unrealized loss for the period                                  |  |       | (7,977  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | (7,977  | ) |  |   |         |  
|Reclassification adjustment for loss included in earnings       |  |       | 469     |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | 469     |   |  |   |         |  
|Net income                                                      |  |       | 102,466 |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | 102,466 |  
|                                                                |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                    |  |       | 819,800 |   |                 |   | 100,000      |  |                          | 421 |                         |   | 833,314 |                      |   | (118,228 | )                                   |  |   | (2,556                                                   | ) |  |   | (9,655  | ) |  |   | 16,504  |  
|Issuance of 1,828,260 common shares                             |  |       | 46,459  |   |                 |   |              |  |                          | 18  |                         |   | 46,441  |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Restricted share grants (30,600 common shares)                  |  |       |        |   |                 |   |              |  |                          |     |                         |   | 859     |                      |   |          |                                     |  |   | (859                                                     | ) |  |   |         |   |  |   |         |  
|Amortization of share grants                                    |  |       | 1,632   |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   | 1,632                                                    |   |  |   |         |   |  |   |         |  
|Share grants forfeited (12,777 shares)                          |  |       |        |   |                 |   |              |  |                          |     |                         |   |         |                      |   | (304     | )                                   |  |   | 304                                                      |   |  |   |         |   |  |   |         |  
|Purchase of 494,365 treasury shares                             |  |       | (14,196 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   | (14,196  | )                                   |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Issuance of common shares in treasury (613,750 common shares)   |  |       | 16,535  |   |                 |   |              |  |                          |     |                         |   | 2,283   |                      |   | 14,252   |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Distributions declared ($2.22 per common share)                 |  |       | (85,807 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (85,807 | )
|Preferred distributions declared ($2.22 per preferred share)    |  |       | (8,358  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (8,358  | )
|Unrealized loss on inv. in securities                           |  |       | (104    | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | (104    | ) |  |   |         |  
|Unrealized loss on interest rate hedges:                        |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Unrealized loss for the period                                  |  |       | (6,587  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | (6,587  | ) |  |   |         |  
|Reclassification adjustment for loss included in earnings       |  |       | 578     |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | 578     |   |  |   |         |  
|Net Income                                                      |  |       | 74,281  |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | 74,281  |  
|                                                                |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                    |  |       | 844,233 |   |                 |   | 100,000      |  |                          | 439 |                         |   | 882,897 |                      |   | (118,476 | )                                   |  |   | (1,479                                                   | ) |  |   | (15,768 | ) |  |   | (3,380  | )
|Issuance of 1,713,377 common shares                             |  |       | 45,489  |   |                 |   |              |  |                          | 18  |                         |   | 45,471  |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Restricted share grants (93,250 common shares)                  |  |       |        |   |                 |   |              |  |                          | 1   |                         |   | 2,432   |                      |   |          |                                     |  |   | (2,433                                                   | ) |  |   |         |   |  |   |         |  
|Amortization of share grants                                    |  |       | 1,736   |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   | 1,736                                                    |   |  |   |         |   |  |   |         |  
|Common shares in deferred comp. plan                            |  |       | (2,150  | ) |                 |   |              |  |                          |     |                         |   | 16      |                      |   | (2,166   | )                                   |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Purchase of 391,641 treasury shares                             |  |       | (12,098 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   | (12,098  | )                                   |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Issuance of common shares in treasury (2,300,000 common shares) |  |       | 66,470  |   |                 |   |              |  |                          |     |                         |   | 11,730  |                      |   | 54,740   |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Distributions declared ($2.24 per common share)                 |  |       | (91,071 | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (91,071 | )
|Preferred distributions declared ($2.24 per preferred share)    |  |       | (8,453  | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | (8,453  | )
|Unrealized loss on inv. in securities                           |  |       | (83     | ) |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | (83     | ) |  |   |         |  
|Share options expensed                                          |  |       | 98      |   |                 |   |              |  |                          |     |                         |   | 98      |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Unrealized gain on interest rate hedges:                        |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Unrealized gain for the period                                  |  |       | 8,390   |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | 8,390   |   |  |   |         |  
|Reclassification adjustment for loss included in earnings       |  |       | 263     |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   | 263     |   |  |   |         |  
|Net income                                                      |  |       | 59,417  |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   | 59,417  |  
|                                                                |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                    |  | $     | 912,241 |   |                 | $ | 100,000      |  | $                        | 458 |                         | $ | 942,644 |                      | $ | (78,000  | )                                   |  | $ | (2,176                                                   | ) |  | $ | (7,198  | ) |  | $ | (43,487 | )
|                                                                |  |       |         |   |                 |   |              |  |                          |     |                         |   |         |                      |   |          |                                     |  |   |                                                          |   |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



F-5



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(dollars in thousands)



|                                                            |  |                         |        |   |      |   |        |      |  |   |         |  
|----------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                            |  | Year Ended December 31, |       
|                                                            |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|Net income                                                  |  | $                       | 59,417 |   |      | $ | 74,281 |      |  | $ | 102,466 |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |         |  
|                                                            |  |                         |       
|Unrealized gains and losses on securities:                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Unrealized (losses)/gains arising during the period         |  |                         | (83    | ) |      |   | (104   | )    |  |   | 366     |  
|Unrealized gains/(losses) on interest rate hedges:          |  |                         |        |   |      |   |        |      |  |   |         |  
|Cumulative transition adjustment                            |  |                         |       |   |      |   |       |      |  |   | (2,513  | )
|Unrealized gains/(losses) arising during the period         |  |                         | 8,390  |   |      |   | (6,587 | )    |  |   | (7,977  | )
|Reclassification adjustment for losses included in earnings |  |                         | 263    |   |      |   | 578    |      |  |   | 469     |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |         |  
|Other comprehensive income                                  |  |                         | 8,570  |   |      |   | (6,113 | )    |  |   | (9,655  | )
|                                                            |  |                         |        |   |      |   |        |      |  |   |         |  
|                                                            |  |                         |       
|Comprehensive income                                        |  | $                       | 67,987 |   |      | $ | 68,168 |      |  | $ | 92,811  |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



F-6



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)



|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                        |  | Year Ended December 31, |         
|                                                                                        |  | 2003                    |          |   | 2002 |   |          | 2001 | 
|Cash Flows from Operating Activities:                                                   |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income                                                                              |  | $                       | 59,417   |   |      | $ | 74,281   |      |  | $ | 102,466  |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                         |          |   |      |   |          |      |  |   |          |  
|Minority interests                                                                      |  |                         | 10,280   |   |      |   | 11,183   |      |  |   | 17,601   |  
|Gain on sale of real estate, net of losses                                              |  |                         | (4,978   | ) |      |   | (8,430   | )    |  |   | (18,660  | )
|Loss on impairment of real estate                                                       |  |                         | 1,792    |   |      |   | 2,855    |      |  |   | 4,765    |  
|Provision for doubtful accounts                                                         |  |                         | 2,274    |   |      |   | 4,626    |      |  |   | (418     | )
|Depreciation and amortization                                                           |  |                         | 80,256   |   |      |   | 73,457   |      |  |   | 64,268   |  
|Amortization of deferred financing costs                                                |  |                         | 2,284    |   |      |   | 1,832    |      |  |   | 1,974    |  
|Earnings in excess of distributions from joint ventures and unconsolidated subsidiaries |  |                         |         |   |      |   | (162     | )    |  |   |         |  
|Non-cash compensation                                                                   |  |                         | 2,687    |   |      |   | 1,757    |      |  |   | 1,934    |  
|Reclassification of accumulated other comprehensive income                              |  |                         | 263      |   |      |   | 578      |      |  |   | 469      |  
|Gain on derivative financial instrument                                                 |  |                         | (312     | ) |      |   | (301     | )    |  |   |         |  
|Changes in assets and liabilities:                                                      |  |                         |          |   |      |   |          |      |  |   |          |  
|Deferred charges and other assets                                                       |  |                         | (2,434   | ) |      |   | (3,585   | )    |  |   | 2,547    |  
|Accounts receivables                                                                    |  |                         | (10,030  | ) |      |   | (3,279   | )    |  |   | (6,657   | )
|Escrowed cash                                                                           |  |                         | (1,430   | ) |      |   | 3,191    |      |  |   | 10,512   |  
|Other payables/receivables (affiliates)                                                 |  |                         |         |   |      |   | 2,971    |      |  |   | (821     | )
|Accounts payable and other liabilities                                                  |  |                         | (6,444   | ) |      |   | (363     | )    |  |   | (19,556  | )
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                               |  |                         | 133,625  |   |      |   | 160,611  |      |  |   | 160,424  |  
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                                                        |  |                         |         
|Cash Flows from Investing Activities:                                                   |  |                         |          |   |      |   |          |      |  |   |          |  
|Development/redevelopment of real estate                                                |  |                         | (11,002  | ) |      |   | (26,294  | )    |  |   | (89,492  | )
|Purchase of real estate                                                                 |  |                         | (181,706 | ) |      |   | (113,985 | )    |  |   | (132,058 | )
|Purchase of mortgage loan                                                               |  |                         |         |   |      |   | (47,000  | )    |  |   |         |  
|Capitalized expenditures for in-service properties                                      |  |                         | (35,236  | ) |      |   | (27,187  | )    |  |   | (27,369  | )
|Proceeds from the sale of real estate                                                   |  |                         | 85,116   |   |      |   | 54,631   |      |  |   | 196,854  |  
|Distributions in excess of earnings of joint ventures and unconsolidated subsidiaries   |  |                         | 315      |   |      |   |         |      |  |   | 2,609    |  
|Investment in joint ventures and unconsolidated subsidiaries                            |  |                         |         |   |      |   |         |      |  |   | (1,438   | )
|Purchase of interest in Prentiss Properties Resources, Inc.                             |  |                         | (67      | ) |      |   |         |      |  |   |         |  
|Cash from consolidation of Prentiss Properties Resources, Inc.                          |  |                         | 461      |   |      |   |         |      |  |   |         |  
|Investments in securities and insurance contracts                                       |  |                         | (185     | ) |      |   | (670     | )    |  |   | (1,960   | )
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                   |  |                         | (142,304 | ) |      |   | (160,505 | )    |  |   | (52,854  | )
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                                                        |  |                         |         
|Cash Flows from Financing Activities:                                                   |  |                         |          |   |      |   |          |      |  |   |          |  
|Net proceeds from sale of common shares                                                 |  |                         | 100,801  |   |      |   | 52,558   |      |  |   | 10,150   |  
|Purchase of treasury shares                                                             |  |                         |         |   |      |   | (2,472   | )    |  |   | (10,007  | )
|Redemption of preferred units                                                           |  |                         |         |   |      |   | (50,535  | )    |  |   |         |  
|Capital contribution from consolidated joint ventures                                   |  |                         | 190      |   |      |   | 1,488    |      |  |   |         |  
|Distributions paid to limited partners                                                  |  |                         | (3,347   | ) |      |   | (3,320   | )    |  |   | (3,400   | )
|Distributions paid to common shareholders                                               |  |                         | (89,020  | ) |      |   | (83,776  | )    |  |   | (74,873  | )
|Distributions paid to preferred shareholders                                            |  |                         | (8,452   | ) |      |   | (8,264   | )    |  |   | (7,699   | )
|Distributions paid to preferred unitholders                                             |  |                         | (8,636   | ) |      |   | (9,843   | )    |  |   | (12,985  | )
|Payment for early extinguishment of debt                                                |  |                         |         |   |      |   |         |      |  |   | (50      | )
|Proceeds from mortgages and notes payable                                               |  |                         | 566,685  |   |      |   | 559,800  |      |  |   | 480,125  |  
|Repayments of mortgages and notes payable                                               |  |                         | (548,677 | ) |      |   | (456,507 | )    |  |   | (488,438 | )
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by/(used in) financing activities                                     |  |                         | 9,544    |   |      |   | (871     | )    |  |   | (107,177 | )
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                                                        |  |                         |         
|Net change in cash and cash equivalents                                                 |  |                         | 865      |   |      |   | (765     | )    |  |   | 393      |  
|Cash and cash equivalents, beginning of year                                            |  |                         | 5,080    |   |      |   | 5,845    |      |  |   | 5,452    |  
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $                       | 5,945    |   |      | $ | 5,080    |      |  | $ | 5,845    |  
|Supplemental Cash Flow Information:                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                                  |  | $                       | 69,094   |   |      | $ | 68,753   |      |  | $ | 68,822   |  
|                                                                                        |  |                         |          |   |      |   |          |      |  |   |          |  



The accompanying notes
are an integral part of these consolidated financial statements.



F-7



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





|(1) | The Organization and 2003 Transactions
|--- | --------------------------------------



Organization



We are a self-administered and self-managed Maryland REIT that acquires, owns, manages, leases, develops and builds primarily office properties throughout
the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, through our own employees. We are self-managed in that we provide all the management and maintenance services that our
properties require through our own employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P., and its subsidiaries, and two
management service companies, Prentiss Properties Resources, Inc. and its subsidiaries and Prentiss Properties Management, L.P. The ownership of the operating partnership was as follows at December 31, 2003 and 2002:



|                          |  |              |  |        |   |  |                                     |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|------------------------- |  | ------------ |  | ------ | - |  | ----------------------------------- |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | -
|2003 (units in thousands) |  | Common Units |  | %      |   |  | Series DConvertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |  
|Prentiss Properties Trust |  | 42,696       |  | 96.66  | % |  | 3,774                               |  | 100.00 | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | %
|Third parties             |  | 1,475        |  | 3.34   | % |  |                                    |  | 0.00   | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                     |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|Total                     |  | 44,171       |  | 100.00 | % |  | 3,774                               |  | 100.00 | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                     |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|                          |  |              |  |        |   |  |                                     | 
|2002 (units in thousands) |  | Common Units |  | %      |   |  | Series DConvertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |  
|Prentiss Properties Trust |  | 38,981       |  | 96.29  | % |  | 3,774                               |  | 100.00 | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | %
|Third parties             |  | 1,501        |  | 3.71   | % |  |                                    |  | 0.00   | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                     |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|Total                     |  | 40,482       |  | 100.00 | % |  | 3,774                               |  | 100.00 | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                     |  |        |   |  |                          |  |        |   |  |                          |  |        |  



Our primary business
is the ownership and operation of office and industrial properties throughout the United States. Our organization which includes approximately 475 employees consists of a corporate office located in Dallas, Texas and five regional offices each of
which operates under the guidance of a member of our senior management team. The following are the 11 markets in which our properties are located with the first market being the location of each regional office:



|                    |  |                                           
|------------------- |  | ------------------------------------------
|Region              |  | Market                                    
|Mid-Atlantic        |  | Metropolitan Washington, DC               
|Midwest             |  | Chicago, Suburban Detroit                 
|Southwest           |  | Dallas/Fort Worth, Austin, Denver, Houston
|Northern California |  | Oakland, Sacramento                       
|Southern California |  | San Diego, Los Angeles                    



As of December 31,
2003, we owned interests in a diversified portfolio of 137 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  |                    |  |                        
|--------------------- |  | ------------------ |  | -----------------------
|                      |  | Number ofBuildings |  | Net RentableSquare Feet
|                      |  |                    |  | (in thousands)         
|Office properties     |  | 106                |  | 15,468                 
|Industrial properties |  | 31                 |  | 2,294                  
|                      |  |                    |  |                        
|Total                 |  | 137                |  | 17,762                 
|                      |  |                    |  |                        



In addition to
managing properties that we own, we manage approximately 11.0 million net rentable square feet in office, industrial and other properties for third parties.



F-8



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



We have determined that our reportable segments are those that are based on our method of internal
reporting, which disaggregates our business based upon our five geographic regions. In April 2001, we completed and asset exchange with Brandywine Realty Trust, which included the sale of all of the properties comprising our Northeast Region, and as
a result, subsequent to April 2001, we no longer had operations in the Northeast Region. As of December 31, 2003, our reportable segments include (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California; and (5) Southern California.



2003 Transactions



Acquisitions



During the year ended December 31, 2003, we acquired 11 office buildings totaling approximately 1.1 million net rentable
square feet and sold 11 office buildings containing approximately 983,000 net rentable square feet as detailed below.



|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      
|------------------------------ |  | --------------- |  | ------------------ |  | -------------------- |  | ------------------- |  | ------------------------------------------ |  | ---------------------------------- | -----
|Acquired Properties            |  | Segment         |  | Market             |  | Month of Acquisition |  | Number of Buildings |  | Net Rentable Square Feet(1) (in thousands) |  | Acquisition Price(2) (in millions)
|Park West C3                   |  | Southwest       |  | Dallas/Ft. Worth   |  | Feb. 2003            |  | 1                   |  | 339                                        |  | $                                  | 28.1 
|410 Warrenville Road           |  | Midwest         |  | Chicago            |  | May 2003             |  | 1                   |  | 60                                         |  |                                    | 8.7  
|Corporate Lakes III            |  | Midwest         |  | Chicago            |  | June 2003            |  | 1                   |  | 124                                        |  |                                    | 22.6 
|2291 Wood Oak Drive            |  | Mid-Atlantic    |  | Metro. Wash., D.C. |  | Aug. 2003            |  | 1                   |  | 228                                        |  |                                    | 52.2 
|Camino West Corporate Park     |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 54                                         |  |                                    | 8.9  
|Carlsbad Airport Plaza         |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 62                                         |  |                                    | 10.5 
|La Place Court                 |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 81                                         |  |                                    | 13.6 
|Pacific Ridge Corporate Centre |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 2                   |  | 121                                        |  |                                    | 23.9 
|Pacific View Plaza             |  | Southern Calif. |  | San Diego          |  | Nov. 2003            |  | 1                   |  | 52                                         |  |                                    | 10.2 
|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      
|                               |  |                 |  |                    |  |                      |  | 11                  |  | 1,121                                      |  | $                                  | 178.7
|                               |  |                 |  |                    |  |                      |  |                     |  |                                            |  |                                    |      



|(1) | Net rentable square feet defines the area of a property for which a tenant is required to pay
rent, which includes the actual rentable area plus a portion of the common areas of the property allocated to a tenant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The acquisitions were funded with proceeds from our revolving credit facility, property sales
as described below and proceeds generated from the sale of common shares as described below.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 5, 2003, we acquired a parcel of land located adjacent to one of our Northern California properties for gross proceeds of approximately $6.1
million. The acquisition was funded with proceeds from a land sale discussed in the dispositions section below.



Dispositions



|                          |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     
|------------------------- |  | ------------ |  | ------- |  | -------------------- |  | ------------------- |  | --------------------------------------- |  | ------------------------------- | ----
|Properties Sold           |  | Segment      |  | Market  |  | Month of Disposition |  | Number of Buildings |  | Net Rentable Square Feet (in thousands) |  | Gross Proceeds(1) (in millions)
|11811 North Freeway       |  | Southwest    |  | Houston |  | June 2003            |  | 1                   |  | 156                                     |  | $                               | 4.5 
|Westheimer Central Plaza  |  | Southwest    |  | Houston |  | June 2003            |  | 1                   |  | 183                                     |  |                                 | 11.5
|Cumberland Office Park(2) |  | Mid-Atlantic |  | Atlanta |  | July 2003            |  | 9                   |  | 644                                     |  |                                 | 40.1
|                          |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     
|                          |  |              |  |         |  |                      |  | 11                  |  | 983                                     |  | $                               | 56.1
|                          |  |              |  |         |  |                      |  |                     |  |                                         |  |                                 |     



|(1) | We recognized a $4.5 million loss on the sale of the properties. Proceeds from the property
sales were used to repay a portion of the outstanding borrowings under our revolving credit facility and to fund acquisitions as described above.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-9



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(2) | Prior to the disposition of the Cumberland Office Park, we recorded an impairment loss of
$1.8 million during 2003 representing the difference between the carrying amount and the fair value of the buildings, less cost to sell.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 28, 2003, we sold to an unrelated third party a 9.2 acre parcel of land located in the Sacramento, California area. The land was classified as
land held for development on our consolidated balance sheet. The sale resulted in net proceeds of approximately $2.4 million and a gain on sale of $1.1 million. The proceeds from the sale were originally placed in an escrow account pending a 1031
exchange for tax purposes. The proceeds were later used in the May 2003 acquisition of the 410 Warrenville Road property.



On May 28, 2003, we completed with an unrelated third party a sale/exchange of our interest in a 1.5 acre parcel of land located adjacent to one of our
Chicago office properties. In the transaction, we exchanged our ownership interest in the land for $1.0 million cash and upon completion of the parking garage to be constructed on the site, we will receive structured parking stalls valued at $3.2
million. The parking stalls will be used by tenants within our office property. The land was classified as land held for development on our consolidated balance sheet. We recognized a gain on sale from the transaction of $778,000. Proceeds from the
transaction were used to repay a portion of the outstanding borrowings under our revolving credit facility.



On December 4, 2003, we sold to an unrelated third party a 2.5 acre parcel of land adjacent to one of our Northern California properties. The land was
classified as land held for development on our consolidated balance sheet. The sale resulted in gross proceeds of approximately $31.5 million, and a gain on sale of $7.5 million. Of the $31.5 million in gross proceeds, $2.5 million was recorded as a
note receivable on our consolidated balance sheet, $2.8 was placed in an escrow account pending a possible 1031 exchange for tax purposes, $6.1 million was used to purchase a parcel of land as described above, and the balance was used to repay a
portion of the outstanding borrowings under our revolving credit facility.



In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for financial statements issued for fiscal years beginning
after December 15, 2001, income and gain/(loss) for real estate properties sold and real estate properties held for sale are to be reflected in the consolidated statements of income as discontinued operations. Below is a summary of our combined
results of operations from the properties disposed of or held for sale and included in discontinued operations during the periods presented. The summary includes the results of operations before gain/(loss) from disposition of discontinued
operations for the three years ended December 31, 2003.



Discontinued
Operations



|                                    |  |                         |        |   |      |   |        |      |  |   |       
|----------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                    |  | Year Ended December 31,
|(in thousands)                      |  | 2003                    |        |   | 2002 |   |        | 2001
|Rental income                       |  | $                       | 8,341  |   |      | $ | 22,680 |      |  | $ | 24,861
|                                    |  |                         |        |   |      |   |        |      |  |   |       
|Property revenues                   |  |                         | 8,341  |   |      |   | 22,680 |      |  |   | 24,861
|                                    |  |                         |        |   |      |   |        |      |  |   |       
|Property operating and maintenance  |  |                         | 3,670  |   |      |   | 7,818  |      |  |   | 8,126 
|Real estate taxes                   |  |                         | 636    |   |      |   | 2,043  |      |  |   | 2,012 
|Depreciation and amortization       |  |                         | 2,063  |   |      |   | 6,004  |      |  |   | 6,417 
|                                    |  |                         |        |   |      |   |        |      |  |   |       
|Property expenses                   |  |                         | 6,369  |   |      |   | 15,865 |      |  |   | 16,555
|                                    |  |                         |        |   |      |   |        |      |  |   |       
|Loss on impairment of real estate   |  |                         | (1,792 | ) |      |   | (2,855 | )    |  |   |      
|                                    |  |                         |        |   |      |   |        |      |  |   |       
|Income from discontinued operations |  | $                       | 180    |   |      | $ | 3,960  |      |  | $ | 8,306 
|                                    |  |                         |        |   |      |   |        |      |  |   |       



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Development



During the year ended December 31, 2003, we transitioned two office properties containing in the aggregate 222,000 net rentable square feet from
development into operations. The properties include one office property containing 40,000 net rentable square feet in the Carlsbad California area and one office property containing 182,000 net rentable square feet in the Northern Virginia area. The
December 31, 2002 carrying amount of these development projects which totaled $41.4 million was reclassified on our consolidated balance sheet to land, building and improvements and deferred charges and other assets, net in the amounts $5.7 million,
$31.5 million and $4.2 million, respectively.



Financing



On January 30, 2003, we completed a loan modification with Farm Bureau Life
Insurance Company for the purpose of swapping the collateral underlying the loan. The purpose of the modification was to provide us flexibility with respect to hold/sell decisions for the underlying collateral. At the time of the modification, the
in-place loan had an outstanding balance of approximately $5.6 million, an interest rate of 8.38% and a maturity of August 1, 2006. Per the modification, we received an additional $1.6 million of cash borrowings resulting in a modified principal
balance of $7.2 million. The loan as modified has an interest rate of 7.75% per annum and a maturity date of January 1, 2007. The additional proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.



On May 22, 2003, we completed a $100.0 million, 5-year
unsecured term loan with a group of lenders headed by Eurohypo AG, as Administrative Agent. The loan requires interest only payments until maturity. Currently, interest is computed using a rate equal to 30-day LIBOR plus 137.5 basis points. Based on
overall leverage, the spread over 30-day LIBOR can fluctuate between 112.5 basis point and 162.5 basis points. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.



On July 16, 2003, we completed a loan modification with Eurohypo AG for the
purpose of converting a $14.1 million loan from a collateralized obligation to an unsecured obligation. The terms of the loan which include fixed rate interest equal to 7.46% per annum and a maturity of July 15, 2009 remain unchanged.



On November 3, 2003, using proceeds from our revolving credit facility, we
repaid two mortgage loans totaling in the aggregate $25.8 million. The loans totaling $2.7 million and $23.1 million had fixed interest rates of 8.63% and 7.84% per annum and were scheduled to mature on December 1, 2003 and February 1, 2004,
respectively.



On November 10, 2003, we negotiated an interest
rate reduction on the $72.1 million mortgage collateralized by our Burnett Plaza property in Fort Worth, Texas. The interest rate was reduced from 30-day LIBOR plus 215 basis points to 30-day LIBOR plus 150 basis points. In exchange for the pricing
reduction, we agreed to pay the principal balance of the loan down by $6.1 million, to $66.0 million and agreed to a one year prepayment lockout from the date of the amendment. The paydown was funded with proceeds from our revolving credit facility.
The other terms of the loan which included interest only payments until maturity and a maturity date of July 9, 2005 remain unchanged.



F-11



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



During the year ended December 31, 2003, we completed three swap agreements as detailed below:



|                |  |                        |  |                                                   |  |                |  |               
|--------------- |  | ---------------------- |  | ------------------------------------------------- |  | -------------- |  | --------------
|Notional Amount |  | Swap Rate Paid (Fixed) |  | Swap Rate Received(Variable) at December 31, 2003 |  | Effective Date |  | Maturity Date 
|$ 50 million    |  | 2.270%                 |  | 1.120%                                            |  | August 2003    |  | August 2007   
|$ 25 million    |  | 2.277%                 |  | 1.120%                                            |  | August 2003    |  | August 2007   
|$ 30 million    |  | 3.857%                 |  | 1.120%                                            |  | October 2004   |  | September 2008
|Total           |  |                        |  |                                                   |  |                |  |               



Beginning on the
effective date, each swap effectively locks in our cost of funds at the swap rate paid (before the spread over LIBOR) on variable rate borrowings in amounts equal to the respective notional amounts above.



Equity



During the year ended December 31, 2003, 4,106,627 common shares of beneficial interest, par value $.01, were issued. The
table below details the common shares issued during the period, common shares placed in treasury during the period and the common shares outstanding at December 31, 2003:



|                                                                     |  |            |  
|-------------------------------------------------------------------- |  | ---------- | -
|Common shares outstanding at December 31, 2002                       |  | 38,981,355 |  
|Common shares issued:                                                |  |            |  
|Equity offering(1)                                                   |  | 2,300,000  |  
|Dividend Reinvestment and Share Purchase Plan(2)                     |  | 361,687    |  
|Dribble Plan(3)                                                      |  | 544,100    |  
|Share options exercised                                              |  | 745,558    |  
|1996 Share Incentive Plan                                            |  | 93,250     |  
|Employees Share Purchase Plan                                       |  | 32,065     |  
|Conversion of operating partnership units                            |  | 25,667     |  
|Trustees Share Incentive Plan                                       |  | 4,300      |  
|                                                                     |  |            |  
|                                                                     |  | 4,106,627  |  
|Less common shares placed in treasury:                               |  |            |  
|Common shares surrendered in connection with share options exercised |  | (391,641   | )
|Common shares held pursuant to our Key Employee Share Option Plan    |  | (83,047    | )
|                                                                     |  |            |  
|Common shares outstanding at December 31, 2003                       |  | 42,613,294 |  
|                                                                     |  |            |  



|(1) | During the month of August 2003, we completed the sale of 2.3 million common shares, which included 300,000 common shares to cover the underwriters
over-allotment option, at $28.90 per share, net of underwriting discounts. After deducting underwriting discounts and commissions, we received net proceeds of approximately $66.5 million. The net proceeds of the sale of the common shares were
contributed to the operating partnership in exchange for common units of limited partnership interest in the operating partnership. Initially, proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving
credit facility. Subsequently, we used a portion of the proceeds to acquire the 2291 Wood Oak Drive building described above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | We have a Dividend Reinvestment and Share Purchase Plan which allows investors an option to
purchase common shares by making optional cash investments of $100 to $5,000 in a given month for current shareholders or $500 to $5,000 for persons who are not current shareholders. The plan also allows shareholders to purchase our common shares by
reinvesting all or a portion of cash dividends received on
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



our common or preferred shares. Purchases of greater than $5,000 can be accomplished by us granting a
waiver to the $5,000 limit. During the year ended December 31, 2003, pursuant to our Dividend Reinvestment and Share Purchase Plan, we issued 361,687 common shares resulting in net proceeds of $11.1 million. The proceeds were used to repay a portion
of the outstanding borrowings under our revolving credit facility.



|(3) | On June 10, 2002, we entered into a securities sales agreement with Brinson Patrick
Securities Corporation which we refer to as the Dribble Plan. Under the Dribble Plan we may sell, with Brinson Patrick acting as our sales agent, up to 3,000,000 of our common shares at the then market price directly to the public. During the year
ended December 31, 2003, we issued 544,100 common shares through the Dribble Plan resulting in net proceeds of $17.1 million. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Summary of Significant Accounting Policies
|--- | ------------------------------------------



Principles of Consolidation



Currently, we consolidate all subsidiaries that we control and we define control as the ownership of a majority of the voting interest of a subsidiary.
Our consolidated financial statements include the accounts of Prentiss Properties Trust, our operating partnership and other consolidated subsidiaries. All significant inter-company balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform to current year presentation with no impact on previously reported net income or shareholders equity.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. In
December 2003, the Financial Standards Board issued a revision to FASB Interpretation No. 46, FASB Interpretation No. 46(R). The Interpretation, as revised, requires consolidation of an entity by an enterprise if that enterprise will absorb a
majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. An entity subject to this Interpretation is called a variable interest entity. The disclosure
provisions of this Interpretation, as revised, are effective for financial statements issued after December 31, 2003. Per this Interpretation, as revised, a public entity that is not a small business issuer with a variable interest entity to which
the provisions of the Interpretation have not been applied as of December 24, 2003, shall apply this Interpretation no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of
this Interpretation, a public entity that is not a small business issuer shall apply this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after
December 15, 2003.



At December 31, 2002, our operating
partnership held a 98% non-voting interest in Prentiss Properties Resources, Inc. which we accounted for using the equity method of accounting.



Effective January 1, 2003, we acquired the remaining outstanding interest in Prentiss Properties Resources, Inc. for consideration of approximately
$67,000. As a result of this transaction, effective January 1, 2003, the accounts of Prentiss Properties Resources, Inc. are consolidated with and into the accounts of our operating partnership. Had this transaction not occurred, Prentiss Properties
Resources, Inc. would have been subject to consolidation as prescribed in the revised Interpretation.



Real Estate



We allocate
the purchase price of properties acquired to tangible and identified intangible assets acquired based on their fair values in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. These fair values
are derived as follows:



We record above-market and
below-market in-place lease values for acquired properties based on the present value (using a market interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid
pursuant to the in-place leases and (2) managements estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-



F-13



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



cancellable term of the lease for above-market leases and the initial term plus the term of the fixed rate renewal
option, if any for below-market leases. We perform this analysis on a lease (tenant) by lease (tenant) basis. The capitalized above-market lease values are amortized as a reduction to rental income over the remaining non-cancellable terms of the
respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term plus the term of the fixed rate renewal option, if any, of the respective leases.



The aggregate value of other intangible assets (in-place leases) acquired is
determined by applying a fair value model. Our estimates of fair value for other intangibles (in-place leases) includes an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market
conditions, and the costs to execute similar leases. In estimating the carrying costs, that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as
well as lost rental revenue during the expected lease-up period based on current market conditions. Costs to execute similar leases include leasing commissions, legal and other related costs. The value of in-place leases is amortized to expense over
the remaining non-cancelable term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value would be charged to expense.



Amounts allocated to land are derived from (1) comparable sales of raw land, (2) floor area ratio (FAR) specifics of the
land as compared to other developed properties (average land cost per FAR) and (3) our other local market knowledge.



Amounts allocated to buildings and improvements are calculated and recorded as if the building was vacant upon purchase as the value associated with any
in-place or above or below-market leases are allocated to such as discussed above. Depreciation is computed using the straight-line method over the estimated life of 30 to 40 years for office buildings and 25 to 30 years for industrial buildings.



Statement No. 141 is effective for business combinations for
which the date of acquisition is July 1, 2001, or later. Based on estimates of the fair value of the components of each real estate property acquired between July 1, 2001 and December 31, 2003, we allocated the purchase price as follows:



|                                            |  |                         |         |      |   |         |      |  |   |       
|------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | ---- |  | - | ------
|                                            |  | Year Ended December 31,
|(in thousands)                              |  | 2003                    |         | 2002 |   |         | 2001
|Land                                        |  | $                       | 33,173  |      | $ | 10,201  |      |  | $ | 3,000 
|Buildings and improvements                  |  | $                       | 107,506 |      | $ | 131,424 |      |  | $ | 15,221
|Tenant Improvements and leasing commissions |  | $                       | 28,159  |      | $ | 21,425  |      |  | $ |      
|Above/(below) market lease value            |  | $                       | 2,408   |      | $ | (2,423  | )    |  | $ |      
|In-place lease value at market              |  | $                       | 7,425   |      | $ |        |      |  | $ |      



We classify real
estate properties, leasehold improvements and land holdings as long-lived assets held for sale or long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying amount or fair value, less cost to sell. With respect to assets classified as held and used, we periodically review these assets to determine whether
our carrying amount will be recovered. All of our long-lived assets were classified as held and used at December 31, 2003. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. We recognize an impairment loss to the extent the carrying amount is not recoverable. The impairment loss is the amount by which the carrying amount exceeds the fair value.



As discussed above, we depreciate our buildings and improvements using the
straight-line method over an estimated useful life of 30 to 40 years for office buildings and 25 to 30 years for industrial buildings. Interest expense and other directly related expenses incurred during construction periods are capitalized and
depreciated commencing with the date the building is placed in service, on the same basis as the related asset. For the years ended December 31, 2003, 2002 and 2001, capitalized interest costs totaled $ 416,000, $3.4 million and $5.2 million,
respectively.



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Expenditures for repairs and maintenance are charged to operations as incurred. Significant
betterments are capitalized and depreciated over their estimated useful life. The cost and related accumulated depreciation for assets sold or retired are removed from the accounts with the resulting gain or loss reflected in net income for the
period.



Deferred Charges



Leasing costs and leasehold improvements are deferred and amortized
on a straight-line basis over the terms of the related lease. Deferred financing costs are recorded at cost and are amortized using the effective interest method over the life of the related debt. Other deferred charges are amortized over terms
applicable to the expenditure.



Allowance for Doubtful Accounts



Accounts receivable are reduced by an allowance for
amounts that we estimate to be uncollectible. Our receivable balance is comprised primarily of accrued rental rate increases to be received over the life of in-place leases as well as rents and operating cost recoveries due from tenants. We
regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. We reserve all outstanding receivables that
are 90-days past due along with a portion of the remaining receivable balance that we feel is uncollectible based on our evaluation of the outstanding receivable balance. In addition, we increase our allowance for doubtful accounts for accrued
rental rate increases, if we determine such future rent is uncollectible.



Cash and Cash Equivalents



Cash and cash
equivalents consist of cash on hand and investments with maturities of three months or less from the date of purchase.



Escrowed Cash



Escrowed cash includes real estate tax, insurance and capital reserve deposits required pursuant to certain of our mortgage loan agreements.



Investments in Securities



Investments in securities consist of investments in marketable securities
held pursuant to our Key Employee Share Option Plan. We account for our investments in securities as available for sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Any decline in market value that is deemed to be other than temporary is recognized as a realized loss in the determination of net income for the period. No such realized loss has been recognized to date. Any change
in the market value of the investments which is deemed temporary is included as an unrealized gain or loss in accumulated other comprehensive income on our consolidated balance sheet. At December 31, 2003, we have an accumulated unrealized gain of
approximately $179,000 from our investments in securities. The unrealized gain is presented in accumulated other comprehensive income in our consolidated statement of changes in shareholders equity.



Investment in Insurance Contracts



Investments in insurance contracts consist of investments held
pursuant to our Executive Choice Deferred Compensation Plan as described in Note (16). We account for our investments in insurance contracts at the cash surrender value of the contracts at each balance sheet date in accordance with FASB Technical
Bulletin No. 85-4, Accounting for Purchase of Life Insurance.



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Investments in Joint Ventures and Unconsolidated Subsidiaries



As of December 31, 2003, we have investments in joint ventures which we
account for using the equity method of accounting including (i) our 50% interest in Broadmoor Austin Associates; (ii) and our 25% interest in Tysons International Partners.



We have a non-controlling interest in these investments and account for our interest using the equity method of accounting,
thus, we report our share of income and losses based on our ownership interest in the respective entities. At December 31, 2003, we classify our interest in subsidiaries as non-controlling when we hold less than a majority of the entities
outstanding voting stock. Any decline in market value that is deemed to be other than temporary is recognized as an impairment in equity in income of joint ventures and unconsolidated subsidiaries. Any excess of carrying amount of our
non-controlling interests over the book value of the underlying equity is amortized over 40 years from the date of purchase. For the three years ended December 31, 2003, we recognized amortization expense totaling approximately $254,000 per year.



Income Taxes



We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on our taxable income that is distributed to our shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income.



Leases



We, as lessor, have retained substantially all the risks and benefits of ownership and account for our leases as operating leases.



Revenue Recognition



In accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases, income on leases which includes scheduled
rental rate increases over the lease term is recognized on a straight-line basis. Income received from tenants for early lease terminations is recognized as earned.



Service business fees and other income items received are recognized as earned. Leasing fees are generally recognized upon
tenant occupancy of the leased premises unless such fees are irrevocably due and payable upon lease execution, in which case recognition occurs on the lease execution date.



Mandatorily Redeemable Preferred Units



In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which defines a mandatorily redeemable financial instrument as a financial instrument issued in the form of shares which embodies an unconditional obligation requiring
the issuer to redeem the instrument by transferring its assets at a specified or determinable date or upon an event certain to occur. Due to the redemption provisions of our Series E Preferred Units, in accordance with Statement No. 150 we
classified our Series E Preferred Units as mandatorily redeemable and thus a liability on our consolidated balance sheet at December 31, 2003.



Distributions



We pay regular quarterly distributions to the holders of our outstanding common shares. These distributions are dependent on distributions from our
operating partnership. The holders of our Series D Convertible Preferred Shares receive a quarterly dividend per share equal to the per share distribution paid on our common shares.



F-16



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Earnings and profits, which will determine the taxability of distributions to shareholders, will
differ from income reported for financial reporting purposes due to the differences for federal tax purposes, primarily in the estimated useful lives used to compute depreciation, timing of the recognition of capital gain or loss transactions,
changes in our allowance for doubtful accounts, and the recognition of rental income on a straight-line basis for financial reporting purposes.



Minority Interest



Minority interest in the operating partnership represents the limited partners proportionate share of the equity in our operating
partnership. The operating partnership pays a regular quarterly distribution to the holders of common and preferred units. Income is allocated to minority interest based on the weighted average percentage ownership during the year.



Minority interest in real estate partnerships represents the other
partners proportionate share of the equity in certain real estate partnerships. Our operating partnership holds a majority controlling interest in the real estate partnerships and thus, consolidates the accounts with and into the accounts of
the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership during the year.



Concentration of Credit Risk



We place cash deposits at major banks. We believe that through our cash investment policy, the credit risk related to these deposits is minimal.



Use of Estimates in the Preparation of Financial Statements



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization
and allowance for doubtful accounts. Actual results could differ from our estimates.



Fair Value of Financial Instruments



Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures about the fair value of financial instruments whether or not such instruments are
recognizable in the balance sheet. Our financial instruments include receivables, cash and cash equivalents, escrowed cash, investments in securities, accounts payable, other accrued expenses, mortgages and notes payable and interest rate hedge
agreements. The fair values of these financial instruments, other than the fixed rate mortgages and notes payable, are not materially different from their carrying or contract amounts. We estimate the fair value of our consolidated fixed rate
mortgages and notes payable to exceed the carrying amount by $67.5 million at December 31, 2003.



Fair Value of Derivative Instruments



Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, beginning January 1, 2001, establishes accounting and
reporting standards for derivative instruments. Specifically it requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Changes in fair
value will affect either shareholders equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes.



During 2003, we recorded an increase in the fair value of our derivatives of $8.7 million. The increase of fair value was recorded as a credit of $8.4
million to other comprehensive income, and a gain in current period earnings of approximately $312,000.



F-17



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



On December 31, 2003, our derivative financial instruments were reported at their fair value as a
liability of $9.8 million and an asset of $1.8 million. Of the net liability, $7.4 million represents an unrealized net loss and is presented in accumulated other comprehensive income in our consolidated statement of changes in shareholders
equity.



Earnings Per Share



We calculate earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share, which requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Additionally, the statement requires a reconciliation of the numerator and
denominator used in computing basic and diluted earnings per share. The table below presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share for the years ended December 31, 2003, 2002 and
2001:



|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|----------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|(in thousands, except per share data)                                   |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Reconciliation of the numerator used for basic earnings per share       |  |      |        |   |      |   |        |      |  |   |         |  
|Income from continuing operations                                       |  | $    | 54,102 |   |      | $ | 62,357 |      |  | $ | 80,619  |  
|Preferred dividends                                                     |  |      | (8,452 | ) |      |   | (8,358 | )    |  |   | (7,887  | )
|Gain on sale of properties including land                               |  |      | 9,435  |   |      |   |       |      |  |   | 18,660  |  
|Impairment loss on real estate                                          |  |      |       |   |      |   |       |      |  |   | (4,765  | )
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Income from continuing operations applicable to common shareholders     |  | $    | 55,085 |   |      | $ | 53,999 |      |  | $ | 86,627  |  
|Discontinued operations                                                 |  |      | (4,120 | ) |      |   | 11,924 |      |  |   | 7,952   |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Net income applicable to common shareholders                            |  | $    | 50,965 |   |      | $ | 65,923 |      |  | $ | 94,579  |  
|Reconciliation of the denominator used for basic earnings per share     |  |      |        |   |      |   |        |      |  |   |         |  
|Weighted average common shares outstanding                              |  |      | 40,068 |   |      |   | 38,409 |      |  |   | 36,736  |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Basic earnings per share                                                |  | $    | 1.27   |   |      | $ | 1.72   |      |  | $ | 2.57    |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Reconciliation of the numerator used for dilutive earnings per share    |  |      |        |   |      |   |        |      |  |   |         |  
|Income from continuing operations                                       |  | $    | 54,102 |   |      | $ | 62,357 |      |  | $ | 80,619  |  
|Preferred dividends                                                     |  |      | (8,452 | ) |      |   | (8,358 | )    |  |   |        |  
|Gain on sale of properties including land                               |  |      | 9,435  |   |      |   |       |      |  |   | 18,660  |  
|Impairment loss on real estate                                          |  |      |       |   |      |   |       |      |  |   | (4,765  | )
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Income from continuing operations applicable to common shareholders     |  | $    | 55,085 |   |      | $ | 53,999 |      |  | $ | 94,514  |  
|Discontinued operations                                                 |  |      | (4,120 | ) |      |   | 11,924 |      |  |   | 7,952   |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|                                                                        |  | $    | 50,965 |   |      | $ | 65,923 |      |  | $ | 102,466 |  
|Reconciliation of the denominator used for dilutive earnings per share  |  |      |        |   |      |   |        |      |  |   |         |  
|Weighted average common shares outstanding                              |  |      | 40,068 |   |      |   | 38,409 |      |  |   | 36,736  |  
|Preferred shares(1)                                                     |  |      |       |   |      |   |       |      |  |   | 3,774   |  
|Options                                                                 |  |      | 202    |   |      |   | 240    |      |  |   | 339     |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Weighted average common shares and common share equivalents outstanding |  |      | 40,270 |   |      |   | 38,649 |      |  |   | 40,849  |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Diluted earnings per share                                              |  | $    | 1.27   |   |      | $ | 1.71   |      |  | $ | 2.51    |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |         |  



|(1) | Preferred shares for the year ended December 31, 2003 and 2002 are excluded from the
denominator in calculating dilutive earnings per share as such shares were anti-dilutive for the periods; therefore, the numerator used in the calculation of dilutive earnings per share is net income applicable to common
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-18



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



shareholders for the years ended December 31, 2003 and 2002 as compared to the year ended December
31, 2001, for which the numerator is net income.



Accounting for Share-Based Compensation



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. The statement amends Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, expanding disclosure requirements and providing alternative methods of transition
for an entity that voluntarily changes to the fair value based method of accounting for stock or share-based employee compensation.



On January 1, 2003, we adopted the fair value based method of accounting as prescribed by statement of Financial Accounting Standards No. 123, as amended,
for our share-based compensation plans and have elected to apply this method on a prospective basis as prescribed in Financial Accounting Standards No. 148. The prospective basis requires that we apply the fair value based method of accounting to
all awards granted, modified or settled after the beginning of the fiscal year in which we adopt the accounting method.



Historically, we applied the intrinsic value based method of accounting as prescribed by APB Opinion 25 and related Interpretations in accounting for our
share-based awards. Had we fully adopted Statements of Financial Accounting Standards No. 123, for awards issued prior to January 1, 2003, it would have changed our method for recognizing the cost of our plans. Had the compensation cost for our
share-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, our net income and net income per common share for 2003, 2002, and 2001 would approximate the pro forma amounts below:



|                                             |  |                                               |        |                   |   |                     |  |                   |        |                     |   |                   |  |   |        |  |   |       
|-------------------------------------------- |  | --------------------------------------------- | ------ | ----------------- | - | ------------------- |  | ----------------- | ------ | ------------------- | - | ----------------- |  | - | ------ |  | - | ------
|                                             |  | (amounts in thousands, except per share data)
|                                             |  | As reported12/31/03                           |        | Pro forma12/31/03 |   | As reported12/31/02 |  | Pro forma12/31/02 |        | As reported12/31/01 |   | Pro forma12/31/01
|SFAS No. 123 charge                          |  | $                                             | 1,959  |                   | $ | 2,237               |  | $                 |       |                     | $ | 2,155             |  | $ |       |  | $ | 2,446 
|APB 25 charge                                |  | $                                             |       |                   | $ |                    |  | $                 | 1,632  |                     | $ |                  |  | $ | 1,810  |  | $ |      
|Net income applicable to common shareholders |  | $                                             | 50,965 |                   | $ | 50,687              |  | $                 | 65,923 |                     | $ | 65,400            |  | $ | 94,579 |  | $ | 93,943
|Net income per common share-basic            |  | $                                             | 1.27   |                   | $ | 1.27                |  | $                 | 1.72   |                     | $ | 1.70              |  | $ | 2.57   |  | $ | 2.56  
|Net income per common share-diluted          |  | $                                             | 1.27   |                   | $ | 1.26                |  | $                 | 1.71   |                     | $ | 1.69              |  | $ | 2.51   |  | $ | 2.49  



The effects of
applying Statement of Financial Accounting Standards No. 123 in this pro forma disclosure are not indicative of future amounts.



|(3) | Deferred Charges and Other Assets, Net
|--- | --------------------------------------



Deferred charges and other assets consisted of the following at December 31, 2003 and 2002:



|
|

|                                               |  |                |          |   |      |   |         |  
|---------------------------------------------- |  | -------------- | -------- | - | ---- | - | ------- | -
|                                               |  | (in thousands) |         
|                                               |  | 2003           |          |   | 2002 |  
|Deferred leasing costs and tenant improvements |  | $              | 276,926  |   |      | $ | 228,426 |  
|In-place lease values at market                |  |                | 7,425    |   |      |   |        |  
|Below market lease values                      |  |                | (15      | ) |      |   |        |  
|Deferred financing costs                       |  |                | 14,870   |   |      |   | 14,526  |  
|Prepaids and other assets                      |  |                | 8,920    |   |      |   | 6,478   |  
|                                               |  |                |          |   |      |   |         |  
|                                               |  |                | 308,126  |   |      |   | 249,430 |  
|Less: accumulated amortization                 |  |                | (100,331 | ) |      |   | (80,057 | )
|                                               |  |                |          |   |      |   |         |  
|                                               |  | $              | 207,795  |   |      | $ | 169,373 |  
|                                               |  |                |          |   |      |   |         |  



F-19



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##### Table of Contents

##### Index to Financial Statements

|(4) | Notes Receivable
|--- | ----------------



Our notes receivable balance of $15.9 million at December 31, 2003, results from the consummation of three separate real estate transactions and includes
(1) an unsecured recourse promissory note totaling $9.0 million, maturing April 2, 2004, bearing interest at 9.22% per annum and requiring interest only payments until maturity, (2) a non-recourse promissory note totaling $4.4 million,
collateralized by a real estate property sold, maturing March 1, 2005, bearing interest at 7.95% per annum and requiring interest only payments until maturity, and (3) a note representing a deferred purchase price of $2.7 million, which was
discounted using an imputed interest rate of 10%. This note is to be paid in five installments during the year ending December 31, 2004.



|
|

|(5) | Accounts Receivable, Net
|--- | ------------------------



Accounts receivable consisted of the following at December 31, 2003 and 2002:



|                                      |  |                |        |   |      |   |        |  
|------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                      |  | (in thousands) |       
|                                      |  | 2003           |        |   | 2002 |  
|Rents and services                    |  | $              | 12,322 |   |      | $ | 9,191  |  
|Accruable rental income               |  |                | 44,137 |   |      |   | 36,198 |  
|Other                                 |  |                | 939    |   |      |   | 1,347  |  
|                                      |  |                |        |   |      |   |        |  
|                                      |  |                | 57,398 |   |      |   | 46,736 |  
|Less: allowance for doubtful accounts |  |                | (9,986 | ) |      |   | (7,712 | )
|                                      |  |                |        |   |      |   |        |  
|                                      |  | $              | 47,412 |   |      | $ | 39,024 |  
|                                      |  |                |        |   |      |   |        |  



Accruable rental
income represents rental income recognized on a straight-line basis in excess of rental revenue accrued in accordance with individual lease agreements.



On June 30, 1999, we loaned $4.2 million to various key employees as part of our long-term incentive plan to retain such employees. The funds were used to
purchase common shares of the company in the open market. The loans are full recourse notes, which accrue interest quarterly at a fixed rate of 7.0% and have a term of five years. Interest payments are due quarterly. The loan balances are to be
forgiven, contingent upon each key employees continued employment with us, in the following manner: one-third of the principal balance was forgiven at the end of the third year of the loan term, one-third was forgiven at the end of the fourth
year of the loan term, and the remaining principal balance will be forgiven at the end of the fifth year of the loan term. The outstanding loan balance totaled approximately $205,000 and $781,000 at December 31, 2003 and 2002, respectively and is
reflected in the other receivable balance presented in the table above.



F-20



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(6) | Investments in Joint Ventures and Unconsolidated Subsidiaries
|--- | -------------------------------------------------------------



The following information summarizes the financial position at December 31, 2003 and 2002 and the results of operations for the years ended December 31,
2003, 2002 and 2001 for the investments in which we held an interest during the periods presented:



Summary of Financial Position:



|                                       |  |              |         |                |   |              |  |              |                     |              |   |         |              |   |         |              |  |              |         |   |  |   |        |  |   |       
|-------------------------------------- |  | ------------ | ------- | -------------- | - | ------------ |  | ------------ | ------------------- | ------------ | - | ------- | ------------ | - | ------- | ------------ |  | ------------ | ------- | - |  | - | ------ |  | - | ------
|                                       |  | Total Assets |         | Total Debt (8) |   | Total Equity |  |              | CompanysInvestment
|(in thousands)                         |  | Dec. 31,2003 |         | Dec. 31,2002   |   | Dec. 31,2003 |  | Dec. 31,2002 |                     | Dec. 31,2003 |   |         | Dec. 31,2002 |   |         | Dec. 31,2003 |  | Dec. 31,2002
|Broadmoor Austin Associates(1)         |  | $            | 103,334 |                | $ | 108,929      |  | $            | 138,552             |              | $ | 144,698 |              | $ | (35,991 | )            |  | $            | (36,436 | ) |  | $ | 3,882  |  | $ | 3,914 
|Prentiss Properties Resources, Inc.(2) |  |              |        |                |   | 12,406       |  |              |                    |              |   |        |              |   |        |              |  |              | 6,463   |   |  |   |       |  |   | 6,299 
|Tysons International Partners(3)       |  |              | 95,186  |                |   | 94,873       |  |              | 59,914              |              |   | 60,628  |              |   | 34,213  |              |  |              | 33,161  |   |  |   | 9,226  |  |   | 9,763 
|Other Investments(4)                   |  |              |        |                |   |             |  |              |                    |              |   |        |              |   |        |              |  |              |        |   |  |   | 1,107  |  |   | 1,107 
|                                       |  |              |         |                |   |              |  |              |                     |              |   |         |              |   |         |              |  |              |         |   |  |   |        |  |   |       
|                                       |  |              |         |                |   |              |  |              |                     |              |   |         |              |   |         |              |  |              |         |   |  | $ | 14,215 |  | $ | 21,083
|                                       |  |              |         |                |   |              |  |              |                     |              |   |         |              |   |         |              |  |              |         |   |  |   |        |  |   |       



Summary of Operations:



|                                     |  |               |        |                   |   |        |                                     |      |        |      |   |       |      |   |       |      |  |      |       |   |      |   |       |  |   |       |   |  |   |       |  
|------------------------------------ |  | ------------- | ------ | ----------------- | - | ------ | ----------------------------------- | ---- | ------ | ---- | - | ----- | ---- | - | ----- | ---- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | - |  | - | ----- | -
|                                     |  | Total Revenue |        | Net Income/(Loss) |   |        | Companys Share of NetIncome/(Loss) |     
|(in thousands)                       |  | 2003          |        | 2002              |   | 2001   |                                     | 2003 |        | 2002 |   |       | 2001 |   |       | 2003 |  | 2002 |       |   | 2001 |  
|Broadmoor Austin Associates          |  | $             | 20,093 |                   | $ | 20,118 |                                     | $    | 19,849 |      | $ | 4,586 |      | $ | 4,295 |      |  | $    | 3,941 |   |      | $ | 2,293 |  | $ | 2,148 |   |  | $ | 1,971 |  
|Burnett Plaza Associates(5)          |  |               |       |                   |   | 4,302  |                                     |      | 21,483 |      |   |      |      |   | 960   |      |  |      | 5,304 |   |      |   |      |  |   | 192   |   |  |   | 1,061 |  
|Lot 21 Associates, L.P(6)            |  |               |       |                   |   |       |                                     |      | 130    |      |   |      |      |   |      |      |  |      |      |   |      |   |      |  |   |      |   |  |   |      |  
|PPS Partners LLC(7)                  |  |               |        |                   |   | 44     |                                     |      | 581    |      |   |      |      |   | (13   | )    |  |      | 361   |   |      |   |      |  |   | (10   | ) |  |   | 271   |  
|Prentiss Properties Limited, Inc.(2) |  |               |       |                   |   |       |                                     |      | 4,939  |      |   |      |      |   |      |      |  |      | 558   |   |      |   |      |  |   |      |   |  |   | 558   |  
|Prentiss Properties Resources, Inc.  |  |               |       |                   |   | 14,075 |                                     |      | 11,667 |      |   |      |      |   | 664   |      |  |      | (915  | ) |      |   |      |  |   | 651   |   |  |   | (897  | )
|Project 127 Partners, L.P(6)         |  |               |       |                   |   |       |                                     |      | 76     |      |   |      |      |   |      |      |  |      | (11   | ) |      |   |      |  |   |      |   |  |   | (6    | )
|Tysons International Partners        |  |               | 12,960 |                   |   | 13,092 |                                     |      | 10,094 |      |   | 1,052 |      |   | 692   |      |  |      | 694   |   |      |   | 262   |  |   | 173   |   |  |   | 173   |  
|                                     |  |               |        |                   |   |        |                                     |      |        |      |   |       |      |   |       |      |  |      |       |   |      |   |       |  |   |       |   |  |   |       |  
|                                     |  |               |        |                   |   |        |                                     |      |        |      |   |       |      |   |       |      |  |      |       |   |      | $ | 2,555 |  | $ | 3,154 |   |  | $ | 3,131 |  
|                                     |  |               |        |                   |   |        |                                     |      |        |      |   |       |      |   |       |      |  |      |       |   |      |   |       |  |   |       |   |  |   |       |  



|(1) | We own a 50% non-controlling interest in Broadmoor Austin Associates, an entity, which owns a
seven-building, 1.1 million net rentable square foot office complex in Austin, Texas.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated under the General
Corporation Law of the State of Delaware to serve as a Taxable REIT Subsidiary and provide services to our operating partnership. On March 29, 2001, Prentiss Properties Resources, Inc. acquired our interest in Prentiss Properties Limited, Inc.,
valued at $3.9 million, along with certain other assets with a carrying amount of approximately $2.5 million. At December 31, 2002, our operating partnership held a 98% economic interest and 0% voting interest in Prentiss Properties Resources, Inc.
Effective January 1, 2003, our operating partnership acquired the remaining 2% interest in Prentiss Properties Resources, Inc. for total consideration of approximately $67,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In April 2001, we acquired from Brandywine Realty Trust a 25% non-controlling interest in
Tysons International Partners, an entity, which owns two office properties containing 452,000 net rentable square feet in the Northern Virginia area.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents a 1% investment in certain real estate entities that we account for using the cost
method of accounting.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Prior to March 2002, we owned a 20% non-controlling interest in Burnett Plaza Associates, an
entity, which owns a 1.0 million net rentable square foot office building in downtown Fort Worth, Texas. On March 7, 2002, we acquired the remaining 80% interest in Burnett Plaza Associates. The summary of operations above includes the results of
operations for the periods prior to our acquisition of a controlling interest on March 7, 2002.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Prior to April 10, 2001, we owned a 60% non-controlling interest in two entities, each owning
a separate office development project in the suburban Philadelphia area. The office projects were sold to Brandywine Realty Trust on April 10, 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | PPS Partners LLC was a joint venture between our operating partnership and a third-party
property owner. The third-party property owner contributed property management contracts to PPS Partners LLC. Our operating partnership through a sub-management contract managed the properties and participated in the net income of the joint venture.
Effective October 2001, our operating partnership resigned the management duties of the properties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | The mortgage debt, all of which is non-recourse, is collateralized by the individual real
estate property or properties within each venture.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



F-21



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(7) | Mortgages and Notes Payable
|--- | ---------------------------



At December 31, 2003, we had mortgage and notes payable of $1.03 billion, excluding our proportionate share of debt from our investments in joint
ventures.



The following table sets forth our mortgages and
notes payable as of December 31, 2003 and 2002:



|                                |  |                |           |      |   |              |  |               |  |                |  |                   
|------------------------------- |  | -------------- | --------- | ---- | - | ------------ |  | ------------- |  | -------------- |  | ------------------
|                                |  | (in thousands) |           |      |   |              |  |              
|Description                     |  | 2003           |           | 2002 |   | Amortization |  | Interest Rate |  | Maturity      
|Collateralized term loan(1)     |  | $              | 70,813    |      | $ | 71,563       |  | 25 yr         |  | LIBOR + 1.500% |  | September 30, 2004
|Revolving credit facility       |  |                | 111,000   |      |   | 156,000      |  | None          |  | LIBOR + 1.500% |  | May 23, 2005      
|Unsecured term loanCommerz     |  |                | 75,000    |      |   | 75,000       |  | None          |  | LIBOR + 1.500% |  | March 16, 2006    
|Unsecured term loanEurohypo I  |  |                | 100,000   |      |   |             |  | None          |  | LIBOR + 1.375% |  | May 22, 2008      
|Unsecured term loanEurohypo II |  |                | 14,000    |      |   |             |  | 30 yr         |  | 7.46%          |  | July 15, 2009     
|PPREFI portfolio loan(2)        |  |                | 180,100   |      |   | 180,100      |  | None          |  | 7.58%          |  | February 26, 2007 
|Mortgage notes payable(3)       |  |                | 478,122   |      |   | 528,364      |  | (4)           |  | (5)            |  | (5)               
|                                |  |                |           |      |   |              |  |               |  |                |  |                   
|                                |  | $              | 1,029,035 |      | $ | 1,011,027    |  |               |  |                |  |                   
|                                |  |                |           |      |   |              |  |               |  |                |  |                   



|(1) | The term loan is collateralized by four properties with an aggregate net book value of real estate of $81.3 million.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | The PPREFI portfolio loan is collateralized by 36 properties with an aggregate net book value of real estate of $242.9 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(3) | The mortgage loans are collateralized by 29 properties with an aggregate net book value of real estate of $628.1 million.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(4) | Excluding the $66.0 million financing of our Burnett Plaza property, which requires interest only payments until maturity, our mortgage notes have debt service
requirements based on amortization terms ranging from 18 to 30 years.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Excluding the Burnett Plaza financing, which has an interest rate equal to LIBOR plus 150 basis points, the interest rates range from 6.63% to 8.05% with a weighted
average interest rate of 7.35% at December 31, 2003. Maturity dates range from April 2005 through June 2013 with a weighted average maturity of 5.7 years from December 31, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our future scheduled principal repayments on our mortgages and notes payable
are as follows:



|                          |  |                |          
|------------------------- |  | -------------- | ---------
|Years ending December 31: |  | (in thousands)
|2004                      |  | $              | 76,625   
|2005                      |  |                | 215,873  
|2006                      |  |                | 85,266   
|2007                      |  |                | 192,786  
|2008                      |  |                | 106,689  
|Thereafter                |  |                | 351,796  
|                          |  |                |          
|                          |  | $              | 1,029,035
|                          |  |                |          



Under our loan
agreements, we are required to satisfy various affirmative and negative covenants, including limitations on total indebtedness, total collateralized indebtedness and cash distributions, as well as obligations to maintain certain minimum tangible net
worth and certain minimum interest coverage ratios. We were in compliance with these covenants at December 31, 2003.



|(8) | Interest Rate Hedges
|--- | --------------------



In the normal course of business, we are exposed to the effect of interest rate changes. We limit our interest rate risk by following established risk
management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used to hedge against rate movements on our related debt.



To manage interest rate risk, we may employ options, forwards, interest rate swaps, caps and floors or a combination thereof
depending on the underlying exposure. We undertake a variety of borrowings from credit facilities, to medium- and long-term financings. To hedge against increases in interest cost, we use interest rate instruments, typically interest rate swaps, to
convert a portion of our variable-rate debt to fixed-rate debt.



On the date we enter into a derivative contract, we designate the derivative as a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability
(cash flow hedge).



F-22



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Currently, we have only entered into derivative contracts designated as cash flow hedges. These agreements involve
the exchange of amounts based on a variable interest rate for amounts based on fixed interest rates over the life of the agreement based upon a notional amount. The difference to be paid or received as the interest rates change is recognized as an
adjustment to interest expense. The related amount payable to or receivable from counterparties is included in accounts payable and other liabilities. Changes in the fair value of a derivative that is highly effective and that is designated and
qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g. until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is
recorded in current-period earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings.



We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. We also
formally assess (both at the hedges inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively, as discussed below.



We discontinue hedge accounting prospectively when (1) we
determine that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging
instrument is no longer appropriate.



When we discontinue hedge
accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the
forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses
that were accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period earnings.



To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For our derivatives, standard
market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value,
and such value may never actually be realized.



Over time, the
unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with when the hedged items are recognized in earnings. Within the next twelve months, we expect to
reclassify to earnings approximately $6.6 million of the current balance held in accumulated other comprehensive income.



The following table summarizes the notional values and fair values of our derivative financial instruments at December 31, 2003. The notional value
provides an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.



F-23



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|                |  |                        |  |                      |  |                                                    |  |                |  |               
|--------------- |  | ---------------------- |  | -------------------- |  | -------------------------------------------------- |  | -------------- |  | --------------
|Notional Amount |  | Swap Rate Paid (Fixed) |  | Effective Fixed Rate |  | Swap Rate Received (Variable) at December 31, 2003 |  | Swap Maturity  |  | Fair Value    
|                |  |                        |  |                      |  |                                                    |  |                |  | (in thousands)
|$ 50 million    |  | 6.253%                 |  | 7.753%               |  | 1.120%                                             |  | September 2004 |  | $(1,877)      
|$ 60 million    |  | 6.248%                 |  | 7.748%               |  | 1.120%                                             |  | September 2004 |  | (2,262)       
|$ 25 million    |  | 4.345%                 |  | 5.845%               |  | 1.120%                                             |  | July 2005      |  | (997)         
|$ 15 million    |  | 4.345%                 |  | 5.845%               |  | 1.120%                                             |  | July 2005      |  | (598)         
|$ 20 million    |  | 5.985%                 |  | 7.485%               |  | 1.120%                                             |  | March 2006     |  | (1,642)       
|$ 30 million    |  | 5.990%                 |  | 7.490%               |  | 1.120%                                             |  | March 2006     |  | (2,466)       
|$ 50 million    |  | 2.270%                 |  | 3.645%               |  | 1.120%                                             |  | August 2007    |  | 1,183         
|$ 25 million    |  | 2.277%                 |  | 3.652%               |  | 1.120%                                             |  | August 2007    |  | 585           
|                |  |                        |  |                      |  |                                                    |  |                |  |               
|Total           |  |                        |  |                      |  |                                                    |  |                |  | $(8,074)      
|                |  |                        |  |                      |  |                                                    |  |                |  |               



Cash payments made
under our interest rate hedges exceeded cash receipts from our interest rate hedges by $9.7 million, $8.2 million and $3.2 million for the years ended December 31, 2003, 2002, and 2001 respectively.



|(9) | Accounts Payable and Other Liabilities
|--- | --------------------------------------



Accounts payable and other liabilities consisted of the following at December 31, 2003 and 2002:



|                                |  |                |        |      |   |       
|------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                |  | (in thousands)
|                                |  | 2003           |        | 2002
|Accrued interest expense        |  | $              | 5,618  |      | $ | 5,400 
|Accrued real estate taxes       |  |                | 24,764 |      |   | 28,494
|Advance rent and deposits       |  |                | 18,067 |      |   | 19,598
|Deferred compensation liability |  |                | 4,941  |      |   | 3,927 
|Other liabilities               |  |                | 28,351 |      |   | 22,207
|                                |  |                |        |      |   |       
|                                |  | $              | 81,741 |      | $ | 79,626
|                                |  |                |        |      |   |       



|(10) | Distributions Payable
|---- | ---------------------



In December 2003, we declared a cash distribution for the fourth quarter of 2003 in the amount of $.56 per share, payable on January 9, 2004, to common
shareholders of record on December 26, 2003. Additionally, it was determined that a distribution of $.56 per unit would be made to the partners of our operating partnership and the holders of our Series D Convertible Preferred Shares. The
distributions totaled $26.8 million and were paid January 9, 2004.



In addition, quarterly distributions totaling $2.2 million in the aggregate were declared in December 2003, payable to the holders of our Series B Cumulative Redeemable Perpetual Preferred Units and our Series E Preferred Units. The
distributions, which equate to an annualized 8.3% of the face amount of the Series B Cumulative Redeemable Perpetual Preferred Units and an annualized 7.5% of the face amount of the Series E Preferred Units, were paid on January 2, 2004 and January
15, 2004, respectively.



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(11) | Leasing Activities
|---- | ------------------



Our future minimum lease payments to be received, under non-cancelable operating leases in place at December 31, 2003, which expire on various dates
through 2022, are as follows:



|                          |  |                |          
|------------------------- |  | -------------- | ---------
|Years ending December 31: |  | (in thousands)
|2004                      |  | $              | 285,992  
|2005                      |  |                | 252,462  
|2006                      |  |                | 220,981  
|2007                      |  |                | 187,165  
|2008                      |  |                | 146,680  
|Thereafter                |  |                | 345,974  
|                          |  |                |          
|                          |  | $              | 1,439,254
|                          |  |                |          



The geographic concentration of the
future minimum lease payments to be received is detailed as follows:



|                      |  |                |          
|--------------------- |  | -------------- | ---------
|Market                |  | (in thousands)
|Metro. Washington, DC |  | $              | 350,157  
|Dallas/Fort Worth     |  |                | 319,972  
|Chicago               |  |                | 249,692  
|Oakland               |  |                | 157,708  
|San Diego             |  |                | 101,371  
|Austin                |  |                | 100,918  
|Denver                |  |                | 51,361   
|Sacramento            |  |                | 37,093   
|Suburban Detroit      |  |                | 25,748   
|Houston               |  |                | 25,748   
|Los Angeles           |  |                | 19,486   
|                      |  |                |          
|                      |  | $              | 1,439,254
|                      |  |                |          



For the years ended
December 31, 2003 and December 31, 2002, no individual tenant accounted for more than 10% of our total rental income.



|(12) | Supplemental Disclosure of Non-Cash Investing and Financing Activities
|---- | ----------------------------------------------------------------------



Distributions totaling $26.8 million payable to holders of common shares, operating partnership units and Series D Convertible Preferred Shares and
distributions totaling $2.2 million payable to holders of our Series B Cumulative Redeemable Perpetual Preferred Units and Series E Preferred Units, were declared in December 2003. The distributions were paid in January 2004.



Pursuant to our long-term incentive plan, during the year ended December 31,
2003, we issued 93,250 restricted share grants to various key employees. The shares, which had a market value of approximately $2.4 million based upon the per share price on the date of grant, were classified as unearned compensation and recorded in
the shareholders equity section of the consolidated balance sheet. The unearned compensation is amortized quarterly as compensation expense over the three-year vesting period.



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



During the year ended December 31, 2003, 25,667 common shares were issued pursuant to the conversion
of 25,667 common units of our operating partnership. The common shares had a market value of approximately $772,000 on the conversion date.



During the year ended December 31, 2003, we marked-to-market our investments in securities and our interest rate hedges. During the year ended December
31, 2003, we recorded an unrealized loss of $83,000 and an unrealized gain of $8.4 million on our investments in securities and interest rate hedges, respectively.



During the year ended December 31, 2003, common shares in treasury decreased by $40.5 million, representing a decrease of
$54.7 million related to the consummation of the private placement of 2.3 million common shares with Deutsche Bank, offset by an increase of $14.2 million related to non-cash activities including $12.1 million attributable to 391,641 common shares
surrendered as payment of the exercise price and statutory tax withholdings for certain share options exercised during the period and $2.1 million, representing 83,047 common shares held pursuant to our Key Employee Share Option Plan.



On January 1, 2003, in connection with the consolidation of Prentiss
Properties Resources, Inc. the following assets and liabilities were recorded in the consolidated balance sheet of the operating partnership.



|
|

|                                                              |  |           |        |  
|------------------------------------------------------------- |  | --------- | ------ | -
|(in thousands)                                                |  | Dr./(Cr.) |       
|Deferred charges and other assets, net                        |  | $         | 933    |  
|Investment in securities                                      |  | $         | 423    |  
|Accounts receivable, net                                      |  | $         | 2,033  |  
|Investments in joint ventures and unconsolidated subsidiaries |  | $         | (5,905 | )
|Accounts payable and other liabilities                        |  | $         | (6,097 | )
|Other payables affiliates                                     |  | $         | 7,355  |  
|Minority interest in real estate partnership                  |  | $         | 1,258  |  



In connection with the
acquisitions during the year ended December 31, 2003, we assumed liabilities of approximately $2.9 million. As a result of property sales during the year ended December 31, 2003, we recorded a note receivable of $2.5 million and removed
approximately $1.4 million, $160,000 and $1.5 million of receivables, other assets and liabilities, respectively.



|(13) | Related Party Transactions
|---- | --------------------------



On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated under the General Corporation Law of the State of Delaware to serve as a Taxable
REIT Subsidiary and provide management services to our operating partnership. Our operating partnership held a 98% economic interest and 0% voting interest in Prentiss Properties Resources, Inc. Effective January 1, 2003, our operating partnership
acquired the remaining 2% interest in Prentiss Properties Resources, Inc., for gross consideration of approximately $67,000. As a result, beginning January 1, 2003, the accounts of Prentiss Properties Resources, Inc. are consolidated with and into
the accounts of our operating partnership.



Prentiss Properties
Resources, Inc. and its subsidiaries incurred certain personnel and other overhead-related expenses on behalf of our operating partnership. For the two years prior to consolidation the expenses totaled $4.6 million and $4.0 million.



|(14) | Capital Share
|---- | -------------



Our board of trustees is authorized to provide for the issuance of 100,000,000 common shares and 20,000,000 preferred shares in one or more series, to
establish the number of shares in each series and to fix the designation, powers, preferences and rights of each such series and the qualifications, limitations or restrictions thereof.



As of December 31, 2003, 42,696,341 and 3,773,585 common shares and Series D Convertible Preferred Shares were issued and
outstanding, respectively. Of the 42,696,341 common shares, 83,047 common shares were held pursuant to our Key Employee Share Option Plan and classified as common shares in treasury on our consolidated balance sheet. The Series D Convertible
Preferred Shares are convertible at the holders option on a one-for-one basis into our common shares, subject to certain adjustments, and may not be redeemed by us before December 29, 2004.



F-26



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



At the operating partnership level, 44,171,240 common units were issued and outstanding at December
31, 2003. The units included 42,696,341 held by Prentiss Properties Trust and 1,474,899 held by limited partners of our operating partnership. The 1,474,899 common units are redeemable at the option of the holder for a like number of common shares,
or at our option, the cash equivalent thereof and are accounted for as minority interest in operating partnership on our consolidated balance sheet.



In June 1998, we privately placed 1,900,000, $50.0 par value, 8.30% Series B Cumulative Redeemable Perpetual Preferred Units of our operating partnership
with Belair Capital Fund. In connection with the private placement, on June 25, 1998, we designated 1,900,000 Series B Preferred Shares. We may redeem the Series B Preferred Units at any time after June 25, 2003 for cash in an amount equal to the
capital account balance subject to certain limitations. The holders of the Series B Preferred Units may exchange the Series B Preferred Units at any time on or after June 25, 2008 for Series B Preferred Shares at an exchange rate of one Series B
Preferred Share for one Series B Preferred Unit, subject to adjustments. As of December 31, 2003, no Series B Preferred Shares were issued or outstanding. At December 31, 2003, the Series B Cumulative Redeemable Perpetual Preferred Units are
accounted for at their redemption value in the line item minority interest in operating partnership on our consolidated balance sheet.



In April 2001, we completed an asset exchange with Brandywine Realty Trust. As part of that exchange, we acquired Brandywines Northern Virginia
assets which includes a 25% non-controlling interest in the Tysons International Partners joint venture that owns two office properties. In exchange for the joint venture interest, we issued to Brandywine a combination of 200,000, $50.0 par value,
7.50% Series E Preferred Units, of our operating partnership and 26,768 common units of our operating partnership. The holders of the Series E Preferred Units may choose to have the Series E Preferred Units redeemed at any time on or after April 10,
2004. The Series E Preferred Units are redeemable for either $10.0 million plus accrued but unpaid distributions or, at our option, common shares having a market value equal to the redemption price. In addition, each common unit held by Brandywine
is exchangeable after April 10, 2003, for either cash equal to the trading price of one common share at the time of the exchange or, at our option, one common share. In evaluating the provisions of Statement of Financial Accounting Standards No. 150
that were not deferred, we determined that our Series E Preferred Units qualify as a mandatorily redeemable financial instrument and; thus, should be classified as a liability and measured at fair value in our consolidated balance sheet at December
31, 2003. We determined that the fair value of the Series E Preferred Units was equal to the $ 10.0 million carrying amount at December 31, 2003 and as a result the reclassification from minority interests to liabilities had no impact on current
period earnings.



|(15) | Share Incentive Plans
|---- | ---------------------



We have two separate share-based incentive compensation plans both of which are approved by our shareholders. The plans include (1) a trustees share
incentive plan and (2) an employees share incentive plan. Under the plans, we are authorized to issue common shares or cash pursuant to awards granted in the form of (1) non-qualified share options not intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended; (2) restricted or non-restricted shares; (3) share appreciation rights; and (4) performance shares. Awards may be granted to selected employees and trustees of our company or an affiliate of our
company.



The Trustees Plan



Under the trustees plan, we are authorized to issue awards with
respect to a maximum of 500,000 shares. Annually on the first business day of July we grant to each independent trustee non-qualified share options to purchase 7,500 of our common shares. The options are 100% vested at grant and, therefore, expensed
upon issuance. In 2003, we issued to the independent trustees, a total of 37,500 non-qualified share options.



On the first business day of each fiscal quarter, we issue to each independent trustee common shares having an aggregate value of $6,250, based on the per
share fair market value of the common shares on the date of grant. The common shares are 100% vested at grant and, therefore, expensed upon issuance. A total of 4,300, 4,265 and 4,750 common shares were granted pursuant to the plan during the years
ended December 31, 2003, 2002, and 2001, respectively.



At
December 31, 2003, we had 221,080 common shares that remain available for future issuance under our trustees plan.



F-27



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



The Employees Plan



Under the employees plan, we are authorized to issue awards with respect to a maximum of 5,000,000 common shares.
Awards may be granted to employees of our operating partnership or management service companies. No participant may be granted, in any calendar year, awards in the form of share options or share appreciation rights with respect to more than 390,000
common shares or restricted share awards for more than 50,000 common shares. We have broad discretion in determining the vesting terms and other terms applicable to awards granted under the plan.



The exercise price of each option granted during 2003 was equal to the per
share fair market value of our common shares on the date of grant. Under the employees plan, during the years ended December 31, 2003, 2002 and 2001, we granted 271,000, 206,500 and 459,000 options which vest 33-1/3% per year on each
anniversary of the date of grant, commencing with the first anniversary of the date of grant. In addition during 2003, 2002 and 2001 we issued 93,250, 30,600 and 89,700 restricted shares which vest 100% on the third anniversary of the date of grant.



At December 31, 2003, we had 609,884 common shares that remain
available for future issuance under our employees plan.



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



A summary of the status of our options as of December 31, 2003, 2002 and 2001 and the changes during
the years ended on those dates is presented below:



|                                                               |  |                                |           |                                 |   |                                |  |                                 |           |                                |   |                                 |  |   |           |  |   |      
|-------------------------------------------------------------- |  | ------------------------------ | --------- | ------------------------------- | - | ------------------------------ |  | ------------------------------- | --------- | ------------------------------ | - | ------------------------------- |  | - | --------- |  | - | -----
|                                                               |  | 2003                           |           | 2002                            |   | 2001                          
|                                                               |  | # Shares of underlying options |           | Weighted average exercise price |   | # Shares of underlying options |  | Weighted average exercise price |           | # Shares of underlying options |   | Weighted average exercise price
|Outstanding at beginning of the year                           |  |                                | 1,421,514 |                                 | $ | 24.93                          |  |                                 | 2,179,175 |                                | $ | 23.65                           |  |   | 2,778,536 |  | $ | 22.30
|Granted                                                        |  |                                | 308,500   |                                 | $ | 26.73                          |  |                                 | 244,000   |                                | $ | 28.43                           |  |   | 496,500   |  | $ | 24.88
|Exercised                                                      |  |                                | 745,558   |                                 | $ | 23.66                          |  |                                 | 997,661   |                                | $ | 23.01                           |  |   | 1,073,859 |  | $ | 20.78
|Forfeited                                                      |  |                                |          |                                 | $ |                               |  |                                 | 4,000     |                                | $ | 26.24                           |  |   | 22,002    |  | $ | 21.60
|Expired                                                        |  |                                |          |                                 | $ |                               |  |                                 |          |                                | $ |                                |  |   |          |  | $ |     
|                                                               |  |                                |           |                                 |   |                                |  |                                 |           |                                |   |                                 |  |   |           |  |   |      
|Outstanding at end of year                                     |  |                                | 984,456   |                                 | $ | 26.45                          |  |                                 | 1,421,514 |                                | $ | 24.93                           |  |   | 2,179,175 |  | $ | 23.65
|Exercisable at end of year                                     |  |                                | 440,625   |                                 | $ | 26.62                          |  |                                 | 679,099   |                                | $ | 25.23                           |  |   | 1,104,408 |  | $ | 24.14
|                                                               |  |                                |           |                                 |   |                                |  |                                 |           |                                |   |                                 |  |   |           |  |   |      
|Weighted-average fair value of options granted during the year |  | $                              | 0.88      |                                 |   |                                |  | $                               | 1.19      |                                |   |                                 |  | $ | 1.01      |  |   |      



The fair value of each
share option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |       |   |  |       |   |  |       |  
|----------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                        |  | 2003  |   |  | 2002  |   |  | 2001  |  
|Expected term           |  | 5.00  |   |  | 5.00  |   |  | 5.00  |  
|Expected dividend yield |  | 8.32  | % |  | 7.81  | % |  | 8.20  | %
|Expected volatility     |  | 15.28 | % |  | 13.64 | % |  | 13.36 | %
|Risk-free interest rate |  | 3.01  | % |  | 4.27  | % |  | 4.79  | %



The following table
summarizes information about share options outstanding at December 31, 2003:



|                        |  |                               |  |                                |  |                                       |  |                               |  |                               
|----------------------- |  | ----------------------------- |  | ------------------------------ |  | ------------------------------------- |  | ----------------------------- |  | ------------------------------
|                        |  | Options Outstanding           |  | Options Exercisable           
|Range of exercise price |  | Number outstanding at12/31/03 |  | Weighted averageexercise price |  | Weighted averageremaining contr. life |  | Number exercisable at12/31/03 |  | Weighted averageexercise price
|$15.00 to $20.00        |  | 53,788                        |  | $19.95                         |  | 5.6                                   |  | 53,788                        |  | $19.95                        
|$20.01 to $25.00        |  | 179,835                       |  | $24.55                         |  | 6.8                                   |  | 48,170                        |  | $24.13                        
|$25.01 to $30.00        |  | 713,333                       |  | $27.16                         |  | 7.5                                   |  | 301,167                       |  | $27.61                        
|$30.01 +                |  | 37,500                        |  | $31.35                         |  | 8.5                                   |  | 37,500                        |  | $31.35                        
|                        |  |                               |  |                                |  |                                       |  |                               |  |                               
|$15.00 +                |  | 984,456                       |  | $26.45                         |  | 7.3                                   |  | 440,625                       |  | $26.62                        
|                        |  |                               |  |                                |  |                                       |  |                               |  |                               



|(16) | Employee Benefit Plans
|---- | ----------------------



We have a 401(k) savings plan for our employees. Under the plan, as amended, employees, age 21 and older, are eligible to participate in the plan after
they have completed one year and 1,000 hours of service. Participants are immediately vested in their contributions, matching contributions and earnings thereon.



We initially match 25% of an employees contribution, not to exceed 25% of 6% of each employees wages. Our cost
of the initial match totaled approximately $271,000, $306,000 and $333,000 for the years ended December 31, 2003, 2002 and 2001, respectively. We may also elect, in any calendar year, to make a discretionary match to the plan. The amount paid
pursuant to the discretionary match totaled approximately $0, $314,000 and $300,000 during the years ended December 31, 2003, 2002 and 2001, respectively.



We have registered 500,000 common shares in connection with a share purchase plan. The share purchase plan enables eligible employees to purchase shares,
subject to certain restrictions, of the company at a 15% discount to fair market value. A total of 32,065, 39,766 and 65,340 common shares were issued, in accordance with the share purchase plan, during the years



F-29



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



ended December 31, 2003, 2002, and 2001, respectively. At December 31, 2003, we have 211,249 shares available for
future issuance.



During the year ended December 31, 2000, we
adopted the Key Employee Share Option Plan. Pursuant to the plan, officers and other selected key employees of our operating partnership or management service companies who earn bonuses have the option of deferring the payment of such bonuses. Such
deferred compensation may be used to purchase various mutual funds and/or our common shares. Pursuant to the participants election, we purchase shares on the open market and place them in a trust for the benefit of such participant. The trust
may deliver to the participant shares or the fair market value of such shares beginning six months from the date they were placed in the trust. The purpose of the deferred compensation plan is to provide a vehicle for the payment of compensation
otherwise payable to the participants, in a form that will provide incentives and rewards for meritorious performance and encourage the recipients continuance as our employees. During the 2000 plan year we provided a discount of 15% on the
purchase price of our common shares purchased by participants in the plan. For each plan year thereafter, we did not provide a discount on our common shares. The mutual fund investments are carried at their market value of $1.9 million and included
as investments in securities on our consolidated balance sheet. The plan holds 83,047 of our common shares which we purchased in the open market on behalf of the participants. These are included as common shares in treasury on our consolidated
balance sheet at December 31, 2003. The fair value of the plan assets totaling $4.7 million are included as deferred compensation liability in accounts payable and other liabilities on our consolidated balance sheet at December 31, 2003. As a result
of the change in the fair value of our investments in securities, we recorded unrealized losses of $83,000 and $104,000 in other comprehensive income during the years ended December 31, 2003 and 2002, respectively.



As of February 12, 2003, we adopted two deferred compensation plans for our
executive officers. The Executive Choice Share Deferral Plan for Executives allows our executive officers to elect to defer the receipt of shares issued upon the exercise of options pursuant to our 1996 Share Incentive Plan. In addition, the
Executive Choice Share Deferral Plan allows our officers to defer receipt of restricted securities issued pursuant to our 1996 Share Incentive Plan and to defer receipt of our common shares received pursuant to our Key Employee Share Option Plan and
our Share Purchase Plan. The Executive Choice Deferred Compensation Plan provides a means for our executive officers to defer receipt of salary and bonus and property other than our common shares received under the Key Employee Share Option Plan.



We also adopted two deferred compensation plans for our
trustees, similar to those adopted for our executives. Under the Executive Choice Share Deferral Plan for Trustees, the independent members of our board of trustees may defer receipt of shares issued upon the exercise of options received under the
Amended and Restated Trustees Share Incentive Plan. Under the Executive Choice Deferred Compensation Plan for Trustees, our independent trustees may defer other compensation received pursuant to service on our board of trustees.



For each of the deferred compensation plans described above, the
executives or the trustees receipt of shares and other compensation is deferred by placing such shares or other compensation in an account, which is treated as an unfunded deferred compensation obligation of the company, and the employee
or trustee does not receive the shares or other compensation until he elects to receive the shares or other compensation at a future date. Each of the plans described above is intended solely as a means of deferring gain that would otherwise be
realized by our officers and trustees and is not intended to amend any other plan or program.



F-30



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(17) | Commitments and Contingencies
|---- | -----------------------------



Legal Matters



We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. We
believe that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.



Environmental Matters



We obtain environmental site assessments for all acquired properties prior to acquisition. The environmental site assessments have not revealed any
environmental condition, liability or compliance concern that we believe may have a material adverse effect on our business, assets or results or operations, nor are we aware of any such condition, liability or concern. It is possible that the
environmental site assessments relating to any one of our properties or properties to be acquired in the future do not reveal all environmental conditions, liabilities or compliance concerns or that there are material environmental conditions,
liabilities or compliance concerns that arose after the related environmental site assessment report was completed, of which we are otherwise unaware.



Insurance



We have and will keep in force comprehensive insurance, including liability, fire, workers compensation, extended coverage, rental loss and, when
available on reasonable commercial terms, flood, wind, earthquake and terrorism insurance, with policy specifications, limits, exclusions and deductibles customarily carried for similar properties. We currently maintain insurance to cover
environmental conditions and business interruption if and when they occur. This policy covers both governmental and third-party claims associated with the covered environmental conditions. Our real property insurance policies exclude earthquake
coverage for properties located within California. As a result, we maintain a separate $100 million blanket earthquake policy on the properties we own in Northern and Southern California. Our real property insurance policies exclude terrorism
coverage. However, we maintain a separate $100 million blanket stand-alone terrorism policy on the properties we own. Certain types of losses, however, generally of a catastrophic nature, such as acts of war, are either uninsurable or the cost of
obtaining insurance is so high that it is more prudent to accept the risk of loss. If more terrorists incidents occur, however, future insurance policies purchased by us may expressly exclude hostile acts, and it may become economically unfeasible
to obtain insurance covering terrorist attacks. In the event of such terrorist acts or other catastrophic losses, we would expect our insurance premiums to increase thereafter, which may have an adverse impact on our cash flow. We believe that our
properties as of the date of this filing are adequately insured in accordance with industry standards.



|Financial | Guarantees and Commitments
|--------- | --------------------------



In connection with the disposition of a real estate property in May 2001, we entered into a financial guarantee with a maximum future potential payment of
$1.4 million. The financial guarantee, provided to the third party purchaser, guaranteed payment of an amount not to exceed the $1.4 million potential maximum if certain tenants, as defined in the purchase and sale agreement, fail to extend either
their leases beyond the maturities of their current in-place leases or to perform according to their in-place leases. An amount totaling $1.0 million was considered probable at the date of disposition and therefore, accrued during the year ended
December 31, 2001. Pursuant to the financial guarantee, during the year ended December 31, 2003, we paid an amount totaling $1.0 million to the third party purchaser.



As a condition of the purchase and sale and as security for our guarantee, we provided to the title company at closing, two
irrevocable letters of credit, totaling $1.4 million, drawn on a financial institution and identifying the purchaser as beneficiary. One letter of credit totaling $1.0 million expired in 2003. The remaining balance on the second letter of credit
totaling $252,000 at December 31, 2003 expires as follows:



F-31



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|               |  |                   |    
|-------------- |  | ----------------- | ---
|(in thousands) |  | Letters of Credit
|2004           |  | $                 | 63 
|2005           |  |                   | 63 
|2006           |  |                   | 126
|               |  |                   |    
|               |  | $                 | 252
|               |  |                   |    



|(18) | Recently Issued Accounting Pronouncements
|---- | -----------------------------------------



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. In
December 2003, the Financial Standards Board issued a revision to FASB Interpretation No. 46, FASB Interpretation No. 46(R). The Interpretation, as revised, requires consolidation of an entity by an enterprise if that enterprise will absorb a
majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. An entity subject to this Interpretation is called a variable interest entity. The disclosure
provisions of this Interpretation, as revised, are effective for financial statements issued after December 31, 2003. Per this Interpretation, as revised, a public entity, that is not a small business issuer, with a variable interest entity to which
the provisions of the Interpretation have not been applied as of December 24, 2003, shall apply this Interpretation no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of
this Interpretation, a public entity, that is not a small business issuer, shall apply this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after
December 15, 2003.



We are currently evaluating whether our
equity investments in Broadmoor Austin Associates and Tysons International Partners qualify as variable interest entities and if so, determining whether we are the primary beneficiary, thus requiring consolidation. In addition, we are evaluating
whether the provisions of this Interpretation will have a material impact on our financial condition and results of operations.



In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments
created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Certain provisions of the statement that were to be initially effective for financial instruments entered into or modified after
May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003 were deferred indefinitely by the Financial Accounting Standards Board. As a result of the deferred provisions, which are discussed in FASB Staff
Position 150-3, companies are not required to recognize non-controlling interests of a limited-life subsidiary as a liability in the consolidated financial statements. In evaluating the provisions of the statement that were not deferred, due to the
redemption provisions of our Series E Preferred Units, we determined that our Series E Preferred Units qualify as a mandatorily redeemable financial instrument and; thus, should be classified as a liability and measured at fair value in our
consolidated balance sheet at December 31, 2003. We determined that the fair value of the Series E Preferred Units was equal to the $10.0 million carrying amount at December 31, 2003 and as a result the reclassification from minority interests to
liabilities had no impact on current period earnings.



F-32



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(19) | Segment Information
|---- | -------------------



The table below presents information about income from continuing operations and segment assets used by our chief operating decision maker as of and for
the years ended December 31, 2003, 2002, and 2001, respectively:



For the Year Ended and As of December 31, 2003



|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | --------- | - | ------------------- | - | ------------------- |  | -------------- | ------- | ----------------------------------- | - | ------- | ------------------ | - | --------- |  | - | ------- | - |  | - | --------- | -
|(in thousands)                                                                   |  | Mid- Atlantic |         | Midwest |   | Northeast |  | Southwest |   | Northern California |   | Southern California |  | Total segments |         | Corporate not allocable to segments |   |         | Consolidated total |  
|Revenues:                                                                        |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Rental income                                                                    |  | $             | 89,220  |         | $ | 58,558    |  | $         |  |                     | $ | 115,482             |  | $              | 44,797  |                                     | $ | 31,484  |                    | $ | 339,541   |  | $ |        |   |  | $ | 339,541   |  
|Service business and other income                                                |  |               | 3,973   |         |   | 2,085     |  |           |  |                     |   | 2,508               |  |                | 2,504   |                                     |   | 991     |                    |   | 12,061    |  |   | 4,755   |   |  |   | 16,816    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total revenues                                                                   |  |               | 93,193  |         |   | 60,643    |  |           |  |                     |   | 117,990             |  |                | 47,301  |                                     |   | 32,475  |                    |   | 351,602   |  |   | 4,755   |   |  |   | 356,357   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Expenses:                                                                        |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Property operating and maintenance                                               |  |               | 19,329  |         |   | 15,126    |  |           |  |                     |   | 34,192              |  |                | 14,060  |                                     |   | 5,598   |                    |   | 88,305    |  |   |        |   |  |   | 88,305    |  
|Real estate taxes                                                                |  |               | 6,733   |         |   | 9,806     |  |           |  |                     |   | 11,892              |  |                | 3,534   |                                     |   | 2,311   |                    |   | 34,276    |  |   |        |   |  |   | 34,276    |  
|General & administrative and personnel costs                                     |  |               | 447     |         |   | 276       |  |           |  |                     |   | 274                 |  |                | 146     |                                     |   | 148     |                    |   | 1,291     |  |   | 9,697   |   |  |   | 10,988    |  
|Expenses of service business                                                     |  |               | 2,691   |         |   | 1,457     |  |           |  |                     |   | 1,812               |  |                | 1,501   |                                     |   | 1,308   |                    |   | 8,769     |  |   | 1,744   |   |  |   | 10,513    |  
|Interest expense                                                                 |  |               |        |         |   |          |  |           |  |                     |   |                    |  |                |        |                                     |   |        |                    |   |          |  |   | 69,814  |   |  |   | 69,814    |  
|Amortization of deferred financing costs                                         |  |               |        |         |   |          |  |           |  |                     |   |                    |  |                |        |                                     |   |        |                    |   |          |  |   | 2,284   |   |  |   | 2,284     |  
|Depreciation and amortization                                                    |  |               | 18,528  |         |   | 14,733    |  |           |  |                     |   | 28,610              |  |                | 7,979   |                                     |   | 8,149   |                    |   | 77,999    |  |   | 194     |   |  |   | 78,193    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total expenses                                                                   |  |               | 47,728  |         |   | 41,398    |  |           |  |                     |   | 76,780              |  |                | 27,220  |                                     |   | 17,514  |                    |   | 210,640   |  |   | 83,733  |   |  |   | 294,373   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Income from continuing operations before minority interests and equity in income |  |               | 45,465  |         |   | 19,245    |  |           |  |                     |   | 41,210              |  |                | 20,081  |                                     |   | 14,961  |                    |   | 140,962   |  |   | (78,978 | ) |  |   | 61,984    |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Minority interests                                                               |  |               |        |         |   |          |  |           |  |                     |   |                    |  |                |        |                                     |   |        |                    |   |          |  |   | (10,437 | ) |  |   | (10,437   | )
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |               | 261     |         |   |          |  |           |  |                     |   | 2,294               |  |                |        |                                     |   |        |                    |   | 2,555     |  |   |        |   |  |   | 2,555     |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Income from continuing operations                                                |  | $             | 45,726  |         | $ | 19,245    |  | $         |  |                     | $ | 43,504              |  | $              | 20,081  |                                     | $ | 14,961  |                    | $ | 143,517   |  | $ | (89,415 | ) |  | $ | 54,102    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Additions to long-loved assets:                                                  |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Development/redevelopment                                                        |  |               | 1,292   |         |   | 4,375     |  |           |  |                     |   | 4,865               |  |                | 4       |                                     |   | 106     |                    |   | 10,642    |  |   |        |   |  |   | 10,642    |  
|Purchase of real estate                                                          |  |               | 52,158  |         |   | 31,375    |  |           |  |                     |   | 28,052              |  |                | 6,062   |                                     |   | 67,086  |                    |   | 184,733   |  |   |        |   |  |   | 184,733   |  
|Capital expenditures for in-service properties                                   |  |               | 8,056   |         |   | 6,359     |  |           |  |                     |   | 13,173              |  |                | 4,377   |                                     |   | 3,271   |                    |   | 35,236    |  |   |        |   |  |   | 35,236    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total additions                                                                  |  |               | 61,506  |         |   | 42,109    |  |           |  |                     |   | 46,090              |  |                | 10,443  |                                     |   | 70,463  |                    |   | 230,611   |  |   |        |   |  |   | 230,611   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Investment balance in equity method investees                                    |  |               | 9,226   |         |   |          |  |           |  |                     |   | 3,882               |  |                |        |                                     |   |        |                    |   | 13,108    |  |   |        |   |  |   | 13,108    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total assets                                                                     |  | $             | 619,207 |         | $ | 412,769   |  | $         |  |                     | $ | 638,170             |  | $              | 252,098 |                                     | $ | 244,004 |                    | $ | 2,166,248 |  | $ | 28,452  |   |  | $ | 2,194,700 |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  



F-33



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



For the Year Ended and As of December 31, 2002



|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | --------- | - | ------------------- | - | ------- | ------------------- | - | ------- | -------------- |  | ----------------------------------- | ------- | - | ------------------ | - | --------- |  | - | ------- | - |  | - | --------- | -
|(in thousands)                                                                   |  | Mid- Atlantic |         | Midwest |   | Northeast |  | Southwest |   | Northern California |   |         | Southern California |   |         | Total segments |  | Corporate not allocable to segments |         |   | Consolidated total |  
|Revenues:                                                                        |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Rental income                                                                    |  | $             | 81,275  |         | $ | 61,724    |  | $         |  |                     | $ | 114,395 |                     | $ | 46,452  |                |  | $                                   | 29,728  |   |                    | $ | 333,574   |  | $ |        |   |  | $ | 333,574   |  
|Service business and other income                                                |  |               | 433     |         |   | 22        |  |           |  |                     |   | 1,034   |                     |   | 280     |                |  |                                     | (59     | ) |                    |   | 1,710     |  |   | 2,676   |   |  |   | 4,386     |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Total revenues                                                                   |  |               | 81,708  |         |   | 61,746    |  |           |  |                     |   | 115,429 |                     |   | 46,732  |                |  |                                     | 29,669  |   |                    |   | 335,284   |  |   | 2,676   |   |  |   | 337,960   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Expenses:                                                                        |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Property operating and maintenance                                               |  |               | 18,143  |         |   | 14,591    |  |           |  |                     |   | 29,941  |                     |   | 14,553  |                |  |                                     | 5,665   |   |                    |   | 82,893    |  |   |        |   |  |   | 82,893    |  
|Real estate taxes                                                                |  |               | 6,201   |         |   | 10,875    |  |           |  |                     |   | 15,523  |                     |   | 3,529   |                |  |                                     | 2,292   |   |                    |   | 38,420    |  |   |        |   |  |   | 38,420    |  
|General & administrative and personnel costs                                     |  |               | 425     |         |   | 302       |  |           |  |                     |   | 379     |                     |   | 358     |                |  |                                     | 171     |   |                    |   | 1,635     |  |   | 8,726   |   |  |   | 10,361    |  
|Interest expense                                                                 |  |               |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |   |          |  |   | 67,081  |   |  |   | 67,081    |  
|Amortization of deferred financing costs                                         |  |               |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |   |          |  |   | 1,832   |   |  |   | 1,832     |  
|Depreciation and amortization                                                    |  |               | 14,585  |         |   | 12,424    |  |           |  |                     |   | 25,652  |                     |   | 7,417   |                |  |                                     | 7,289   |   |                    |   | 67,367    |  |   | 86      |   |  |   | 67,453    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Total expenses                                                                   |  |               | 39,354  |         |   | 38,192    |  |           |  |                     |   | 71,495  |                     |   | 25,857  |                |  |                                     | 15,417  |   |                    |   | 190,315   |  |   | 77,725  |   |  |   | 268,040   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Income from continuing operations before minority interests and equity in income |  |               | 42,354  |         |   | 23,554    |  |           |  |                     |   | 43,934  |                     |   | 20,875  |                |  |                                     | 14,252  |   |                    |   | 144,969   |  |   | (75,049 | ) |  |   | 69,920    |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Minority interests                                                               |  |               |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |   |          |  |   | (10,717 | ) |  |   | (10,717   | )
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |               | 1,875   |         |   | 1,007     |  |           |  |                     |   | 2,282   |                     |   | (386    | )              |  |                                     | (146    | ) |                    |   | 4,632     |  |   | (1,478  | ) |  |   | 3,154     |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Income from continuing operations                                                |  | $             | 44,229  |         | $ | 24,561    |  | $         |  |                     | $ | 46,216  |                     | $ | 20,489  |                |  | $                                   | 14,106  |   |                    | $ | 149,601   |  | $ | (87,244 | ) |  | $ | 62,357    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |           |  
|Additions to long-loved assets:                                                  |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Development/redevelopment                                                        |  |               | 8,081   |         |   | 10,977    |  |           |  |                     |   | 4,172   |                     |   | 108     |                |  |                                     | 2,956   |   |                    |   | 26,294    |  |   |        |   |  |   | 26,294    |  
|Purchase of real estate                                                          |  |               | 55,152  |         |   |          |  |           |  |                     |   | 107,475 |                     |   |        |                |  |                                     | 10,597  |   |                    |   | 173,224   |  |   |        |   |  |   | 173,224   |  
|Capital expenditures for in-service properties                                   |  |               | 4,313   |         |   | 2,329     |  |           |  |                     |   | 13,296  |                     |   | 4,215   |                |  |                                     | 3,034   |   |                    |   | 27,187    |  |   |        |   |  |   | 27,187    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Total additions                                                                  |  |               | 67,546  |         |   | 13,306    |  |           |   |                     |   | 124,943 |                     |   | 4,323   |                |  |                                     | 16,587  |   |                    |   | 226,705   |  |   |         |   |  |   | 226,705   |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Investment balance in equity method investees                                    |  |               | 9,763   |         |   |          |  |           |  |                     |   | 3,914   |                     |   |        |                |  |                                     |        |   |                    |   | 13,677    |  |   | 6,299   |   |  |   | 19,976    |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  
|Total assets                                                                     |  | $             | 617,295 |         | $ | 383,559   |  | $         |  |                     | $ | 639,416 |                     | $ | 267,050 |                |  | $                                   | 180,379 |   |                    | $ | 2,087,699 |  | $ | 34,590  |   |  | $ | 2,122,289 |  
|                                                                                 |  |               |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |   |           |  |   |         |   |  |   |           |  



F-34



---

##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



For the Year Ended and As of December 31, 2002



|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | - | --------- | - | ------------------ | - | ------- | ------------------- | - | -------------- | - | ----------------------------------- | - | ------- | ------------------ | - | --------- |  | - | ------- | - |  | - | --------- | -
|(in thousands)                                                                   |  | Mid- Atlantic |         | Midwest |   | Northeast |  |   | Southwest |   | NorthernCalifornia |   |         | Southern California |   | Total segments |   | Corporate not allocable to segments |   |         | Consolidated total |  
|Revenues:                                                                        |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Rental income                                                                    |  | $             | 77,161  |         | $ | 68,918    |  | $ | 8,166     |   |                    | $ | 88,200  |                     | $ | 44,160         |   |                                     | $ | 27,911  |                    | $ | 314,516   |  | $ |        |   |  | $ | 314,516   |  
|Management and other fees, net                                                   |  |               | 726     |         |   | 79        |  |   | 748       |   |                    |   | 1,596   |                     |   | 280            |   |                                     |   | 120     |                    |   | 3,549     |  |   | 1,493   |   |  |   | 5,042     |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total revenues                                                                   |  |               | 77,887  |         |   | 68,997    |  |   | 8,914     |   |                    |   | 89,796  |                     |   | 44,440         |   |                                     |   | 28,031  |                    |   | 318,065   |  |   | 1,493   |   |  |   | 319,558   |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |   |          
|Expenses:                                                                        |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Property operating and maintenance                                               |  |               | 15,833  |         |   | 13,757    |  |   | 1,631     |   |                    |   | 22,091  |                     |   | 12,646         |   |                                     |   | 4,829   |                    |   | 70,787    |  |   |        |   |  |   | 70,787    |  
|Real estate taxes                                                                |  |               | 5,858   |         |   | 11,911    |  |   | 558       |   |                    |   | 12,527  |                     |   | 3,343          |   |                                     |   | 2,146   |                    |   | 36,343    |  |   |        |   |  |   | 36,343    |  
|General & administrative and personnel costs, net                                |  |               | 560     |         |   | 308       |  |   | 192       |   |                    |   | 541     |                     |   | 25             |   |                                     |   | 579     |                    |   | 2,205     |  |   | 8,191   |   |  |   | 10,396    |  
|Interest expense                                                                 |  |               |        |         |   |          |  |   |          |   |                    |   |        |                     |   |               |   |                                     |   |        |                    |   |          |  |   | 64,472  |   |  |   | 64,472    |  
|Amortization of deferred financing costs                                         |  |               |        |         |   |          |  |   |          |   |                    |   |        |                     |   |               |   |                                     |   |        |                    |   |          |  |   | 1,974   |   |  |   | 1,974     |  
|Depreciation and amortization                                                    |  |               | 13,068  |         |   | 10,289    |  |   | 1,587     |   |                    |   | 19,168  |                     |   | 6,898          |   |                                     |   | 6,768   |                    |   | 57,778    |  |   | 73      |   |  |   | 57,851    |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total expenses                                                                   |  |               | 35,319  |         |   | 36,265    |  |   | 3,968     |   |                    |   | 54,327  |                     |   | 22,912         |   |                                     |   | 14,322  |                    |   | 167,113   |  |   | 74,710  |   |  |   | 241,823   |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |   |          
|Merger termination fee, net                                                      |  |               |        |         |   |          |  |   |          |   |                    |   |        |                     |   |               |   |                                     |   |        |                    |   |          |  |   | 17,000  |   |  |   | 17,000    |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |   |          
|Income from continuing operations before minority interests and equity in income |  |               | 42,568  |         |   | 32,732    |  |   | 4,946     |   |                    |   | 35,469  |                     |   | 21,528         |   |                                     |   | 13,709  |                    |   | 150,952   |  |   | (56,217 | ) |  |   | 94,735    |  
|                                                                                 |  |               |         |         |   |           |  |   |          
|Minority interests                                                               |  |               |        |         |   |          |  |   |          |   |                    |   |        |                     |   |               |   |                                     |   |        |                    |   |          |  |   | (17,247 | ) |  |   | (17,247   | )
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |               | 935     |         |   | 1,070     |  |   | (291      | ) |                    |   | 4,305   |                     |   | (51            | ) |                                     |   | 370     |                    |   | 6,338     |  |   | (3,207  | ) |  |   | 3,131     |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Income from continuing operations                                                |  | $             | 43,503  |         | $ | 33,802    |  | $ | 4,655     |   |                    | $ | 39,774  |                     | $ | 21,477         |   |                                     | $ | 14,079  |                    | $ | 157,290   |  | $ | (76,671 | ) |  | $ | 80,619    |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|                                                                                 |  |               |         |         |   |           |  |   |          
|Additions to long-loved assets:                                                  |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Development/redevelopment                                                        |  |               | 25,575  |         |   | 16,859    |  |   | 3,583     |   |                    |   | 37,777  |                     |   | 2,159          |   |                                     |   | 3,540   |                    |   | 89,493    |  |   |        |   |  |   | 89,493    |  
|Purchase of real estate                                                          |  |               | 126,821 |         |   |          |  |   |          |   |                    |   | 3,421   |                     |   |               |   |                                     |   |        |                    |   | 130,242   |  |   |        |   |  |   | 130,242   |  
|Capital expenditures for in-service properties                                   |  |               | 5,216   |         |   | 3,209     |  |   | 695       |   |                    |   | 7,237   |                     |   | 6,605          |   |                                     |   | 4,406   |                    |   | 27,368    |  |   |        |   |  |   | 27,368    |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total additions                                                                  |  |               | 157,612 |         |   | 20,068    |  |   | 4,278     |   |                    |   | 48,435  |                     |   | 8,764          |   |                                     |   | 7,946   |                    |   | 247,103   |  |   |         |   |  |   | 247,103   |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Investment balance in equity method investees                                    |  |               | 10,389  |         |   |          |  |   |          |   |                    |   | 14,229  |                     |   |               |   |                                     |   |        |                    |   | 24,618    |  |   | 5,728   |   |  |   | 30,346    |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  
|Total assets                                                                     |  | $             | 592,023 |         | $ | 383,018   |  | $ |          |   |                    | $ | 550,069 |                     | $ | 270,216        |   |                                     | $ | 196,132 |                    | $ | 1,991,458 |  | $ | 39,135  |   |  | $ | 2,030,593 |  
|                                                                                 |  |               |         |         |   |           |  |   |           |   |                    |   |         |                     |   |                |   |                                     |   |         |                    |   |           |  |   |         |   |  |   |           |  



F-35



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(20) | Selected Quarterly Financial Data (Unaudited)
|---- | ---------------------------------------------



The following schedule is a summary of the quarterly results of operations for the years ended December 31, 2003, 2002 and 2001:



|                                    |  |                                               |        |               |   |              |  |               |        |       |   |        |  |   |        
|----------------------------------- |  | --------------------------------------------- | ------ | ------------- | - | ------------ |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                                    |  | (amounts in thousands, except per share data)
|                                    |  | FirstQuarter                                  |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |        | Total
|Year ended December 31, 2003        |  |                                               |        |               |   |              |  |               |        |       |   |        |  |   |        
|Revenue                             |  | $                                             | 87,263 |               | $ | 88,450       |  | $             | 88,706 |       | $ | 91,938 |  | $ | 356,357
|Income from continuing operations   |  | $                                             | 13,507 |               | $ | 12,800       |  | $             | 14,034 |       | $ | 13,761 |  | $ | 54,102 
|Net income                          |  | $                                             | 15,510 |               | $ | 8,512        |  | $             | 14,218 |       | $ | 21,177 |  | $ | 59,417 
|Net income per common sharebasic   |  | $                                             | 0.34   |               | $ | 0.16         |  | $             | 0.30   |       | $ | 0.45   |  | $ | 1.27   
|Net income per common sharediluted |  | $                                             | 0.34   |               | $ | 0.16         |  | $             | 0.30   |       | $ | 0.45   |  | $ | 1.27   
|                                    |  |                                               |        |               |  
|Year ended December 31, 2002        |  |                                               |        |               |   |              |  |               |        |       |   |        |  |   |        
|Revenue                             |  | $                                             | 80,657 |               | $ | 85,924       |  | $             | 84,886 |       | $ | 86,493 |  | $ | 337,960
|Income from continuing operations   |  | $                                             | 16,329 |               | $ | 15,237       |  | $             | 15,790 |       | $ | 15,001 |  | $ | 62,357 
|Net income                          |  | $                                             | 18,220 |               | $ | 17,341       |  | $             | 22,894 |       | $ | 15,826 |  | $ | 74,281 
|Net income per common sharebasic   |  | $                                             | 0.43   |               | $ | 0.40         |  | $             | 0.53   |       | $ | 0.35   |  | $ | 1.72   
|Net income per common sharediluted |  | $                                             | 0.43   |               | $ | 0.39         |  | $             | 0.53   |       | $ | 0.35   |  | $ | 1.71   
|                                    |  |                                               |        |               |  
|Year ended December 31, 2001        |  |                                               |        |               |   |              |  |               |        |       |   |        |  |   |        
|Revenue                             |  | $                                             | 82,214 |               | $ | 79,407       |  | $             | 80,962 |       | $ | 76,975 |  | $ | 319,558
|Income from continuing operations   |  | $                                             | 21,865 |               | $ | 25,593       |  | $             | 16,105 |       | $ | 17,056 |  | $ | 80,619 
|Net income                          |  | $                                             | 29,323 |               | $ | 36,472       |  | $             | 17,848 |       | $ | 18,823 |  | $ | 102,466
|Net income per common sharebasic   |  | $                                             | 0.75   |               | $ | 0.94         |  | $             | 0.43   |       | $ | 0.45   |  | $ | 2.57   
|Net income per common sharediluted |  | $                                             | 0.72   |               | $ | 0.90         |  | $             | 0.43   |       | $ | 0.45   |  | $ | 2.51   



|(21) | Income Taxes
|---- | ------------



We have elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, commencing with our taxable year ended December
31, 1996. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our adjusted taxable income to our shareholders. It is our current intention
to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income we distribute currently to our shareholders. If we fail to qualify as a REIT in any
taxable year, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a
REIT, we may be subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT
subsidiaries is subject to federal, state and local income taxes.



F-36



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Reconciliation between GAAP Net Income and Taxable Income



The following is a reconciliation of GAAP net income to taxable income for
the years ended December 31, 2003, 2002 and 2001:



|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|(in thousands)                                                                   |  | 2003 |        |   | 2002 |   |        | 2001 | 
|GAAP net income                                                                  |  | $    | 59,417 |   |      | $ | 74,281 |      |  | $ | 102,466 |  
|GAAP loss (net income) of taxable subsidiaries included above                    |  |      | (883   | ) |      |   | (651   | )    |  |   | 339     |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  
|GAAP net income from REIT operations                                             |  |      | 58,534 |   |      |   | 73,630 |      |  |   | 102,805 |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  
|GAAP to tax adjustments:(1)                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Depreciation and amortization                                                    |  |      | 18,897 |   |      |   | 14,495 |      |  |   | 5,551   |  
|Gains and losses from capital transactions(2)                                    |  |      | (4,783 | ) |      |   | (296   | )    |  |   | (17,645 | )
|Straight-line rent adjustment, net of rents received in advance                  |  |      | (7,948 | ) |      |   | (7,177 | )    |  |   | (8,231  | )
|Capitalized operating expenses and interest cost related to development projects |  |      | (182   | ) |      |   | (3,017 | )    |  |   | (4,955  | )
|Interest income                                                                  |  |      | 482    |   |      |   | 481    |      |  |   | 1,439   |  
|Compensation expense                                                             |  |      | (665   | ) |      |   | (4,542 | )    |  |   | (3,199  | )
|Other differences, net                                                           |  |      | 648    |   |      |   | 3,502  |      |  |   | (467    | )
|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  
|Total GAAP to tax adjustments                                                    |  |      | 6,449  |   |      |   | 3,446  |      |  |   | (27,507 | )
|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  
|Adjusted taxable income subject to distribution requirement(3)                   |  | $    | 64,983 |   |      | $ | 77,076 |      |  | $ | 75,298  |  
|                                                                                 |  |      |        |   |      |   |        |      |  |   |         |  



|(1) | All adjustments to GAAP net income from REIT operations are net of amounts attributable to
minority interest.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Represents the GAAP to tax difference for gains and losses including tax-deferred gain on
transactions qualifying under Section 1031 of the Internal Revenue Code.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The distribution requirement was 90% in each of the years ended December 31, 2003, 2002 and
2001.
|--- | -------------------------------------------------------------------------------------------------



Characterization of Distributions



The classification of distributions presented below is determined out of our
earnings and profits as defined by Section 316 of the Internal Revenue Code, which differs from federal taxable income.



The following table characterizes distributions paid per common share for the years ended December 31, 2003, 2002, and 2001:



|                  |  |      |       |  |       |   |  |      |       |  |       |   |  |   |       |  |       |  
|----------------- |  | ---- | ----- |  | ----- | - |  | ---- | ----- |  | ----- | - |  | - | ----- |  | ----- | -
|(in thousands)    |  | 2003 |       |  | 2002  |   |  | 2001 |      
|Ordinary income   |  | $    | 1.426 |  | 63.66 | % |  | $    | 1.788 |  | 80.73 | % |  | $ | 1.801 |  | 86.14 | %
|Return of capital |  | $    | 0.814 |  | 36.34 | % |  | $    | 0.427 |  | 19.27 | % |  | $ | 0.185 |  | 8.90  | %
|Capital gains     |  | $    | 0.00  |  | 0.00  | % |  | $    | 0.00  |  | 0.00  | % |  | $ | 0.104 |  | 4.96  | %
|                  |  |      |       |  |       |   |  |      |       |  |       |   |  |   |       |  |       |  
|                  |  | $    | 2.240 |  |       |   |  | $    | 2.215 |  |       |   |  | $ | 2.090 |  |       |  
|                  |  |      |       |  |       |   |  |      |       |  |       |   |  |   |       |  |       |  



F-37



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Prentiss Properties Resources, Inc. was incorporated in March 2001 to serve as a Taxable REIT
Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services business serves a broad base of clients, including major financial institutions and pension funds, large corporate
users, real estate advisory firms and real estate investment groups. Prentiss Properties Resources, Inc. had a deferred tax liability totaling approximately $643,000 at December 31, 2003 as detailed below:





|                                    |  |           |      |  
|----------------------------------- |  | --------- | ---- | -
|(in thousands)                      |  | Dr./(Cr.) |     
|Bad Debt Reserve                    |  | $         | 284  |  
|Accrued employee liabilities        |  |           | (121 | )
|Accrued depreciation & amortization |  |           | (220 | )
|Loss from partnership interests     |  |           | (556 | )
|other miscellaneous tax benefits    |  |           | 64   |  
|State Tax reserve                   |  |           | (94  | )
|Total deferred tax liability        |  | $         | (643 | )



|(22) | Subsequent Events
|---- | -----------------



Regus Business Centre Corp. (RBCC) was a tenant of ours under a lease. The tenant filed Chapter 11 bankruptcy on January 14, 2003 and effective January
14, 2003, the lease was rejected. On January 21, 2004, we received a payment totaling $3.2 million as settlement for our claims in the bankruptcy.



On January 22, 2004, Prentiss Office Investors, L.P. was established to acquire office properties in our core markets of Washington D.C./Northern
Virginia, Chicago, Dallas/Ft. Worth, Northern California and San Diego/Orange County. The partnership was initially 99.9% owned by the operating partnership and was seeded by the transfer of several recent acquisitions including, 2291 Wood Oak Drive
a single office building containing approximately 228,000 net rentable square feet located in Herndon Virginia, Corporate Lakes III a single office building containing approximately 124,000 net rentable square feet located in Chicago Illinois, and
seven office buildings containing approximately 370,000 net rentable square feet located in Carlsbad California.



Pursuant to a joint venture agreement, effective February 1, 2004, Stichting Pensioenfonds ABP, a Netherlands based pension fund, acquired a 49% limited
partnership interest in Prentiss Office Investors, L.P. for proceeds totaling $68.9 million. The joint venture will be consolidated with and into the accounts of the operating partnership.



On January 28, 2004, we completed two four-year interest rate swaps in the
notional amount of $50.0 million. The interest rate swaps effectively lock in our cost of funds at 3.819% (before the spread over LIBOR) on $50.0 million of our variable rate borrowings. The interest rate swap agreements are effective beginning
October 1, 2004 and mature October 1, 2008.



On February 4,
2004, pursuant to a unit repurchase agreement between our operating partnership and Brandywine Operating Partnership, L.P., we repurchased from Brandywine Operating Partnership, L.P. our outstanding 7.50% Series E Preferred Units and 26,768 common
units held by Brandywine Operating Partnership L.P. The Series E Preferred Units were repurchased at their liquidation value of $10.0 million plus accrued and unpaid dividends of $70,055. The common units were repurchased for $891,803 representing a
per unit price of $33.316, calculated as the average of the daily market price of our common shares for the 10 consecutive trading days prior to the date of repurchase. Concurrent with the repurchase, Brandywine Operating Partnership, L.P. repaid a
promissory note in the amount of $8.9 million and accrued and unpaid interest of $282,308 due to our operating partnership. An amount totaling $1.7 million, representing the difference between the units repurchased and the proceeds from the
promissory note was paid by our operating partnership to Brandywine Operating Partnership, L.P using funds from our revolving credit facility.



On February 19, 2004, we renewed our $300 million revolving credit facility, including an extension of the maturity date from May 23, 2005 to February 19,
2007. The interest rate on the facility will fluctuate based on our overall leverage with a range between 30-day LIBOR plus 112.5 basis points and 30-day LIBOR plus 160 basis points. The pricing on the renewed facility represents a 12.5 basis point
to 15.0 basis point pricing reduction across the leverage grid. The facility was substantially oversubscribed with initial commitments of $370 million. Banking participants in the revolving credit facility include Bank One as Administrative Agent;
Bank of America as Syndication Agent; Commerzbank, EuroHypo and Societe General as



F-38



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Documentation Agents; PNC Bank, Sun Trust and Union Bank of California as Co-Agents; and Comerica Bank, KeyBank,
Mellon Bank, and SouthTrust Bank as Lenders.



Using proceeds
from our revolving credit facility, on February 24, 2004, we repurchased the operating partnerships outstanding 8.30% Series B Cumulative Redeemable Perpetual Preferred Units, for approximately $96.2 million, which included accrued and unpaid
dividends of $1.2 million.



On March 2, 2004, we negotiated an
interest rate reduction on the $75.0 million unsecured term loan with Commerzbank AG. The interest rate which is based on overall leverage was reduced from 30-day LIBOR plus 125 to 175 basis points to 30-day LIBOR plus 112.5 to 160 basis points. In
addition, the term loan which had an original maturity date of March 16, 2006 was extended to March 16, 2009.



On March 10, 2004, we completed a five-year interest rate swap in the notional amount of $30.0 million. The interest rate swap effectively locks in our
cost of funds at 3.443% (before the spread over LIBOR) on $30.0 million of our variable rate borrowings. The interest rate swap agreement is effective beginning October 1, 2004 and matures October 1, 2009.



On June 10, 2002, we entered into a securities sales agreement with Brinson
Patrick Securities Corporation which we refer to as the Dribble Plan. Under our Dribble Plan we may sell, with Brinson Patrick acting as our sales agent, up to 3,000,000 of our common shares at the then market price directly to the public.
Subsequent to December 31, 2003, we issued 1,186,100 common shares through the Dribble Plan resulting in net proceeds of $39.3 million, or $33.09 per share after underwriting discounts. The proceeds were used to repay a portion of the outstanding
borrowings under our revolving credit facility. Since the inception of the Dribble Plan, through March 12, 2004, pursuant to the Dribble Plan, we have issued 1,730,200 common shares and as a result, we have 1,269,800 remaining common shares
available to issue under the plan.



F-39



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##### Table of Contents

##### Index to Financial Statements

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Report of Independent Auditors on

Financial Statement Schedules



To the Board of Trustees and Shareholders

of Prentiss Properties Trust:



Our audits of the consolidated financial statements referred to in our report dated March 10, 2004 appearing in the 2003 Annual Report to Shareholders of Prentiss Properties Trust on Form 10-K also included an audit
of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements.



/s/    PricewaterhouseCoopers LLP



Dallas, Texas

March 10, 2004



F-40



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##### Table of Contents

##### Index to Financial Statements

Schedule II



PRENTISS PROPERTIES TRUST

VALUATIONS AND QUALIFYING ACCOUNTS

(dollars in thousands)



|                                 |  |                             |       |                                       |   |                           |  |   |                       |   |  |   |      
|-------------------------------- |  | --------------------------- | ----- | ------------------------------------- | - | ------------------------- |  | - | --------------------- | - |  | - | -----
|Description                      |  | Balance Beginning of Period |       | Additions Charged to Costs & Expenses |   | Deductions from Reserve 1 |  |   | Balance End of Period
|Allowance for Doubtful Accounts: |  |                             |       |                                       |   |                           |  |   |                       |   |  |   |      
|Year Ended:                      |  |                             |       |                                       |   |                           |  |   |                       |   |  |   |      
|December 31, 2003                |  | $                           | 7,712 |                                       | $ | 3,563                     |  | $ | (1,289                | ) |  | $ | 9,986
|December 31, 2002                |  |                             | 3,086 |                                       |   | 5,428                     |  |   | (802                  | ) |  |   | 7,712
|December 31, 2001                |  |                             | 3,504 |                                       |   | 766                       |  |   | (1,184                | ) |  |   | 3,086



|1 | Balance written off as uncollectible.
|- | -------------------------------------





---

##### Table of Contents

##### Index to Financial Statements

Operating Real Estate and Accumulated Depreciation



A summary of activity for operating real estate and accumulated depreciation for the years ended December 31, 2003, 2002 and 2001 is as
follows:



|                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|(in thousands)                                                                      |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Operating real estate:                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at beginning of the period                                                  |  | $    | 1,932,028 |   |      | $ | 1,807,039 |      |  | $ | 1,869,694 |  
|Beginning construction in progress moved to operating real estate during the period |  |      | 37,170    |   |      |   | 29,084    |      |  |   | 78,389    |  
|Additions to and improvement of real estate                                         |  |      | 149,380   |   |      |   | 150,554   |      |  |   | 143,008   |  
|Cost of operating real estate sold                                                  |  |      | (65,899   | ) |      |   | (54,649   | )    |  |   | (284,052  | )
|                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at end of the period                                                        |  | $    | 2,052,679 |   |      | $ | 1,932,028 |      |  | $ | 1,807,039 |  
|                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Accumulated depreciation:                                                           |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at beginning of the period                                                  |  | $    | 178,792   |   |      | $ | 146,349   |      |  | $ | 126,630   |  
|Depreciation expense                                                                |  |      | 43,677    |   |      |   | 42,229    |      |  |   | 39,250    |  
|Accumulated depreciation of real estate sold or retired                             |  |      | (11,525   | ) |      |   | (9,786    | )    |  |   | (19,531   | )
|                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at end of the period                                                        |  | $    | 210,944   |   |      | $ | 178,792   |      |  | $ | 146,349   |  
|                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  





---

##### Table of Contents

##### Index to Financial Statements

Schedule III



PRENTISS PROPERTIES TRUST

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(dollars in thousands)



|                           |  |                   |      |              |                           |              |   |                                          |  |                          |                                        |       |                         |       |                     |  |              |        |  |                          |        |  |   |         |  |   |        |  |            |  |            |   |  |    
|-------------------------- |  | ----------------- | ---- | ------------ | ------------------------- | ------------ | - | ---------------------------------------- |  | ------------------------ | -------------------------------------- | ----- | ----------------------- | ----- | ------------------- |  | ------------ | ------ |  | ------------------------ | ------ |  | - | ------- |  | - | ------ |  | ---------- |  | ---------- | - |  | ---
|Property name              |  | Market            |      | Encumbrances |                           | Initial cost |   | Costscapitalizedsubsequentto acquisition |  |                          | Gross amountcarried at close of period |       | Accumulateddepreciation |       | Year ofconstruction |  | Dateacquired |        |  | Depreciable lives(years)
|                           |  |                   | Land |              | Buildings andimprovements |              |   | Land andimprovements                     |  | Building andimprovements |                                        | Total |                         |       |                     | 
|Barton Skyway I-IV         |  | Austin            |      | $            |                          |              | $ | 13,639                                   |  | $                        | 89,980                                 |       | $                       | 249   |                     |  | $            | 13,639 |  | $                        | 90,229 |  | $ | 103,868 |  | $ | 6,703  |  | 2000-2002  |  | (1         | ) |  | (2)
|Cielo Center               |  | Austin            |      |              |                          |              |   | 7,083                                    |  |                          | 40,334                                 |       |                         | 307   |                     |  |              | 7,083  |  |                          | 40,641 |  |   | 47,724  |  |   | 3,316  |  | 1984       |  | 9/21/2000  |   |  | (2)
|Spyglass Point             |  | Austin            |      |              |                          |              |   | 1,612                                    |  |                          | 6,465                                  |       |                         | 1     |                     |  |              | 1,612  |  |                          | 6,466  |  |   | 8,078   |  |   | 716    |  | 1998-1999  |  | (1         | ) |  | (2)
|123 North Wacker Drive     |  | Chicago           |      |              |                          |              |   | 13,163                                   |  |                          | 74,599                                 |       |                         | 6,720 |                     |  |              | 13,163 |  |                          | 81,319 |  |   | 94,482  |  |   | 7,470  |  | 1986       |  | 11/18/1999 |   |  | (2)
|410 Warrenville Road       |  | Chicago           |      |              |                          |              |   | 1,511                                    |  |                          | 4,131                                  |       |                         |      |                     |  |              | 1,511  |  |                          | 4,131  |  |   | 5,642   |  |   | 65     |  | 1999       |  | 5/8/2003   |   |  | (2)
|701 Warrenville Road       |  | Chicago           |      |              |                          |              |   | 1,564                                    |  |                          | 8,863                                  |       |                         | 6     |                     |  |              | 1,564  |  |                          | 8,869  |  |   | 10,433  |  |   | 1,201  |  | 1988       |  | 8/10/1998  |   |  | (2)
|1717 Deerfield Road        |  | Chicago           |      |              | 14,200                    |              |   | 3,237                                    |  |                          | 18,481                                 |       |                         | 220   |                     |  |              | 3,237  |  |                          | 18,701 |  |   | 21,938  |  |   | 3,265  |  | 1985       |  | 12/11/1996 |   |  | (2)
|1800 Sherman Avenue        |  | Chicago           |      |              |                          |              |   | 2,278                                    |  |                          | 13,099                                 |       |                         | 80    |                     |  |              | 2,278  |  |                          | 13,179 |  |   | 15,457  |  |   | 1,785  |  | 1986       |  | 8/5/1998   |   |  | (2)
|Bannockburn Centre         |  | Chicago           |      |              | 26,133                    |              |   | 7,927                                    |  |                          | 23,835                                 |       |                         |      |                     |  |              | 7,927  |  |                          | 23,835 |  |   | 31,762  |  |   | 2,584  |  | 1999       |  | (1         | ) |  | (2)
|Chicago Industrial         |  | Chicago           |      |              | 11,630                    |              |   | 2,871                                    |  |                          | 17,615                                 |       |                         | 636   |                     |  |              | 2,871  |  |                          | 18,251 |  |   | 21,122  |  |   | 4,016  |  | 1987-1988  |  | Various    |   |  | (2)
|Corporate Lakes III        |  | Chicago           |      |              |                          |              |   | 3,100                                    |  |                          | 14,638                                 |       |                         |      |                     |  |              | 3,100  |  |                          | 14,638 |  |   | 17,738  |  |   | 198    |  | 1990       |  | 6/18/2003  |   |  | (2)
|Corporetum Office Campus   |  | Chicago           |      |              | 24,679                    |              |   | 7,607                                    |  |                          | 43,104                                 |       |                         | 1,380 |                     |  |              | 7,607  |  |                          | 44,484 |  |   | 52,091  |  |   | 7,280  |  | 1984-1987  |  | 5/6/1997   |   |  | (2)
|OHare Plaza II            |  | Chicago           |      |              | 11,400                    |              |   | 3,854                                    |  |                          | 22,017                                 |       |                         | 382   |                     |  |              | 3,854  |  |                          | 22,399 |  |   | 26,253  |  |   | 3,949  |  | 1986       |  | 12/13/1996 |   |  | (2)
|One OHare Centre          |  | Chicago           |      |              | 39,735                    |              |   | 10,160                                   |  |                          | 57,514                                 |       |                         | 542   |                     |  |              | 10,160 |  |                          | 58,056 |  |   | 68,216  |  |   | 7,753  |  | 1984       |  | 8/27/1998  |   |  | (2)
|Salton                     |  | Chicago           |      |              |                          |              |   | 2,180                                    |  |                          | 5,351                                  |       |                         | (7    | )                   |  |              | 2,180  |  |                          | 5,344  |  |   | 7,524   |  |   | 379    |  | 2000-2001  |  | (1         | ) |  | (2)
|Bachman East & West        |  | Dallas/Fort Worth |      |              |                          |              |   | 2,133                                    |  |                          | 13,461                                 |       |                         | 252   |                     |  |              | 2,133  |  |                          | 13,713 |  |   | 15,846  |  |   | 2,451  |  | 1986       |  | 1996-1997  |   |  | (2)
|Burnett Plaza              |  | Dallas/Fort Worth |      |              | 66,000                    |              |   | 3,601                                    |  |                          | 87,950                                 |       |                         | 523   |                     |  |              | 3,601  |  |                          | 88,474 |  |   | 92,075  |  |   | 4,107  |  | 1983       |  | 3/7/2002   |   |  | (2)
|Cottonwood Office Center   |  | Dallas/Fort Worth |      |              | 8,348                     |              |   | 1,735                                    |  |                          | 9,865                                  |       |                         | 5     |                     |  |              | 1,735  |  |                          | 9,870  |  |   | 11,605  |  |   | 1,753  |  | 1986       |  | 10/24/1996 |   |  | (2)
|IBM Call Center            |  | Dallas/Fort Worth |      |              | 13,249                    |              |   | 1,418                                    |  |                          | 6,063                                  |       |                         | 3     |                     |  |              | 1,418  |  |                          | 6,066  |  |   | 7,484   |  |   | 789    |  | 1998       |  | (1         | ) |  | (2)
|Lakeview Center            |  | Dallas/Fort Worth |      |              |                          |              |   | 753                                      |  |                          | 5,020                                  |       |                         | 20    |                     |  |              | 753    |  |                          | 5,040  |  |   | 5,793   |  |   | 547    |  | 2000       |  | (1         | ) |  | (2)
|Millennium Center          |  | Dallas/Fort Worth |      |              |                          |              |   | 989                                      |  |                          | 6,392                                  |       |                         | 605   |                     |  |              | 980    |  |                          | 7,006  |  |   | 7,986   |  |   | 746    |  | 1999       |  | (1         | ) |  | (2)
|Park West C2               |  | Dallas/Fort Worth |      |              | 33,472                    |              |   | 8,360                                    |  |                          | 29,640                                 |       |                         | 6,532 |                     |  |              | 9,695  |  |                          | 34,837 |  |   | 44,532  |  |   | 7,024  |  | 1989       |  | 9/5/1995   |   |  | (2)
|Park West C3               |  | Dallas/Fort Worth |      |              |                          |              |   | 6,000                                    |  |                          | 18,612                                 |       |                         |      |                     |  |              | 6,000  |  |                          | 18,612 |  |   | 24,612  |  |   | 426    |  | 1985       |  | 1/31/2003  |   |  | (2)
|Park West E1               |  | Dallas/Fort Worth |      |              | 12,100                    |              |   | 2,857                                    |  |                          | 16,499                                 |       |                         | 150   |                     |  |              | 2,857  |  |                          | 16,649 |  |   | 19,506  |  |   | 2,966  |  | 1982       |  | 10/23/1996 |   |  | (2)
|Park West E2               |  | Dallas/Fort Worth |      |              | 7,900                     |              |   | 2,079                                    |  |                          | 11,863                                 |       |                         |      |                     |  |              | 2,079  |  |                          | 11,863 |  |   | 13,942  |  |   | 2,132  |  | 1985       |  | 10/23/1996 |   |  | (2)
|Walnut Glen Tower          |  | Dallas/Fort Worth |      |              | 33,545                    |              |   | 4,300                                    |  |                          | 32,669                                 |       |                         | 3,516 |                     |  |              | 5,612  |  |                          | 34,873 |  |   | 40,485  |  |   | 11,479 |  | 1985       |  | 1/1/1994   |   |  | (2)
|WestPoint Office Building  |  | Dallas/Fort Worth |      |              | 12,610                    |              |   | 2,844                                    |  |                          | 12,165                                 |       |                         | 37    |                     |  |              | 2,844  |  |                          | 12,202 |  |   | 15,046  |  |   | 1,627  |  | 1998       |  | (1         | ) |  | (2)
|Carrara Place              |  | Denver            |      |              |                          |              |   | 4,687                                    |  |                          | 26,561                                 |       |                         | 325   |                     |  |              | 4,687  |  |                          | 26,886 |  |   | 31,573  |  |   | 3,937  |  | 1982       |  | 1/30/1998  |   |  | (2)
|Highland Court             |  | Denver            |      |              | 4,488                     |              |   | 1,588                                    |  |                          | 9,010                                  |       |                         | 54    |                     |  |              | 1,588  |  |                          | 9,064  |  |   | 10,652  |  |   | 1,372  |  | 1986       |  | 12/12/1997 |   |  | (2)
|Orchard Place I & II       |  | Denver            |      |              |                          |              |   | 1,531                                    |  |                          | 8,653                                  |       |                         | 97    |                     |  |              | 1,531  |  |                          | 8,750  |  |   | 10,281  |  |   | 970    |  | 1980       |  | 7/20/1999  |   |  | (2)
|PacifiCare Building        |  | Denver            |      |              | 12,060                    |              |   | 3,045                                    |  |                          | 17,392                                 |       |                         | 325   |                     |  |              | 3,045  |  |                          | 17,717 |  |   | 20,762  |  |   | 3,116  |  | 1983       |  | 12/20/1996 |   |  | (2)
|Panorama Point             |  | Denver            |      |              |                          |              |   | 1,241                                    |  |                          | 7,043                                  |       |                         | 246   |                     |  |              | 1,241  |  |                          | 7,289  |  |   | 8,530   |  |   | 1,074  |  | 1983       |  | 12/30/1997 |   |  | (2)
|One Westchase Center       |  | Houston           |      |              |                          |              |   | 7,864                                    |  |                          | 44,564                                 |       |                         | 768   |                     |  |              | 7,864  |  |                          | 45,332 |  |   | 53,196  |  |   | 6,335  |  | 1982       |  | 6/12/1998  |   |  | (2)
|Los Angeles Industrial     |  | Los Angeles       |      |              | 31,300                    |              |   | 6,429                                    |  |                          | 36,431                                 |       |                         | 1,159 |                     |  |              | 6,429  |  |                          | 37,590 |  |   | 44,019  |  |   | 8,963  |  | 1973-1983  |  | Various    |   |  | (2)
|2291 Wood Oak Drive        |  | Metro. Wash., DC  |      |              |                          |              |   | 6,827                                    |  |                          | 28,614                                 |       |                         | 1     |                     |  |              | 6,827  |  |                          | 28,615 |  |   | 35,442  |  |   | 239    |  | 1999       |  | 8/28/2003  |   |  | (2)
|2411 Dulles Corner Road    |  | Metro. Wash., DC  |      |              | 16,700                    |              |   | 3,973                                    |  |                          | 22,682                                 |       |                         | 88    |                     |  |              | 3,973  |  |                          | 22,770 |  |   | 26,743  |  |   | 3,948  |  | 1990       |  | 12/31/1996 |   |  | (2)
|3130 Fairview Park Drive   |  | Metro. Wash., DC  |      |              | 22,255                    |              |   | 3,141                                    |  |                          | 21,314                                 |       |                         |      |                     |  |              | 3,141  |  |                          | 21,314 |  |   | 24,455  |  |   | 2,576  |  | 1997-1999  |  | (1         | ) |  | (2)
|3141 Fairview Park Drive   |  | Metro. Wash., DC  |      |              | 12,800                    |              |   | 4,000                                    |  |                          | 15,980                                 |       |                         | 480   |                     |  |              | 4,007  |  |                          | 16,453 |  |   | 20,460  |  |   | 3,503  |  | 1988       |  | 2/22/1996  |   |  | (2)
|4401 Fair Lakes Court      |  | Metro. Wash., DC  |      |              | 3,200                     |              |   | 933                                      |  |                          | 5,232                                  |       |                         | 192   |                     |  |              | 933    |  |                          | 5,424  |  |   | 6,357   |  |   | 942    |  | 1988       |  | 1/14/1997  |   |  | (2)
|6600 Rockledge Drive       |  | Metro. Wash., DC  |      |              |                          |              |   |                                         |  |                          | 22,428                                 |       |                         | 44    |                     |  |              |       |  |                          | 22,472 |  |   | 22,472  |  |   | 2,735  |  | 1981       |  | 6/30/1998  |   |  | (2)
|7101 Wisconsin Avenue      |  | Metro. Wash., DC  |      |              | 20,386                    |              |   | 5,170                                    |  |                          | 29,298                                 |       |                         | 2,177 |                     |  |              | 5,170  |  |                          | 31,475 |  |   | 36,645  |  |   | 4,962  |  | 1975       |  | 12/30/1997 |   |  | (2)
|8521 Leesburg Pike         |  | Metro. Wash., DC  |      |              | 15,115                    |              |   | 2,130                                    |  |                          | 5,955                                  |       |                         | 5,544 |                     |  |              | 2,259  |  |                          | 11,370 |  |   | 13,629  |  |   | 3,101  |  | 1984       |  | 8/17/1994  |   |  | (2)
|12601 Fair Lakes Circle    |  | Metro. Wash., DC  |      |              |                          |              |   | 6,600                                    |  |                          | 45,474                                 |       |                         |      |                     |  |              | 6,600  |  |                          | 45,474 |  |   | 52,074  |  |   | 1,273  |  | 1995       |  | 11/18/2002 |   |  | (2)
|13825 Sunrise Valley Drive |  | Metro. Wash., DC  |      |              | 8,052                     |              |   | 2,099                                    |  |                          | 11,983                                 |       |                         | 341   |                     |  |              | 2,099  |  |                          | 12,324 |  |   | 14,423  |  |   | 2,143  |  | 1989       |  | 12/31/1996 |   |  | (2)
|Calverton Office Park      |  | Metro. Wash., DC  |      |              |                          |              |   | 2,885                                    |  |                          | 25,965                                 |       |                         | 1,076 |                     |  |              | 2,885  |  |                          | 27,041 |  |   | 29,926  |  |   | 4,419  |  | 1981-1987  |  | 8/27/1997  |   |  | (2)
|Campus Point               |  | Metro. Wash., DC  |      |              |                          |              |   | 5,730                                    |  |                          | 24,469                                 |       |                         | 213   |                     |  |              | 5,730  |  |                          | 24,682 |  |   | 30,412  |  |   | 1,692  |  | 1985       |  | 4/1/2001   |   |  | (2)
|Fairmont Building          |  | Metro. Wash., DC  |      |              |                          |              |   | 3,750                                    |  |                          | 17,656                                 |       |                         | 333   |                     |  |              | 3,750  |  |                          | 17,989 |  |   | 21,739  |  |   | 1,907  |  | 1964, 1997 |  | 11/4/1999  |   |  | (2)
|Greenwood Center           |  | Metro. Wash., DC  |      |              |                          |              |   | 3,092                                    |  |                          | 21,818                                 |       |                         | 177   |                     |  |              | 3,092  |  |                          | 21,995 |  |   | 25,087  |  |   | 1,504  |  | 1985       |  | 4/1/2001   |   |  | (2)
|Oakwood Center             |  | Metro. Wash., DC  |      |              |                          |              |   | 2,660                                    |  |                          | 12,224                                 |       |                         | 424   |                     |  |              | 2,660  |  |                          | 12,648 |  |   | 15,308  |  |   | 852    |  | 1982       |  | 4/1/2001   |   |  | (2)



---

##### Table of Contents

##### Index to Financial Statements

|                                 |  |                        |      |              |                           |              |   |                                          |  |                                        |           |                         |   |                     |  |              |         |  |                          |           |  |   |           |  |   |         |  |                 |  |            |     |  |    
|-------------------------------- |  | ---------------------- | ---- | ------------ | ------------------------- | ------------ | - | ---------------------------------------- |  | -------------------------------------- | --------- | ----------------------- | - | ------------------- |  | ------------ | ------- |  | ------------------------ | --------- |  | - | --------- |  | - | ------- |  | --------------- |  | ---------- | --- |  | ---
|Property name                    |  | Market                 |      | Encumbrances |                           | Initial cost |   | Costscapitalizedsubsequentto acquisition |  | Gross amountcarried at close of period |           | Accumulateddepreciation |   | Year ofconstruction |  | Dateacquired |         |  | Depreciable lives(years)
|                                 |  |                        | Land |              | Buildings andimprovements |              |   | Land andimprovements                     |  | Building andimprovements               |           | Total                   |   |                     |  |             
|Park West at Dulles Corner       |  | Metro. Wash., DC       |      |              |                          |              |   | 3,000                                    |  |                                        | 15,221    |                         |   | 888                 |  |              | 3,000   |  |                          | 16,109    |  |   | 19,109    |  |   | 824     |  | 1997            |  | 7/2/2001   |     |  | (2)
|Plaza 1900                       |  | Metro. Wash., DC       |      |              |                          |              |   | 6,274                                    |  |                                        | 31,323    |                         |   | 439                 |  |              | 6,274   |  |                          | 31,762    |  |   | 38,036    |  |   | 2,168   |  | 1989            |  | 4/1/2001   |     |  | (2)
|Research Office Center I-III     |  | Metro. Wash., DC       |      |              | 43,960                    |              |   | 9,124                                    |  |                                        | 47,761    |                         |   | 81                  |  |              | 9,106   |  |                          | 47,860    |  |   | 56,966    |  |   | 6,589   |  | 1986-1990, 2000 |  | 9/9/1997   | (1) |  | (2)
|Willow Oaks I-III                |  | Metro. Wash., DC       |      |              | 42,449                    |              |   | 14,460                                   |  |                                        | 89,106    |                         |   | 26                  |  |              | 14,460  |  |                          | 89,132    |  |   | 103,592   |  |   | 8,848   |  | 1986-2002       |  | 8/18/1998  | (1) |  | (2)
|Natomas Corporate Center         |  | Sacramento             |      |              | 36,069                    |              |   | 11,208                                   |  |                                        | 63,466    |                         |   | 538                 |  |              | 11,208  |  |                          | 64,004    |  |   | 75,212    |  |   | 10,869  |  | 1984-1991       |  | 4/2/1997   |     |  | (2)
|Camino West Corporate Park       |  | San Diego              |      |              |                          |              |   | 2,240                                    |  |                                        | 5,567     |                         |   |                    |  |              | 2,240   |  |                          | 5,567     |  |   | 7,807     |  |   | 15      |  | 1991            |  | 11/21/2003 |     |  | (2)
|Carlsbad Airport Plaza           |  | San Diego              |      |              |                          |              |   | 2,510                                    |  |                                        | 6,650     |                         |   |                    |  |              | 2,510   |  |                          | 6,650     |  |   | 9,160     |  |   | 18      |  | 1987            |  | 11/21/2003 |     |  | (2)
|Carlsbad Pacific Center I-III    |  | San Diego              |      |              |                          |              |   | 6,270                                    |  |                                        | 14,645    |                         |   | 429                 |  |              | 6,270   |  |                          | 15,074    |  |   | 21,344    |  |   | 1,743   |  | 1986-2002       |  | 11/13/1997 | (1) |  | (2)
|Carlsbad Pacifica                |  | San Diego              |      |              |                          |              |   | 1,532                                    |  |                                        | 6,129     |                         |   | 186                 |  |              | 1,532   |  |                          | 6,315     |  |   | 7,847     |  |   | 929     |  | 1986            |  | 2/4/1998   |     |  | (2)
|Del Mar Gateway                  |  | San Diego              |      |              | 26,330                    |              |   | 5,260                                    |  |                                        | 23,419    |                         |   | 136                 |  |              | 5,260   |  |                          | 23,555    |  |   | 28,815    |  |   | 1,908   |  | 2000-2001       |  | (1)        |     |  | (2)
|Executive Center Del Mar         |  | San Diego              |      |              | 17,553                    |              |   | 3,952                                    |  |                                        | 12,063    |                         |   | 247                 |  |              | 3,952   |  |                          | 12,310    |  |   | 16,262    |  |   | 1,631   |  | 1998            |  | (1)        |     |  | (2)
|La Place Court                   |  | San Diego              |      |              |                          |              |   | 2,932                                    |  |                                        | 9,369     |                         |   |                    |  |              | 2,932   |  |                          | 9,369     |  |   | 12,301    |  |   | 25      |  | 1988            |  | 11/21/2003 |     |  | (2)
|Pacific Ridge Corporate Center   |  | San Diego              |      |              |                          |              |   | 6,218                                    |  |                                        | 12,623    |                         |   |                    |  |              | 6,218   |  |                          | 12,623    |  |   | 18,841    |  |   | 34      |  | 1999            |  | 11/21/2003 |     |  | (2)
|Pacific View Plaza               |  | San Diego              |      |              |                          |              |   | 1,835                                    |  |                                        | 7,302     |                         |   |                    |  |              | 1,835   |  |                          | 7,302     |  |   | 9,137     |  |   | 20      |  | 1986            |  | 11/21/2003 |     |  | (2)
|Plaza I & II                     |  | San Diego              |      |              | 7,052                     |              |   | 2,811                                    |  |                                        | 11,246    |                         |   | 321                 |  |              | 2,811   |  |                          | 11,567    |  |   | 14,378    |  |   | 1,698   |  | 1988-1989       |  | 2/4/1998   |     |  | (2)
|San Diego Industrial             |  | San Diego              |      |              |                          |              |   | 6,282                                    |  |                                        | 25,128    |                         |   | 1,064               |  |              | 6,282   |  |                          | 26,192    |  |   | 32,474    |  |   | 5,093   |  | 1985-1988       |  | Various    |     |  | (2)
|The Campus                       |  | San Diego              |      |              |                          |              |   | 1,195                                    |  |                                        | 4,779     |                         |   | 245                 |  |              | 1,195   |  |                          | 5,024     |  |   | 6,219     |  |   | 731     |  | 1988            |  | 2/4/1998   |     |  | (2)
|Lake Merritt Tower I             |  | San Francisco Bay Area |      |              |                          |              |   | 6,504                                    |  |                                        | 36,853    |                         |   | 93                  |  |              | 6,504   |  |                          | 36,946    |  |   | 43,450    |  |   | 3,098   |  | 1990            |  | 8/31/2000  |     |  | (2)
|The Ordway                       |  | San Francisco Bay Area |      |              | 47,969                    |              |   | 23,316                                   |  |                                        | 54,402    |                         |   | 750                 |  |              | 23,316  |  |                          | 55,152    |  |   | 78,468    |  |   | 7,715   |  | 1970            |  | 5/21/1998  |     |  | (2)
|World Savings Center             |  | San Francisco Bay Area |      |              | 28,496                    |              |   | 7,714                                    |  |                                        | 30,856    |                         |   | 1,482               |  |              | 7,714   |  |                          | 32,338    |  |   | 40,052    |  |   | 3,912   |  | 1985            |  | 7/29/1997  |     |  | (2)
|One Northwestern Plaza           |  | Suburban Detroit       |      |              | 17,800                    |              |   |                                         |  |                                        | 27,448    |                         |   | 336                 |  |              |        |  |                          | 27,784    |  |   | 27,784    |  |   | 4,786   |  | 1989            |  | 10/23/1996 |     |  | (2)
|                                 |  |                        |      |              |                           |              |   |                                          |  |                                        |           |                         |   |                     |  |              |         |  |                          |           |  |   |           |  |   |         |  |                 |  |            |     |  |    
|Total Operating Properties       |  |                        |      |              | 729,035                   |              |   | 322,867                                  |  |                                        | 1,686,327 |                         |   | 43,484              |  |              | 325,623 |  |                          | 1,727,056 |  |   | 2,052,679 |  |   | 210,944 |  |                 |  |            |     |  |    
|Land Held for Future Development |  |                        |      |              |                          |              |   | 40,887                                   |  |                                        | 6,152     |                         |   | 163                 |  |              | 40,887  |  |                          | 6,315     |  |   | 47,202    |  |   |         |  |                 |  |            |     |  |    
|                                 |  |                        |      |              |                           |              |   |                                          |  |                                        |           |                         |   |                     |  |              |         |  |                          |           |  |   |           |  |   |         |  |                 |  |            |     |  |    
|Total Real Estate                |  |                        |      | $            | 729,035                   |              | $ | 363,754                                  |  | $                                      | 1,692,479 |                         | $ | 43,647              |  | $            | 366,510 |  | $                        | 1,733,371 |  | $ | 2,099,881 |  | $ | 210,944 |  |                 |  |            |     |  |    
|                                 |  |                        |      |              |                           |              |   |                                          |  |                                        |           |                         |   |                     |  |              |         |  |                          |           |  |   |           |  |   |         |  |                 |  |            |     |  |    

---

|(1) | The real estate project or portion of real estate project was developed by the company.
|--- | ---------------------------------------------------------------------------------------

|(2) | Buildings & improvements - 30 to 40 years.
|--- | ------------------------------------------

|(3) | The aggregate cost for federal income tax purposes was approximately $2,197,811.
|--- | --------------------------------------------------------------------------------



---

##### Table of Contents

##### Index to Financial Statements

SIGNATURES



Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



PRENTISS PROPERTIES TRUSTBy:

/s/    Thomas P. SimonThomas P. Simon Senior Vice President and Chief Accounting Officer




Date:             March 12, 2004



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



|               |  |                                                                                              |  | 
|-------------- |  | -------------------------------------------------------------------------------------------- |  | 
|Date           |  | Signature                                                                                    |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Michael V. PrentissMichael V. Prentiss Chairman of the Board and Trustee              |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Thomas F. AugustThomas F. August President and Chief Executive Officer Trustee        |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Michael A. ErnstMichael A. Ernst Executive Vice President and Chief Financial Officer |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Thomas P. SimonThomas P. Simon Senior Vice President and Chief Accounting Officer     |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Thomas J. Hynes,
Jr.Thomas J. Hynes, Jr. Trustee                                      |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Barry J.C. ParkerBarry J.C. Parker Trustee                                            |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Dr. Leonard M. Riggs, Jr.Dr. Leonard M. Riggs, Jr. Trustee                            |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Ronald G. SteinhartRonald G. Steinhart Trustee                                        |  | 
|               |  |                                                                                             
|March 12, 2004 |  | /s/    Lawrence A. WilsonLawrence A. Wilson Trustee                                          |  | 



70