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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-K



(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2002



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)



|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)



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 28, 2002, 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 $1,127,803,307.



As
of March 25, 2003, the number of Common Shares of Beneficial Interest outstanding was 39,094,127, 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 15, 2003.



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PRENTISS PROPERTIES TRUST



INDEX



|Item No.                   |  |                                                                                                |  | Form 10-K Report Page
|-------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------------
|                          
|Forward-Looking Statements |  | 3                                                                                             
|                          
|                           |  | PART I                                                                                         |  |                      
|                          
|1.                         |  | Business                                                                                       |  | 4                    
|2.                         |  | Properties                                                                                     |  | 8                    
|3.                         |  | Legal Proceedings                                                                              |  | 15                   
|4.                         |  | Submission of Matters to a Vote of Security Holders                                            |  | 15                   
|                          
|                           |  | PART II                                                                                        |  |                      
|                          
|5.                         |  | Market for Registrants Common Equity and Related Shareholder Matters                          |  | 16                   
|6.                         |  | Selected Financial and Operating Data                                                          |  | 17                   
|7.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 21                   
|7A.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 53                   
|8.                         |  | Financial Statements and Supplementary Data                                                    |  | 54                   
|9.                         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 54                   
|                          
|                           |  | PART III                                                                                       |  |                      
|                          
|10.                        |  | Trustees and Executive Officers of the Company                                                 |  | 55                   
|11.                        |  | Executive Compensation                                                                         |  | 55                   
|12.                        |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |  | 55                   
|13.                        |  | Certain Relationships and Related Transactions                                                 |  | 55                   
|14.                        |  | Controls and Procedures                                                                        |  | 55                   
|                          
|                           |  | PART IV                                                                                        |  |                      
|                          
|15.                        |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 55                   
|                          
|Signatures                 |  |                                                                                                |  | 62                   
|Certifications             |  |                                                                                                |  | 63                   



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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 insurance;
|                                                                                                                                                    
|     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;                                                    



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 41 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 a management services company, Prentiss Properties Resources and its subsidiaries. The ownership of the operating partnership is
as follows at December 31, 2002:



|2002                      |  | Common Units         |  | %      |   |  | Series D Convertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |  
|------------------------- |  | -------------------- |  | ------ | - |  | ------------------------------------ |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | -
|                          |  | (units in thousands) | 
|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 | %
|                          |  |                      |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  



As of
December 31, 2002, we owned interests in a diversified portfolio of 137 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  | Number of Buildings |  | Net Rentable Square Feet
|--------------------- |  | ------------------- |  | ------------------------
|                      |  |                     |  | (in millions)           
|Office properties     |  | 106                 |  | 15.3                    
|Industrial properties |  | 31                  |  | 2.3                     
|                      |  |                     |  |                         
|Total                 |  | 137                 |  | 17.6                    
|                      |  |                     |  |                         



Our
properties include two office properties containing 222,000 net rentable square feet that were in various stages of development at December 31, 2002. As of December 31, 2002, our properties, exclusive of the development properties, were 93% leased
to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 14.9 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 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 12 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, Atlanta       
|Midwest             |  | Chicago, Suburban Detroit                 
|Southwest           |  | Dallas/Fort Worth, Austin, Denver, Houston
|Northern California |  | Oakland, Sacramento                       
|Southern California |  | San Diego, Los Angeles                    



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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 (20) to our Consolidated Financial Statements.



Recent Developments



At December 31, 2002, the operating partnership held a 98% non-voting interest in Prentiss Properties Resources, which we accounted for using the equity method of accounting. Effective January 1, 2003,
we acquired from Ampulla, LLC, a single member limited liability company owned by Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust, the remaining outstanding interest in Prentiss Properties Resources, for gross consideration
of approximately $67,000. As a result of this transaction, effective January 1, 2003 the accounts of Prentiss Properties Resources will be consolidated with and into the accounts of our operating partnership.



On January 31, 2003, using proceeds from our revolving credit
facility, we acquired a 339,471 net rentable square foot office building in Dallas, Texas for gross consideration of $28.0 million. At acquisition, the building was 68% leased.



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.



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); or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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



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



| |  |  | presence in and knowledge of our 12 markets across the United States;
| | - |  | ---------------------------------------------------------------------

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

| |  |  | existing relationships with 33 different 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, which may allow sellers to defer tax consequences on sale; and
| | - |  | --------------------------------------------------------------------------------

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



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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, 2002, we completed the following acquisition related transactions:



| |  |  | In January 2002, we contributed $3.0 million to a joint venture established to develop two multi-story office buildings in Del Mar, California within our Southern
California Region. Our contribution represents a 70% controlling interest in the joint venture. On January 25, 2002, the joint venture acquired for $10.5 million, from an unrelated third party, a 7.4 acre development site in Del Mar, California.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 31, 2002, we acquired from Teachers Insurance and Annuity Association of America the $47.0 million mortgage loan on the Burnett Plaza property. The
Burnett Plaza property, located within our Southwest Region, was owned pursuant to a joint venture agreement between our operating partnership and Burnett Plaza  VEF III, L.P. an affiliate of Lend Lease Real Estate Investments, as 20% and 80%
owners, respectively. The loan, which bore interest at 7.50% per annum, was originally scheduled to mature February 1, 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 7, 2002, we purchased from Burnett Plaza  VEF III, L.P., its 80% interest in the Burnett Plaza joint venture for a purchase price of approximately
$51.2 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 18, 2002, we acquired a 263,990 net rentable square foot office property located within our Mid-Atlantic Region for gross consideration of $55.0 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Item 2. Properties
for additional information relating to our properties.



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 on a build-to-suit basis, but we will also consider selective opportunities for speculative development, when we deem conditions for such development activity appropriate.



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.
| | - |  | --------------------------------------------------------------------------------------------------------



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At December
31, 2002, we had two office properties containing 222,000 square feet in various stages of development. During the year ended December 31, 2002, we completed and placed in-service one office property in Austin Texas containing 223,000 net rentable
square feet. The following table presents our properties under development at December 31, 2002:



|Properties Under Development |  | Segment             |  | Market                |  | Number of Buildings |  | Net Rentable Square Feet(1)
|---------------------------- |  | ------------------- |  | --------------------- |  | ------------------- |  | ---------------------------
|                             |  |                     |  |                       |  |                     |  | (in thousands)             
|Carlsbad Pacific Center III  |  | Southern California |  | San Diego             |  | 1                   |  | 40                         
|Willow Oaks III              |  | Mid-Atlantic        |  | Metro. Washington, DC |  | 1                   |  | 182                        
|                             |  |                     |  |                       |  |                     |  |                            
|Total                        |  |                     |  |                       |  | 2                   |  | 222                        
|                             |  |                     |  |                       |  |                     |  |                            

---

|(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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Item 2. Properties for additional information on our development properties.



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.



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. Training is provided through Prentiss Properties University, a training program that
increases consistency within operations and communicates new technology and procedures throughout our organization.



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.



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Third-Party Management



At December 31, 2002, we, through our
subsidiaries, managed or performed property-related services for 175 office, industrial and other properties owned by 33 third-party management clients. These properties are located throughout the United States and contain approximately 14.9 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 12 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 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., Prime
Group 
|                   
|Southwest           |  | CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office Properties, Lincoln Property Co., Trammell Crow
Co.
|                   
|Northern California |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Shorenstein Co.                                    
|                   
|Southern California |  | Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty Corp.                                     



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 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, 2002, we owned interests in 137 properties totaling 17.6 million net rentable square feet with no individual property representing either 10% or more of our total assets at December 31, 2002 or gross revenues for the year ended December
31, 2002. The properties consist of 106 office properties comprising approximately 15.3 million net rentable square feet and 31 industrial properties comprising approximately 2.3 million net rentable square feet. As of December 31, 2002, all of
these properties are wholly-owned by us (through our subsidiaries), except the following:



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| | (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;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | the 1676 International and 8260 Greensboro properties, which are owned by Tysons International Partners, a joint venture, in which we own a 25% non-controlling
interest;
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | One Northwestern Plaza, a property in which we own a 100% leasehold interest; and
| | --- |  | ---------------------------------------------------------------------------------



| | (4) |  | 6600 Rockledge Drive, a property, in which we own a 99% leasehold interest.
| | --- |  | ---------------------------------------------------------------------------



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The following
table presents specific information about our 137 properties as of December 31, 2002:



|Property Name                |  | Building Type |  | Market            |  | Year(s) Built/ Renovated |  | Number of Buildings |  | Net Rentable Square Feet(D) |  | Total Base Rent for Year Ended 12/31/02(E) |        | Percent Leased As of 12/31/02
|---------------------------- |  | ------------- |  | ----------------- |  | ------------------------ |  | ------------------- |  | --------------------------- |  | ------------------------------------------ | ------ | -----------------------------
|                             |  |               |  |                   |  |                          |  |                     |  | (in thousands)              |  | (in thousands)                             |        |                              
|Cumberland Office Park       |  | Office        |  | Atlanta           |  | 1972-1999                |  | 9                   |  | 644                         |  | $                                          | 11,021 |                              
|1676 International(A)        |  | Office        |  | Metro. Wash., DC  |  | 1999                     |  | 1                   |  | 75                          |  |                                            | 2,061  |                              
|2411 Dulles Corner Road      |  | Office        |  | Metro. Wash., DC  |  | 1990                     |  | 1                   |  | 177                         |  |                                            | 4,578  |                              
|3130 Fairview Park Drive     |  | Office        |  | Metro. Wash., DC  |  | 1999                     |  | 1                   |  | 183                         |  |                                            | 5,434  |                              
|3141 Fairview Park Drive     |  | Office        |  | Metro. Wash., DC  |  | 1988                     |  | 1                   |  | 192                         |  |                                            | 3,082  |                              
|4401 Fair Lakes Court        |  | Office        |  | Metro. Wash., DC  |  | 1988                     |  | 1                   |  | 59                          |  |                                            | 1,526  |                              
|6600 Rockledge Drive         |  | Office        |  | Metro. Wash., DC  |  | 1981                     |  | 1                   |  | 156                         |  |                                            | 4,022  |                              
|7101 Wisconsin Avenue        |  | Office        |  | Metro. Wash., DC  |  | 1975                     |  | 1                   |  | 237                         |  |                                            | 4,353  |                              
|8260 Greensboro(A)           |  | Office        |  | Metro. Wash., DC  |  | 1980                     |  | 1                   |  | 38                          |  |                                            | 858    |                              
|8521 Leesburg Pike           |  | Office        |  | Metro. Wash., DC  |  | 1984                     |  | 1                   |  | 145                         |  |                                            | 3,175  |                              
|12601 Fair Lakes Circle      |  | Office        |  | Metro. Wash., DC  |  | 1995                     |  | 1                   |  | 264                         |  |                                            | 568    |                              
|13825 Sunrise Valley Drive   |  | Office        |  | Metro. Wash., DC  |  | 1989                     |  | 1                   |  | 104                         |  |                                            | 2,502  |                              
|Calverton Office Park        |  | Office        |  | Metro. Wash., DC  |  | 1981-1987                |  | 3                   |  | 307                         |  |                                            | 5,638  |                              
|Campus Point                 |  | Office        |  | Metro. Wash., DC  |  | 1985                     |  | 1                   |  | 172                         |  |                                            | 2,814  |                              
|Fairmont Building            |  | Office        |  | Metro, Wash., DC  |  | 1964/1997                |  | 1                   |  | 122                         |  |                                            | 2,593  |                              
|Greenwood Center             |  | Office        |  | Metro. Wash., DC  |  | 1985                     |  | 1                   |  | 150                         |  |                                            | 3,569  |                              
|Oakwood Center               |  | Office        |  | Metro, Wash., DC  |  | 1982                     |  | 1                   |  | 128                         |  |                                            | 2,719  |                              
|Park West at Dulles          |  | Office        |  | Metro, Wash., DC  |  | 1997                     |  | 1                   |  | 152                         |  |                                            | 3,447  |                              
|Plaza 1900                   |  | Office        |  | Metro, Wash., DC  |  | 1989                     |  | 1                   |  | 203                         |  |                                            | 4,139  |                              
|Research Office Center I-III |  | Office        |  | Metro. Wash., DC  |  | 1986-2000                |  | 3                   |  | 439                         |  |                                            | 9,996  |                              
|Willow Oaks I & II           |  | Office        |  | Metro. Wash., DC  |  | 1986-1989                |  | 2                   |  | 387                         |  |                                            | 7,087  |                              
|Willow Oaks III              |  | Office        |  | Metro. Wash., DC  |  |   (C)                   |  | 1                   |  | 182                         |  |                                            | 95     |                              
|                             |  |               |  |                   |  |                          |  |                     |  |                             |  |                                            |        |                              
|Total Mid-Atlantic Region    |  |               |  |                   |  |                          |  | 35                  |  | 4,516                       |  |                                            | 85,277 |                              
|                             |  |               |  |                   |  |                          |  |                     |  |                             |  |                                            |        |                              
|123 North Wacker Drive       |  | Office        |  | Chicago           |  | 1986                     |  | 1                   |  | 537                         |  |                                            | 4,500  |                              
|1717 Deerfield Road          |  | Office        |  | Chicago           |  | 1985                     |  | 1                   |  | 138                         |  |                                            | 2,173  |                              
|1800 Sherman Avenue          |  | Office        |  | Chicago           |  | 1986                     |  | 1                   |  | 136                         |  |                                            | 3,457  |                              
|701 Warrenville Road         |  | Office        |  | Chicago           |  | 1988                     |  | 1                   |  | 67                          |  |                                            | 1,014  |                              
|Bannockburn Centre           |  | Office        |  | Chicago           |  | 1999                     |  | 1                   |  | 257                         |  |                                            | 4,383  |                              
|Corporetum Office Campus     |  | Office        |  | Chicago           |  | 1984-1987                |  | 5                   |  | 324                         |  |                                            | 5,765  |                              
|OHare Plaza II              |  | Office        |  | Chicago           |  | 1986                     |  | 1                   |  | 236                         |  |                                            | 5,689  |                              
|One OHare Centre            |  | Office        |  | Chicago           |  | 1984                     |  | 1                   |  | 380                         |  |                                            | 5,658  |                              
|Salton                       |  | Office        |  | Chicago           |  | 2001                     |  | 1                   |  | 59                          |  |                                            | 1,077  |                              
|Chicago Industrial           |  | Industrial    |  | Chicago           |  | 1987-1988                |  | 4                   |  | 682                         |  |                                            | 2,255  |                              
|One Northwestern Plaza       |  | Office        |  | Sub. Detroit      |  | 1989                     |  | 1                   |  | 242                         |  |                                            | 4,963  |                              
|                             |  |               |  |                   |  |                          |  |                     |  |                             |  |                                            |        |                              
|Total Midwest Region         |  |               |  |                   |  |                          |  | 18                  |  | 3,058                       |  |                                            | 40,934 |                              
|                             |  |               |  |                   |  |                          |  |                     |  |                             |  |                                            |        |                              
|Barton Skyway I-IV           |  | Office        |  | Austin            |  | 1999-2002                |  | 4                   |  | 787                         |  |                                            | 14,605 |                              
|Broadmoor Austin(B)          |  | Office        |  | Austin            |  | 1991                     |  | 7                   |  | 556                         |  |                                            | 10,179 |                              
|Cielo Center                 |  | Office        |  | Austin            |  | 1984                     |  | 3                   |  | 271                         |  |                                            | 4,875  |                              
|Spyglass Point               |  | Office        |  | Austin            |  | 1999                     |  | 1                   |  | 59                          |  |                                            | 964    |                              
|Bachman East & West          |  | Office        |  | Dallas/Fort Worth |  | 1986                     |  | 2                   |  | 196                         |  |                                            | 2,715  |                              
|Burnett Plaza                |  | Office        |  | Dallas/Fort Worth |  | 1983                     |  | 1                   |  | 1,025                       |  |                                            | 13,110 |                              
|Cottonwood Office Center     |  | Office        |  | Dallas/Fort Worth |  | 1986                     |  | 3                   |  | 164                         |  |                                            | 2,682  |                              
|IBM Call Center              |  | Office        |  | Dallas/Fort Worth |  | 1998                     |  | 1                   |  | 150                         |  |                                            | 2,120  |                              
|Lakeview Center              |  | Office        |  | Dallas/Fort Worth |  | 2000                     |  | 1                   |  | 101                         |  |                                            | 1,131  |                              
|Millennium Center            |  | Office        |  | Dallas/Fort Worth |  | 1999                     |  | 1                   |  | 99                          |  |                                            | 1,429  |                              
|Park West C2                 |  | Office        |  | Dallas/Fort Worth |  | 1989                     |  | 1                   |  | 349                         |  |                                            | 8,227  |                              
|Park West E1                 |  | Office        |  | Dallas/Fort Worth |  | 1982                     |  | 1                   |  | 183                         |  |                                            | 3,107  |                              
|Park West E2                 |  | Office        |  | Dallas/Fort Worth |  | 1985                     |  | 1                   |  | 201                         |  |                                            | 2,818  |                              
|Walnut Glen Tower            |  | Office        |  | Dallas/Fort Worth |  | 1985                     |  | 1                   |  | 464                         |  |                                            | 8,307  |                              
|WestPoint Office Building    |  | Office        |  | Dallas/Fort Worth |  | 1998                     |  | 1                   |  | 150                         |  |                                            | 736    |                              
|Carrara Place                |  | Office        |  | Denver            |  | 1982                     |  | 1                   |  | 235                         |  |                                            | 3,197  |                              
|Highland Court               |  | Office        |  | Denver            |  | 1986                     |  | 1                   |  | 99                          |  |                                            | 1,299  |                              



10



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|Property Name                    |  | Building Type |  | Market      |  | Year(s) Built/ Renovated |  | Number of Buildings |  | Net Rentable Square Feet(D) |  | Total Base Rent for Year Ended 12/31/02(E) |         | Percent Leased As of 12/31/02
|-------------------------------- |  | ------------- |  | ----------- |  | ------------------------ |  | ------------------- |  | --------------------------- |  | ------------------------------------------ | ------- | -----------------------------
|                                 |  |               |  |             |  |                          |  |                     |  | (in thousands)              |  | (in thousands)                             |         |                              
|Orchard Place I & II             |  | Office        |  | Denver      |  | 1980                     |  | 2                   |  | 105                         |  |                                            | 2,036   |                              
|PacifiCare Building              |  | Office        |  | Denver      |  | 1983                     |  | 1                   |  | 200                         |  |                                            | 2,706   |                              
|Panorama Point                   |  | Office        |  | Denver      |  | 1983                     |  | 1                   |  | 79                          |  |                                            | 1,175   |                              
|International Energy Center      |  | Office        |  | Houston     |  | 1982/1990                |  | 1                   |  | 156                         |  |                                            | 1,665   |                              
|One Westchase Center             |  | Office        |  | Houston     |  | 1982                     |  | 1                   |  | 466                         |  |                                            | 7,311   |                              
|Westheimer Central Plaza         |  | Office        |  | Houston     |  | 1982                     |  | 1                   |  | 183                         |  |                                            | 2,939   |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Total Southwest Region           |  |               |  |             |  |                          |  | 38                  |  | 6,278                       |  |                                            | 99,333  |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Natomas Corporate Center         |  | Office        |  | Sacramento  |  | 1984-1991                |  | 6                   |  | 566                         |  |                                            | 11,691  |                              
|Lake Merritt Tower I             |  | Office        |  | Oakland     |  | 1990                     |  | 1                   |  | 204                         |  |                                            | 5,275   |                              
|The Ordway                       |  | Office        |  | Oakland     |  | 1970                     |  | 1                   |  | 531                         |  |                                            | 14,273  |                              
|World Savings Center             |  | Office        |  | Oakland     |  | 1985                     |  | 1                   |  | 272                         |  |                                            | 7,260   |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Total Northern California Region |  |               |  |             |  |                          |  | 9                   |  | 1,573                       |  |                                            | 38,499  |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Los Angeles Industrial           |  | Industrial    |  | Los Angeles |  | 1973-1983                |  | 18                  |  | 1,253                       |  |                                            | 7,010   |                              
|Carlsbad Pacific Center I & II   |  | Office        |  | San Diego   |  | 1986-1989                |  | 2                   |  | 90                          |  |                                            | 2,214   |                              
|Carlsbad Pacific Center III      |  | Office        |  | San Diego   |  | (C)                     |  | 1                   |  | 40                          |  |                                            | 430     |                              
|Carlsbad Pacifica                |  | Office        |  | San Diego   |  | 1986                     |  | 1                   |  | 49                          |  |                                            | 1,180   |                              
|Del Mar Gateway                  |  | Office        |  | San Diego   |  | 2001                     |  | 1                   |  | 164                         |  |                                            | 5,047   |                              
|Executive Center Del Mar         |  | Office        |  | San Diego   |  | 1998                     |  | 2                   |  | 113                         |  |                                            | 3,225   |                              
|Plaza I & II                     |  | Office        |  | San Diego   |  | 1988-1989                |  | 2                   |  | 89                          |  |                                            | 2,032   |                              
|The Campus                       |  | Office        |  | San Diego   |  | 1988                     |  | 1                   |  | 45                          |  |                                            | 790     |                              
|San Diego Industrial             |  | Industrial    |  | San Diego   |  | 1985-1988                |  | 9                   |  | 359                         |  |                                            | 4,010   |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Total Southern California Region |  |               |  |             |  |                          |  | 37                  |  | 2,202                       |  |                                            | 25,938  |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              
|Total Properties                 |  |               |  |             |  |                          |  | 137                 |  | 17,627                      |  | $                                          | 289,981 |                              
|                                 |  |               |  |             |  |                          |  |                     |  |                             |  |                                            |         |                              

---

|(A) |  | We hold a 25% non-controlling interest in Tysons International Partners. Tysons International
Partners owns the 1676 International 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) |  | Properties in various stages of development or properties that have been recently developed
by us and are in various stages of lease-up. See Item 1. BusinessBusiness and Growth Strategies for further disclosure on our development properties.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) |  | Total base rent for the year ended December 31, 2002 includes the fixed rental amount due for
the year ended December 31, 2002 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2002, including our pro rata share of debt on our joint venture properties, we had $867.5 million of mortgages on our properties, which represents 79.0% 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.



11



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Our properties
are leased to local, national and foreign companies engaged in a variety of businesses including computer systems design, management, insurance, broadcasting and telecommunications, legal services, and information services. As of December 31, 2002,
we had approximately 1,000 tenants, with the following 8 tenants representing approximately 19% of our aggregate annualized based rent and approximately 17% of our total net rentable square footage: International Business Machines, Kaiser Foundation
Health Plan, Verizon Communications, MCI WorldCom, Northrop Grumman Corporation, General Services Administration, Aspen Systems Corporation and American Management Systems. Leases typically contain provisions permitting tenants to renew expiring
leases at prevailing market rates. Approximately 65% 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.



The following table sets forth a 10-year schedule of the operating properties lease expirations for leases in place as of
December 31, 2002.



|Office Properties   |  | 2003                                          |  |   | 2004  |   |  | 2005 |        |   | 2006 |   |        | 2007 |  |   | 2008   |   |  | 2009 |        |   | 2010 |   |       | 2011 |  |   | 2012  |   |  | Thereafter |      
|------------------- |  | --------------------------------------------- |  | - | ----- | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---------- | -----
|Mid-Atlantic Region |  | Square Feet Expiring (000s)                  |  |   | 294   |   |  |      | 798    |   |      |   | 538    |      |  |   | 658    |   |  |      | 623    |   |      |   | 154   |      |  |   | 288   |   |  |            | 48   
|                    |  | Square Feet as a % of NRA                     |  |   | 7     | % |  |      | 18     | % |      |   | 12     | %    |  |   | 15     | % |  |      | 14     | % |      |   | 4     | %    |  |   | 7     | % |  |            | 1    
|                    |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 6,367 |   |  | $    | 16,739 |   |      | $ | 13,610 |      |  | $ | 17,000 |   |  | $    | 15,430 |   |      | $ | 4,570 |      |  | $ | 7,877 |   |  | $          | 1,371
|                    |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 21.66 |   |  | $    | 20.98  |   |      | $ | 25.30  |      |  | $ | 25.84  |   |  | $    | 24.77  |   |      | $ | 29.68 |      |  | $ | 27.35 |   |  | $          | 28.56
|                    |  | Number of Leases Expiring                     |  |   | 47    |   |  |      | 51     |   |      |   | 38     |      |  |   | 42     |   |  |      | 33     |   |      |   | 10    |      |  |   | 10    |   |  |            | 5    
|Midwest Region      |  | Square Feet Expiring (000s)                  |  |   | 376   |   |  |      | 253    |   |      |   | 192    |      |  |   | 152    |   |  |      | 142    |   |      |   | 43    |      |  |   | 32    |   |  |            | 24   
|                    |  | Square Feet as a % of NRA                     |  |   | 16    | % |  |      | 11     | % |      |   | 8      | %    |  |   | 6      | % |  |      | 6      | % |      |   | 2     | %    |  |   | 1     | % |  |            | 1    
|                    |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 8,040 |   |  | $    | 6,719  |   |      | $ | 4,199  |      |  | $ | 3,762  |   |  | $    | 3,549  |   |      | $ | 893   |      |  | $ | 825   |   |  | $          | 557  
|                    |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 21.38 |   |  | $    | 26.56  |   |      | $ | 21.87  |      |  | $ | 24.75  |   |  | $    | 24.99  |   |      | $ | 20.77 |      |  | $ | 25.78 |   |  | $          | 23.21
|                    |  | Number of Leases Expiring                     |  |   | 29    |   |  |      | 22     |   |      |   | 23     |      |  |   | 18     |   |  |      | 25     |   |      |   | 4     |      |  |   | 5     |   |  |            | 2    



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|Office Properties          |  | 2003                                          |  |   | 2004   |   |  | 2005 |        |   | 2006 |   |        | 2007 |  |   | 2008   |   |  | 2009 |        |   | 2010 |   |        | 2011 |  |   | 2012   |   |  | Thereafter |      
|-------------------------- |  | --------------------------------------------- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---------- | -----
|Southwest Region           |  | Square Feet Expiring (000s)                  |  |   | 392    |   |  |      | 722    |   |      |   | 708    |      |  |   | 644    |   |  |      | 573    |   |      |   | 349    |      |  |   | 610    |   |  |            | 189  
|                           |  | Square Feet as a % of NRA                     |  |   | 6      | % |  |      | 12     | % |      |   | 11     | %    |  |   | 10     | % |  |      | 9      | % |      |   | 6      | %    |  |   | 10     | % |  |            | 3    
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 7,361  |   |  | $    | 13,066 |   |      | $ | 13,117 |      |  | $ | 12,919 |   |  | $    | 10,638 |   |      | $ | 6,230  |      |  | $ | 14,316 |   |  | $          | 3,236
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 18.78  |   |  | $    | 18.10  |   |      | $ | 18.53  |      |  | $ | 20.08  |   |  | $    | 18.57  |   |      | $ | 17.85  |      |  | $ | 23.47  |   |  | $          | 17.12
|                           |  | Number of Leases Expiring                     |  |   | 70     |   |  |      | 67     |   |      |   | 57     |      |  |   | 51     |   |  |      | 42     |   |      |   | 19     |      |  |   | 17     |   |  |            | 9    
|Northern California Region |  | Square Feet Expiring (000s)                  |  |   | 145    |   |  |      | 242    |   |      |   | 173    |      |  |   | 120    |   |  |      | 249    |   |      |   | 92     |      |  |   | 130    |   |  |            | 78   
|                           |  | Square Feet as a % of NRA                     |  |   | 9      | % |  |      | 15     | % |      |   | 11     | %    |  |   | 8      | % |  |      | 16     | % |      |   | 6      | %    |  |   | 8      | % |  |            | 5    
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 3,592  |   |  | $    | 6,560  |   |      | $ | 4,284  |      |  | $ | 3,391  |   |  | $    | 6,923  |   |      | $ | 2,684  |      |  | $ | 3,348  |   |  | $          | 2,817
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 24.77  |   |  | $    | 27.11  |   |      | $ | 24.76  |      |  | $ | 28.26  |   |  | $    | 27.80  |   |      | $ | 29.17  |      |  | $ | 25.75  |   |  | $          | 36.12
|                           |  | Number of Leases Expiring                     |  |   | 23     |   |  |      | 29     |   |      |   | 24     |      |  |   | 11     |   |  |      | 20     |   |      |   | 3      |      |  |   | 6      |   |  |            | 2    
|Southern California Region |  | Square Feet Expiring (000s)                  |  |   | 132    |   |  |      | 71     |   |      |   | 86     |      |  |   | 55     |   |  |      | 18     |   |      |   | 28     |      |  |   | 0      |   |  |            | 29   
|                           |  | Square Feet as a % of NRA                     |  |   | 24     | % |  |      | 13     | % |      |   | 16     | %    |  |   | 10     | % |  |      | 3      | % |      |   | 5      | %    |  |   | 0      | % |  |            | 5    
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 3,488  |   |  | $    | 1,948  |   |      | $ | 2,388  |      |  | $ | 1,503  |   |  | $    | 525    |   |      | $ | 805    |      |  | $ | 0      |   |  | $          | 1,091
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 26.42  |   |  | $    | 27.44  |   |      | $ | 27.77  |      |  | $ | 27.33  |   |  | $    | 29.17  |   |      | $ | 28.75  |      |  | $ | 0.00   |   |  | $          | 37.62
|                           |  | Number of Leases Expiring                     |  |   | 37     |   |  |      | 25     |   |      |   | 20     |      |  |   | 6      |   |  |      | 6      |   |      |   | 3      |      |  |   | 0      |   |  |            | 1    
|Total Office Properties    |  | Square Feet Expiring (000s)                  |  |   | 1,339  |   |  |      | 2,086  |   |      |   | 1,697  |      |  |   | 1,629  |   |  |      | 1,605  |   |      |   | 666    |      |  |   | 1,060  |   |  |            | 368  
|                           |  | Square Feet as a % of NRA                     |  |   | 9      | % |  |      | 14     | % |      |   | 11     | %    |  |   | 11     | % |  |      | 11     | % |      |   | 4      | %    |  |   | 7      | % |  |            | 2    
|                           |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 28,848 |   |  | $    | 45,032 |   |      | $ | 37,598 |      |  | $ | 38,575 |   |  | $    | 37,065 |   |      | $ | 15,182 |      |  | $ | 26,366 |   |  | $          | 9,072
|                           |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 21.54  |   |  | $    | 21.59  |   |      | $ | 22.16  |      |  | $ | 23.69  |   |  | $    | 23.09  |   |      | $ | 22.80  |      |  | $ | 24.87  |   |  | $          | 24.65
|                           |  | Number of Leases Expiring                     |  |   | 206    |   |  |      | 194    |   |      |   | 162    |      |  |   | 128    |   |  |      | 126    |   |      |   | 39     |      |  |   | 38     |   |  |            | 19   



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|Industrial Properties |  | 2003                                          |  |   | 2004  |   |  | 2005 |       |   | 2006 |   |       | 2007 |  |   | 2008  |   |  | 2009 |       |   | 2010 |   |       | 2011 |  |   | 2012 |   |  | Thereafter |     
|--------------------- |  | --------------------------------------------- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | - |  | ---------- | ----
|Midwest Region        |  | Square Feet Expiring (000s)                  |  |   | 0     |   |  |      | 136   |   |      |   | 0     |      |  |   | 189   |   |  |      | 40    |   |      |   | 267   |      |  |   | 0    |   |  |            | 0   
|                      |  | Square Feet as a % of NRA                     |  |   | 0     | % |  |      | 20    | % |      |   | 0     | %    |  |   | 28    | % |  |      | 6     | % |      |   | 39    | %    |  |   | 0    | % |  |            | 0   
|                      |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 0     |   |  | $    | 534   |   |      | $ | 0     |      |  | $ | 648   |   |  | $    | 248   |   |      | $ | 988   |      |  | $ | 0    |   |  | $          | 0   
|                      |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 0.00  |   |  | $    | 3.93  |   |      | $ | 0.00  |      |  | $ | 3.43  |   |  | $    | 6.20  |   |      | $ | 3.70  |      |  | $ | 0.00 |   |  | $          | 0.00
|                      |  | Number of Leases Expiring                     |  |   | 0     |   |  |      | 2     |   |      |   | 0     |      |  |   | 1     |   |  |      | 2     |   |      |   | 1     |      |  |   | 0    |   |  |            | 0   
|Southern California   |  | Square Feet Expiring (000s)                  |  |   | 302   |   |  |      | 426   |   |      |   | 304   |      |  |   | 57    |   |  |      | 398   |   |      |   | 94    |      |  |   | 31   |   |  |            | 0   
|Region                |  | Square Feet as a % of NRA                     |  |   | 19    | % |  |      | 26    | % |      |   | 19    | %    |  |   | 4     | % |  |      | 25    | % |      |   | 6     | %    |  |   | 2    | % |  |            | 0   
|                      |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 2,102 |   |  | $    | 2,853 |   |      | $ | 2,626 |      |  | $ | 700   |   |  | $    | 2,770 |   |      | $ | 554   |      |  | $ | 300  |   |  | $          | 0   
|                      |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 6.96  |   |  | $    | 6.70  |   |      | $ | 8.64  |      |  | $ | 12.28 |   |  | $    | 6.96  |   |      | $ | 5.89  |      |  | $ | 9.68 |   |  | $          | 0.00
|                      |  | Number of Leases Expiring                     |  |   | 15    |   |  |      | 20    |   |      |   | 9     |      |  |   | 3     |   |  |      | 2     |   |      |   | 2     |      |  |   | 1    |   |  |            | 0   
|Total Industrial      |  | Square Feet Expiring (000s)                  |  |   | 302   |   |  |      | 562   |   |      |   | 304   |      |  |   | 246   |   |  |      | 438   |   |      |   | 361   |      |  |   | 31   |   |  |            | 0   
|Properties            |  | Square Feet as a % of NRA                     |  |   | 13    | % |  |      | 24    | % |      |   | 13    | %    |  |   | 11    | % |  |      | 19    | % |      |   | 16    | %    |  |   | 1    | % |  |            | 0   
|                      |  | Annualized Base Rent in Expiring Year (000s) |  | $ | 2,102 |   |  | $    | 3,387 |   |      | $ | 2,626 |      |  | $ | 1,348 |   |  | $    | 3,018 |   |      | $ | 1,542 |      |  | $ | 300  |   |  | $          | 0   
|                      |  | Annualized Base Rent PSF in Expiring Year     |  | $ | 6.96  |   |  | $    | 6.03  |   |      | $ | 8.64  |      |  | $ | 5.48  |   |  | $    | 6.89  |   |      | $ | 4.27  |      |  | $ | 9.68 |   |  | $          | 0.00
|                      |  | Number of Leases Expiring                     |  |   | 15    |   |  |      | 22    |   |      |   | 9     |      |  |   | 4     |   |  |      | 4     |   |      |   | 3     |      |  |   | 1    |   |  |            | 0   



We are
actively engaged in and have significant experience in the development, redevelopment and renovation of office and industrial properties. Subject to supply and demand, we expect to have the total projected costs of our properties under development
comprise approximately 10-15% of our total market capitalization at any point in time. Due to current market conditions, we have scaled back our development activity, and as a result, at December 31, 2002, we had 222,000 net rentable square feet of
properties under development with an estimated development cost of $48.9 million, or 2.0% of our December 31, 2002 total market capitalization. In addition to developing new properties, we are involved in substantial levels of construction activity
in the normal course of owning and operating buildings. Such activity includes building out interior space for tenants, expansions of existing buildings, and repairs necessary to upgrade or maintain the quality of the buildings. The table below sets
forth a schedule of the segment, market, net rentable square feet and estimated cost of each of our development properties.

|Properties Under Development |  | Segment             |  | Market                |  | Net Rentable Square Feet(1) |  | Estimated Cost(2)
|---------------------------- |  | ------------------- |  | --------------------- |  | --------------------------- |  | -----------------
|                             |  |                     |  |                       |  | (in thousands)              |  | (in millions)    
|Carlsbad Pacific Center III  |  | Southern California |  | San Diego             |  | 40                          |  | $                
|Willow Oaks III              |  | Mid-Atlantic        |  | Metro. Washington, DC |  | 182                         |  |                  
|                             |  |                     |  |                       |  |                             |  |                  
|Total                        |  |                     |  |                       |  | 222                         |  | $                
|                             |  |                     |  |                       |  |                             |  |                  

---

|(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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) |  | As of December 31, 2002, we have incurred $41.4 million of the total estimated cost of our
development properties.
|--- |  | ------------------------------------------------------------------------------------------------------------------



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 $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 $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 be impossible to obtain insurance covering terrorist attacks. In addition, we would expect our insurance premiums to increase in the future, which may have an adverse impact on our cash flow. We may not
be able to purchase policies in the future with coverage limits and deductibles similar to those that were available before September 11, 2001. We believe that our properties as of the date of this filing are adequately insured in accordance with
industry standards.



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 2002 through the solicitation of proxies or otherwise.



15



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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 25, 2003, the last reported sales price per common share on the NYSE was $27.55 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  
|-------------- |  | ----- |  | -----
|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
|2001           |  |       |  |      
|Fourth Quarter |  | 28.29 |  | 24.36
|Third Quarter  |  | 29.16 |  | 25.80
|Second Quarter |  | 27.10 |  | 23.70
|First Quarter  |  | 27.00 |  | 23.76



Holders



At March 25, 2003, we had approximately 506
holders of record and approximately 7,000 beneficial owners of our common shares. As of March 25, 2003, 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 units of limited partnership interest in the operating partnership, which are redeemable for common shares subject to limitations, were held by 22 entities or persons.



In order to comply with certain requirements related to
qualification as a REIT, our organizational documents limit the number of outstanding common shares that may be owned by any single person or affiliated group to 8.5% of the outstanding common shares (other than Michael V. Prentiss, for whom the
ownership limitation is 15%, and Security Capital Preferred Growth, Incorporated, for whom the ownership limitation is 11%).



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 2002 and 2001.



16



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##### Table of Contents



|Period Which Distribution Relates |  | Distribution Record Date |  | Distribution Payment Date |  | Per Share Distribution Amount
|--------------------------------- |  | ------------------------ |  | ------------------------- |  | -----------------------------
|2002                              |  |                          |  |                           |  |                              
|Fourth Quarter                    |  | 12/27/02                 |  | 1/10/03                   |  | $                            
|Third Quarter                     |  | 9/30/02                  |  | 10/11/02                  |  | $                            
|Second Quarter                    |  | 6/28/02                  |  | 7/12/02                   |  | $                            
|First Quarter                     |  | 3/29/02                  |  | 4/12/02                   |  | $                            
|2001                              |  |                          |  |                           |  |                              
|Fourth Quarter                    |  | 12/28/01                 |  | 1/11/02                   |  | $                            
|Third Quarter                     |  | 9/28/01                  |  | 10/12/01                  |  | $                            
|Second Quarter                    |  | 6/29/01                  |  | 7/13/01                   |  | $                            
|First Quarter                     |  | 3/30/01                  |  | 4/12/01                   |  | $                            



For tax
purposes, the foregoing distributions represent an approximate 19.3% and 8.9% return of capital in 2002 and 2001, 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, 2002 and 2001, we declared distributions totaling $2.215 and $2.09 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 2003 in the amount of $.56 per share, payable on April 11, 2003 to holders of record on March 31, 2003. 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.



Item 6. Selected Financial and Operating Data



The following section sets forth our selected consolidated financial and operating data. The following data should be read in conjunction with the 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.



17



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##### Table of Contents



|                                                                                            |  | Year Ended December 31,                  |        
|------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------
|                                                                                            |  | 2002                                     |        
|                                                                                            |  | (in thousands, except per share amounts) |        
|Operating Data:                                                                             |  |                                          |        
|Rental income                                                                               |  | $                                        | 350,122
|Management and other fees, net                                                              |  |                                          | 4,386  
|                                                                                            |  |                                          |        
|Total revenues                                                                              |  |                                          | 354,508
|                                                                                            |  |                                          |        
|Property operating expenses and real estate taxes                                           |  |                                          | 128,773
|General and administrative and personnel costs                                              |  |                                          | 10,361 
|Interest expense and amortization of financing costs                                        |  |                                          | 68,913 
|Depreciation and amortization                                                               |  |                                          | 71,734 
|                                                                                            |  |                                          |        
|Total expenses                                                                              |  |                                          | 279,781
|                                                                                            |  |                                          |        
|Merger termination fee, net                                                                 |  |                                          |       
|Loss on investment in securities                                                            |  |                                          |       
|                                                                                            |  |                                          |        
|Income from continuing operations before minority interests and
equity in income            |  |                                          | 74,727 
|Minority interests(1)                                                                       |  |                                          | (10,899
|Equity in income of joint ventures and unconsolidated subsidiaries                          |  |                                          | 3,154  
|                                                                                            |  |                                          |        
|Income from continuing operations                                                           |  |                                          | 66,982 
|                                                                                            |  |                                          |        
|Income from discontinued operations                                                         |  |                                          | 2,008  
|Gain from disposition of discontinued operations                                            |  |                                          | 5,575  
|Minority interests related to discontinued operations                                       |  |                                          | (284   
|                                                                                            |  |                                          |        
|Discontinued operations                                                                     |  |                                          | 7,299  
|                                                                                            |  |                                          |        
|Income before gain on sale of properties and extraordinary items                            |  |                                          | 74,281 
|                                                                                            |  |                                          |        
|Gain on sale of properties                                                                  |  |                                          |       
|Extraordinary items                                                                         |  |                                          |       
|                                                                                            |  |                                          |        
|Net income                                                                                  |  | $                                        | 74,281 
|                                                                                           
|Preferred dividends                                                                         |  |                                          | (8,358 
|                                                                                            |  |                                          |        
|Net income applicable to common shareholders                                                |  | $                                        | 65,923 
|                                                                                            |  |                                          |        
|                                                                                           
|Per Share Data:                                                                             |  |                                          |        
|Basic earnings per common share:                                                            |  |                                          |        
|Income from continuing operations applicable to common shareholders                         |  | $                                        | 1.53   
|Discontinued operations                                                                     |  | $                                        | 0.19   
|Extraordinary items                                                                         |  | $                                        |       
|                                                                                            |  |                                          |        
|Net income applicable to common shareholders  basic                                        |  | $                                        | 1.72   
|                                                                                            |  |                                          |        
|Weighted average number of common shares outstanding  basic                                |  |                                          | 38,409 
|Diluted earnings per common share:                                                          |  |                                          |        
|Income from continuing operations applicable to common shareholders                         |  | $                                        | 1.52   
|Discontinued operations                                                                     |  | $                                        | 0.19   
|Extraordinary items                                                                         |  | $                                        |       
|                                                                                            |  |                                          |        
|Net income applicable to common shareholders  diluted                                      |  | $                                        | 1.71   
|                                                                                            |  |                                          |        
|Weighted average number of common shares and common share equivalents outstanding 
diluted |  |                                          | 38,649 



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|                                                       |  | As of or For the Year Ended December 31, |          
|------------------------------------------------------ |  | ---------------------------------------- | ---------
|                                                       |  | 2002                                     |          
|                                                       |  | (in thousands)                           |          
|Balance Sheet Data:                                    |  |                                          |          
|Operating real estate, before accumulated depreciation |  | $                                        | 1,932,028
|Operating real estate, after accumulated depreciation  |  |                                          | 1,753,236
|Cash and cash equivalents                              |  |                                          | 5,080    
|Total assets                                           |  |                                          | 2,122,289
|Mortgages and notes payable                            |  |                                          | 1,011,027
|Total liabilities                                      |  |                                          | 1,141,731
|Minority interests                                     |  |                                          | 136,325  
|Shareholders equity                                   |  |                                          | 844,233  
|                                                      
|Other Data:                                            |  |                                          |          
|Cash flow from operations                              |  | $                                        | 160,611  
|Cash flow from investing                               |  |                                          | (160,505 
|Cash flow from financing                               |  |                                          | (871     
|EBITDA(2)                                              |  |                                          | 233,061  
|Funds from operations(3)                               |  |                                          | 147,766  
|                                                      
|                                                       |  | (square feet in thousands)               |          
|                                                      
|Property Data:                                         |  |                                          |          
|Number of properties                                   |  |                                          | 137      
|Total net rentable square feet                         |  |                                          | 17,627   
|Leased %                                               |  |                                          | 93       

---

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

|(2) |  | EBITDA, a non-GAAP financial measure, means operating income before mortgage and other interest expense, income taxes, depreciation and amortization. We believe that
EBITDA is useful to investors and our management as an indication of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.
EBITDA does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and should not be considered as an alternative to operating income or net income as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA:
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                   |  | Year Ended December 31, |        
|------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                   |  | 2002                    |        
|                                                                   |  | (in thousands)          |        
|EBITDA                                                             |  |                         |        
|Net income                                                         |  | $                       | 74,281 
|Add:                                                               |  |                         |        
|Interest expense and amortization of financing cost                |  |                         | 68,913 
|Real estate depreciation and amortization(A)                       |  |                         | 73,368 
|Other depreciation and amortization                                |  |                         | 89     
|EBITDA of unconsolidated subsidiaries                              |  |                         | 1,577  
|EBITDA of unconsolidated real estate joint ventures                |  |                         | 12,311 
|Extraordinary items                                                |  |                         |       
|Minority interests(B)                                              |  |                         | 11,251 
|Less:                                                              |  |                         |        
|Merger termination fee, net(C)                                     |  |                         |       
|Gain on sales                                                      |  |                         | (5,575 
|Loss on investment in securities(C)                                |  |                         |       
|Equity in income of joint ventures and unconsolidated subsidiaries |  |                         | (3,154 
|                                                                   |  |                         |        
|EBITDA                                                             |  | $                       | 233,061
|                                                                   |  |                         |        



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---

| | (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 common and preferred unit holders of the operating partnership.
| | --- |  | ---------------------------------------------------------------------------------------------------------------

| | (C) |  | Due to the non-recurring nature of these items, it is our opinion that these items should be excluded from our EBITDA.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------

| | (3) |  | 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 generally accepted accounting principles excluding extraordinary items (as defined by generally accepted accounting principles) 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 the performance of an equity REIT because, along with cash flow
from operating activities, financing and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. Our funds from operations is not 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 audited Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K. Funds from operations does not represent cash generated from operating activities in accordance with
generally accepted accounting principles 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 ability to make distributions. The following is a reconciliation
of net income, the most directly comparable GAAP measure, to funds from operations:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                           |  | Year Ended December 31, |        
|-------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                           |  | 2002                    |        
|                                                                           |  | (in thousands)          |        
|Funds from operations                                                      |  |                         |        
|Net income                                                                 |  | $                       | 74,281 
|Add:                                                                       |  |                         |        
|Real estate depreciation and amortization(A)                               |  |                         | 73,368 
|Real estate depreciation and amortization of unconsolidated
joint ventures |  |                         | 3,103  
|Minority interests(B)                                                      |  |                         | 11,251 
|Extraordinary items                                                        |  |                         |       
|Less:                                                                      |  |                         |        
|Merger termination fee, net(C)                                             |  |                         |       
|Gain on sales                                                              |  |                         | (5,575 
|Dividend on perpetual preferred units                                      |  |                         | (8,662 
|                                                                           |  |                         |        
|Funds from operations                                                      |  | $                       | 147,766
|                                                                           |  |                         |        



20



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---

| | (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 and preferred 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.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 and Operating Data and our historical consolidated financial statements and related notes thereto. Historical results set forth in our Selected Financial and Operating Data and Consolidated Financial
Statements should not be taken as an indication of our future operations.



Overview



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.



The following are the 12 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, Atlanta       
|Midwest             |  | Chicago, Suburban Detroit                 
|Southwest           |  | Dallas/Fort Worth, Austin, Denver, Houston
|Northern California |  | Oakland, Sacramento                       
|Southern California |  | San Diego, Los Angeles                    



At
December 31, 2002, we had 16.1 million square feet of in-place leases representing 93% of the net rentable square feet of our operating properties. Our leases range in term from 1 month to 20 years with an average term of 5 to 7 years. The 16.1
million square feet of in-place leases expire as follows:



|           |  | Square Feet               
|---------- |  | --------------------------
|           |  | (square feet in thousands)
|2003       |  | 1,641                     
|2004       |  | 2,648                     
|2005       |  | 2,001                     
|2006       |  | 1,875                     
|2007       |  | 2,043                     
|Thereafter |  | 5,901                     
|           |  |                           
|           |  | 16,109                    
|           |  |                           



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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.



On July 21, 2002, WorldCom, Inc. announced that WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Code in the United States Bankruptcy Court. At the time of the announcement, WorldCom subsidiaries had operating leases totaling 273,000 square feet in six of our properties. In November 2002, we
received formal notice of rejection of approximately 24,000 square feet of WorldCom related leases.



At December 31, 2002, we had six remaining office lease agreements with WorldCom subsidiaries representing 249,045 square feet in five of
our office properties. Annualized base rental revenue from these leases equates to approximately $5.6 million, or less than 2% of our annualized base rental revenue. All rent due as of December 31, 2002 under the office lease agreements has been
collected. Accruable rental income related to these leases totaled approximately $730,000 at December 31, 2002, all of which was reserved at December 31, 2002. Our WorldCom related office leases expire as follows: 17,118 square feet expire in March
2003; 18,039 square feet expire in July 2003; 106,576 square feet expire in April 2005; and 107,312 square feet expire at various times in 2006. Base rental rates under these leases range from $17.50 per square foot to $23.52 per square foot. In
addition to the office lease agreements, we have rooftop antenna lease agreements with WorldCom subsidiaries. These leases expire at various dates through June 30, 2008. Annualized rent from these leases equates to approximately $272,000. In January
2003, we received formal notice of rejection of approximately 71,000 square feet of the Worldcom related office leases expiring in 2006. At December 31, 2002, approximately 24,000 square feet of the 71,000 square feet, was sub-leased to a tenant
unaffiliated with Worldcom.



As of the date of
this filing, we are uncertain whether the remaining leases will be accepted or rejected in the bankruptcy proceedings or whether WorldCom or its subsidiaries will continue to pay in accordance with the lease terms.



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, 2002, 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 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. 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.
| | --- |  | -------------------------------------



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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, 2002. Our operating real estate, which comprises the majority of our long-lived assets, had
a carrying amount of $1.8 billion at December 31, 2002. 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 would recognize an impairment loss to reduce the carrying value of the long-lived asset to our estimate of its 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. For assets classified as held and used, we have not recognized any impairment during the three year period ended December 31, 2002. During this same period, however, we classified two real estate assets as held for sale and
recognized impairment losses totaling $7.6 million in the aggregate. The table below details the impairment losses recognized during the three years ended December 31, 2002:



|                           |  | Year Ended December 31,
|-------------------------- |  | -----------------------
|                           |  | 2002                   
|                           |  | (in thousands)         
|Impairment loss recognized |  | $                      

---

| | (1) |  | Included in gain from disposition of discontinued operations, net in the accompanying
statement of income.
| | --- |  | ----------------------------------------------------------------------------------------------------------

| | (2) |  | Included in gain on sale of properties, net in the accompanying statement 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, 2002, we had
total receivables of $46.7 million and an allowance for doubtful accounts of $7.7 million, resulting in a net receivable balance of $39.0 million. Of the $46.7 million in total receivables, $36.2 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. The table below presents bad debt expense recognized
during the three years ended December 31, 2002, which includes increases or decreases to our allowance for doubtful accounts. The table also presents our allowance for doubtful accounts at each period end.



|                                                       |  | Year Ended December 31, |      
|------------------------------------------------------ |  | ----------------------- | -----
|                                                       |  | 2002                    |      
|                                                       |  | (in thousands)          |      
|Bad debt expense                                       |  | $                       | 5,428
|Less: Bad debts realized during the period             |  |                         | (802 
|                                                       |  |                         |      
|Increase/(decrease) in allowance for doubtful accounts |  | $                       | 4,626
|                                                       |  |                         |      
|Allowance for doubtful accounts at period end          |  | $                       | 7,712
|                                                       |  |                         |      



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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, an increase or decrease in earnings. The table below
presents real estate related depreciation and amortization expense, including depreciation and amortization expense related to discontinued operations, recognized during the three years ended December 31, 2002:



|                                      |  | Year Ended December 31,
|------------------------------------- |  | -----------------------
|                                      |  | 2002                   
|                                      |  | (in thousands)         
|Depreciation and amortization expense |  | $                      



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



In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, which includes, within its scope, real estate acquisitions, we estimate at the date of acquisition the fair value of
the various components of each real estate asset acquired and allocate the purchase price to each component accordingly. Generally this includes an allocation of the purchase price to land, building, leasing costs, leasehold improvements and to an
intangible asset or liability representing the difference between the contractual in-place leases and the fair value of such in-place leases. We determine the fair value of the components using a variety of methods and assumptions all of which
result in a general approximation of fair value. Differing assumptions and methods could result in different estimates of fair value and thus, a different purchase price allocation. Financial Accounting Standards No. 141 is effective for business
combinations for which the date of acquisition is July 1, 2001, or later. During the period July 1, 2001 through December 31, 2002, we acquired three real estate properties. Based on our estimates of the fair value of the components of each
real estate property acquired between July 1, 2001 and December 31, 2002, we allocated the purchase price as follows:



|                                         |  | Year Ended December 31,
|---------------------------------------- |  | -----------------------
|                                         |  | 2002                   
|                                         |  | (in thousands)         
|Land                                     |  | $                      
|Buildings and improvements               |  | $                      
|Leasing costs and leasehold improvements |  | $                      
|Intangible asset/(liability)             |  | $                      



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



24



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##### Table of Contents

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 exchange of the underlying principal amount. During 2002, such
derivatives were used to hedge the variable cash flows associated with a portion of our variable-rate debt.



As of December 31, 2002, 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, the impact of 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 under our interest rate swap agreements exceeded cash receipts from our agreements, or conversely, the amount by
which cash receipts exceeded cash payments made under our agreements during the three years ended December 31, 2002. The table also presents the estimated fair value of our in-place swap agreements as of December 31, 2002, 2001 and 2000.



|                                                                 |  | Year Ended December 31, |        
|---------------------------------------------------------------- |  | ----------------------- | -------
|                                                                 |  | 2002                    |        
|                                                                 |  | (in thousands)          |        
|Net cash (paid)/received under our interest rate swap agreements |  | $                       | (8,232 
|Fair value of interest rate swaps                                |  | $                       | (16,776

---

| | (1) |  | In accordance with Statement of Financial Accounting Standards No. 133, the fair value of the interest rate swap at December 31, 2000 was included as a cumulative
transition adjustment and recorded as a liability on our consolidated balance sheet on January 1, 2001.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents



Results of Operations



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:



|                                                                                 |  | Year Ended December 31, |        
|-------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                 |  | 2002                    |        
|                                                                                 |  | (in thousands)          |        
|Consolidated Statements of Income                                                |  |                         |        
|Revenues:                                                                        |  |                         |        
|Rental income                                                                    |  | $                       | 350,122
|Management and other fees, net                                                   |  |                         | 4,386  
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 354,508
|                                                                                 |  |                         |        
|Expenses:                                                                        |  |                         |        
|Property operating and maintenance                                               |  |                         | 88,842 
|Real estate taxes                                                                |  |                         | 39,931 
|General and administrative and personnel cost                                    |  |                         | 10,361 
|Interest expense                                                                 |  |                         | 67,081 
|Amortization of deferred financing costs                                         |  |                         | 1,832  
|Depreciation and amortization                                                    |  |                         | 71,734 
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 279,781
|                                                                                 |  |                         |        
|                                                                                
|Merger termination fee, net                                                      |  |                         |       
|                                                                                 |  |                         |        
|                                                                                
|Income from continuing operations before minority interests and equity in
income |  |                         | 74,727 
|                                                                                
|Minority interests                                                               |  |                         | (10,899
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                         | 3,154  
|                                                                                 |  |                         |        
|                                                                                
|Income from continuing operations                                                |  |                         | 66,982 
|                                                                                
|Discontinued operations:                                                         |  |                         |        
|Income from discontinued operations                                              |  |                         | 2,008  
|Gain from disposition of discontinued operations                                 |  |                         | 5,575  
|Minority interests related to discontinued operations                            |  |                         | (284   
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 7,299  
|                                                                                
|Income before gain on sale of properties and extraordinary items                 |  |                         | 74,281 
|Gain on sale of properties                                                       |  |                         |       
|Extraordinary items                                                              |  |                         |       
|                                                                                 |  |                         |        
|                                                                                
|Net income                                                                       |  | $                       | 74,281 
|Preferred dividends                                                              |  |                         | (8,358 
|                                                                                 |  |                         |        
|Net income applicable to common shareholders                                     |  | $                       | 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, 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 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. Subsequent to this purchase, the results of operations
for the Burnett Plaza property are consolidated into the results of operations of our operating partnership.



26



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##### Table of Contents



In addition to
the acquisition of the Burnett Plaza property, between April 2001 and November 2002, we acquired six wholly-owned office properties and an interest in a real estate joint venture. The six wholly-owned properties, all of which are located in our
Mid-Atlantic Region, contain 1.1 million net rentable square feet and were acquired for an aggregate purchase price of $179.2 million. The joint venture interest, which we acquired for $10.7 million, consists of a 25% non-controlling interest in a
joint venture owning two office properties containing 452,000 net rentable square feet which are located in our Mid-Atlantic Region. We account for our interest in the joint venture using the equity method of accounting.



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.



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. The sales resulted in aggregate gross proceeds of $56.0 million which were used to repay a portion of the outstanding borrowings under
our revolving credit facility. 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 1.70 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 537,000 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, is currently 81% leased.



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 $18.6 million, or 5.6%, from $331.6 million to $350.1 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 $4.1
million from our other properties relating primarily to occupancy declines in our portfolio.



27



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##### Table of Contents



Property Operating and
Maintenance. Property operating and maintenance costs increased by $12.0 million, or 15.7%, from $76.8 million to $88.8 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 $6.5 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 $2.2 million, or 6.0%, from $37.7 million to $39.9 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 $963,000 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 to $3.4 million for the respective periods. The increase was partially offset by a decrease in the weighted average interest rate paid on outstanding borrowings from 7.37% to 6.78% for the respective periods.



Depreciation and Amortization. Depreciation and amortization increased
by $9.7 million, or 15.7%, from $62.0 million to $71.7 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 $3.6 million, respectively which is 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 $6.6 million, or 37.7 %, from $17.5 million to $10.9 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, extraordinary items and
minority interests from $117.7 million for the year ended December 31, 2001 to $77.9 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.



Discontinued Operations. Discontinued operations increased by $4.7 million, from $2.6 million to $7.3 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 $13.9 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 $18.6 million. The gain was partially offset by a $4.7 million write-down on the Crescent Centre property, prior to its disposition in May 2001.



28



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##### Table of Contents



Comparison of the Year
Ended December 31, 2001 to the Year Ended December 31, 2000



The table below presents our consolidated statements of income for the years ended December 31, 2001 and 2000:



|                                                                                 |  | Year Ended December 31, |        
|-------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                 |  | 2001                    |        
|                                                                                 |  | (in thousands)          |        
|Consolidated Statements of Income                                                |  |                         |        
|Revenues:                                                                        |  |                         |        
|Rental income                                                                    |  | $                       | 331,570
|Management and other fees, net                                                   |  |                         | 5,042  
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 336,612
|                                                                                 |  |                         |        
|Expenses:                                                                        |  |                         |        
|Property operating and maintenance                                               |  |                         | 76,796 
|Real estate taxes                                                                |  |                         | 37,688 
|General and administrative and personnel cost                                    |  |                         | 10,396 
|Interest expense                                                                 |  |                         | 64,472 
|Amortization of deferred financing costs                                         |  |                         | 1,607  
|Depreciation and amortization                                                    |  |                         | 61,986 
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 252,945
|                                                                                 |  |                         |        
|                                                                                
|Merger termination fee, net                                                      |  |                         | 17,000 
|Loss on investment in securities                                                 |  |                         |       
|                                                                                 |  |                         |        
|Income from continuing operations before minority interests and equity in
income |  |                         | 100,667
|Minority interests                                                               |  |                         | (17,483
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                         | 3,131  
|                                                                                 |  |                         |        
|Incoming from continuing operations                                              |  |                         | 86,315 
|                                                                                
|Discontinued operations:                                                         |  |                         |        
|Income from discontinued operations                                              |  |                         | 2,741  
|Minority interests related to discontinued operations                            |  |                         | (118   
|                                                                                 |  |                         |        
|                                                                                 |  |                         | 2,623  
|                                                                                
|Income before gain on sale of properties and extraordinary items                 |  |                         | 88,938 
|Gain on sale of properties                                                       |  |                         | 13,895 
|Extraordinary items                                                              |  |                         | (367   
|                                                                                 |  |                         |        
|                                                                                
|Net income                                                                       |  | $                       | 102,466
|Preferred dividends                                                              |  |                         | (7,887 
|                                                                                 |  |                         |        
|Net income applicable to common shareholders                                     |  | $                       | 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, 2001 to the year ended December 31, 2000.



Acquisition of Real Estate.We acquired 10 wholly-owned office
properties and an interest in a real estate joint venture between January 1, 2000 and December 31, 2001. One of the acquired properties was sold concurrent with its acquisition. The remaining nine wholly-owned properties, which contain 1.3 million
net rentable square feet and our interest in the real estate joint venture, consisting of a 25% non-controlling interest in a joint venture owning two office properties containing 452,000 net rentable square feet, impact our results of operations
when comparing the year ended December 31, 2001 to the year ended December 31, 2000. Seven of the properties, including the joint venture properties, are located in our Mid-Atlantic Region, contain 1.3 million net rentable square feet and were
acquired between April 2001 and July 2001 for an aggregate purchase price of $134.9 million. Three of the properties, located in our Southwest Region, contain 271,000 net rentable square feet and were acquired in September 2000 for an aggregate
purchase price of $47.2 million. One property, located in our Northern California



29



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##### Table of Contents

Region, contains 201,000 net rentable square feet and was acquired for an aggregate purchase price of
$42.9 million. We account for our interest in the real estate joint venture using the equity method of accounting.



Leasing of Development Projects.Our results of operations, for the year ended December 31, 2001, have been bolstered by the contribution of
several development projects. The projects include approximately 148,000 net rentable square feet in our Mid-Atlantic Region, 59,000 net rentable square feet in our Midwest Region, 787,000 net rentable square feet in our Southwest Region and 164,000
net rentable square feet in our Southern California Region. At December 31, 2001, these projects were approximately 99% leased.



Real Estate Dispositions. We disposed of 69 properties between January 1, 2000 and December 31, 2001. One property was acquired and concurrently
sold. The remaining 68 properties contained 4.3 million net rentable square feet. The 68 properties included 1 property containing 243,000 net rentable square feet in our Mid-Atlantic Region, 5 properties containing 584,000 net rentable square feet
in our Midwest Region, 12 properties containing 906,000 net rentable square feet in our Southwest Region, 18 properties containing 822,000 net rentable square feet in our Southern California Region and 32 properties containing 1.73 million net
rentable square feet, which represented all of our holdings within our Northeast Region.



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.



Issuance of
Preferred Units.We issued $10.0 million of 7.50%, Series E Cumulative Preferred Units in April 2001 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 537,000 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 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, 2001 to the year ended December 31, 2000.



Rental Income. Rental income increased by $3.8 million, or 1.1%, from
$327.8 million to $331.6 million. The real estate acquisitions and development properties coming on-line resulted in increases of $21.1 million and $15.2 million, respectively. These increases were offset by a decrease of $38.9 million related to
property dispositions during the period January 1, 2000 through December 31, 2001 and a decrease of $4.8 million related to our 123 North Wacker property. Other properties increased by $11.1 million primarily as a result of an increase in
straight-lined rent achieved from new leases exceeding that from expiring leases.



Property Operating and Maintenance. Property operating and maintenance costs increased by $909,000, or 1.2%, from $75.9 million to $76.8 million. The real estate acquisitions and development properties coming on-line
resulted in increases of $4.8 million and $2.3 million, respectively. These increases were offset by a decrease of $8.2 million related to real estate dispositions during the period January 1, 2000 through December 31, 2001 and a decrease of
$516,000 related to our 123 North Wacker property. Property operating and maintenance expenses related to our other properties increased by $2.5 million primarily as a result of an increase of $1.3 million in utility expenses accompanied by a
general increase in expenses of operating and maintaining our properties.



Real Estate Taxes. Real estate taxes decreased by $21,000, or less than 1.0% during the period. The real estate acquisitions and development properties coming on-line resulted in increases of $2.2 million and $1.2 million,
respectively. These increases were offset by a decrease of $3.5 million related to real estate dispositions during the period January 1, 2000 through December 31, 2001 and a decrease of $1.2 million related to our 123 North Wacker



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property. Real estate taxes related to our other properties increased by $1.2 million primarily as a
result of the reassessment of certain property values by various taxing authorities.



Interest Expense. Interest expense decreased by $6.7 million, or 9.5%, from $71.2 million to $64.5 million primarily as a result of a decrease in weighted average borrowings outstanding from the year ended December
31, 2000 to the year end December 31, 2001, a decrease in the weighted average interest rate paid on outstanding borrowings from 7.59% to 7.37% and an increase in capitalized interest from $3.4 million to $5.2 million from the year ended December
31, 2000 to the year ended December 31, 2001.



Depreciation
and Amortization. Depreciation and amortization increased by $507,000, or less than 1.0%, from $61.5 million to $62.0 million. The real estate acquisitions and development properties coming on-line resulted in increases of $3.2 million and $3.8
million, respectively. These increases were offset by a decrease of $8.2 million related to real estate dispositions during the period January 1, 2000 through December 31, 2001 and a decrease of $177,000 related to our 123 North Wacker property.
Depreciation and amortization expense related to our other properties increased by $1.9 million which is 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.On September 26, 2000, we requested and received $8.0 million from the Mack-Cali escrow account. The proceeds received were recorded net of merger related cost totaling $3.9 million. During the year ended December 31, 2001, we received final
distributions totaling $17.0 million from the Mack-Cali escrow account.



Loss on Investment in Securities. In November 1999, we invested $1.0 million in Urban Media Communications Corporation, a provider of broad band internet access to tenants of commercial office buildings. As a result of Urban
Medias purported inability to raise funding necessary to continue day to day operations, in December 2000, we recognized a loss equal to 100% of our investment in Urban Media.



Minority Interests. Minority interests increased by $2.0 million, or 12.7%, from $15.5 million to $17.5 million. The
increase was primarily attributable to the minority interest holders proportionate share of the increase in net income before discontinued operations, extraordinary items and minority interests from $81.9 million for the year ended December 31, 2000
to $117.7 million for the year ended December 31, 2001, accompanied by the income allocation totaling $563,000 related to the Series E Preferred Units issued in April 2001.



Discontinued Operations. Discontinued operations decreased by $538,000, from $3.2 million to $2.6 million, primarily
as a result of a decrease in rental income accompanied by an increase in depreciation and amortization expense. Rental income decreased by $230,000, or 2.9%, while depreciation and amortization expense increased by $362,000, or 18.9%.



Gain on Sale of Properties. Gain on sale of properties increased by
$13.7 million from $221,000 to $13.9 million. It is our strategy to obtain the maximum value from each of our properties, which is occasionally achieved through the sale of a property. During the year ended December 31, 2001, we sold 42 properties
totaling 2.8 million net rentable square feet compared to 27 properties totaling 1.7 million net rentable square feet sold during 2000.



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Liquidity and Capital
Resources



Cash and cash equivalents were
$5.1 million and $5.8 million at December 31, 2002 and December 31, 2001, respectively. The decrease in cash and cash equivalents is a result of net cash used in investing and financing activities exceeding cash provided by operating activities.
Cash flows provided by operating activities totaled $160.6 million for the year ended December 31, 2002, compared to $160.4 million for the year ended December 31, 2001.



Net cash used in investing activities totaled $160.5 million for the year ended December 31, 2002 compared to
$52.9 million for the year ended December 31, 2001. This increase in net cash used in investing activities of $107.7 million is due primarily to a decrease in cash generated from the sale of real estate of $142.2 million, an increase of $28.9
million in cash used to purchase real estate and mortgage loans, partially offset by a decrease of $63.2 million in cash used in the development and redevelopment of real estate.



Net cash used in financing activities totaled $871,000 for the year ended December 31, 2002 compared to
$107.2 million for the year ended December 31, 2001. The decrease in net cash used in financing activities of $106.3 million is due primarily to net borrowings of $103.3 million for the year ended December 31, 2002 compared to net repayments of $8.3
million for the year ended December 31, 2001, an increase in cash generated from the sale of common shares of $42.4 million, partially offset by an increase in cash used of $50.5 million for the repurchase of our outstanding Series C Cumulative
Redeemable Perpetual Preferred Units in January 2002.



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.



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Debt Financing



Financing Strategy



As of December 31, 2002, we had outstanding total
indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 44.7% of total market capitalization based on a common share price of $28.28 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. Although 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, we view ratios such as interest coverage and fixed
charge coverage as more stable and indicative measures of our ability to meet debt obligations. For the year ended December 31, 2002, our interest coverage (earnings before interest, taxes and depreciation and amortization over interest expense) and
fixed charge coverage (earnings before interest, taxes and depreciation and amortization over interest expense and perpetual preferred distributions) totaled 3.08 and 2.76 times, respectively. Our credit agreements limit total indebtedness to 55% of
total assets and require an interest coverage ratio of at least 2 to 1.



We have in place a $300 million unsecured revolving credit facility with a group of 12 banks. The facility, which was renewed in May 2002, matures in May 2005. The facility has an initial interest rate of LIBOR plus 137.5
basis points. Additionally, we are required to pay an average unused commitment fee of 25 basis points per annum if the unused portion of the credit facility is greater than $200 million. The fee is reduced to 20 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, 2002, we had net
borrowings under our credit facility of $37.5 million and an outstanding balance of $156.0 million at December 31, 2002 resulting in an available balance of $144.0 million.



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The following
table sets forth our mortgages and notes payable, including our pro rata share of joint venture debt, as of December 31, 2002.



|Borrower/Description                           |  | Current Balance |           | Amortization |       | Interest Rate |                |   | Maturity
|---------------------------------------------- |  | --------------- | --------- | ------------ | ----- | ------------- | -------------- | - | --------
|                                               |  | (in thousands)  |           |              |       |               |                |   |         
|Broadmoor Austin Associates                    |  |                 |           |              |       |               |                |   |         
|Broadmoor Austin(1)                            |  | $               | 72,349    |              | 16 yr |               | 7.04%          |   |         
|Burnett Plaza Associates                       |  |                 |           |              |       |               |                |   |         
|Burnett Plaza                                  |  |                 | 72,100    |              | None  |               | LIBOR + 2.150% |   |         
|PL Properties Associates, L.P.                 |  |                 |           |              |       |               |                |   |         
|Park West C2                                   |  |                 | 33,982    |              | 30 yr |               | 6.63           | % |         
|Prentiss Properties Acquisition Partners, L.P. |  |                 |           |              |       |               |                |   |         
|Bachman West                                   |  |                 | 2,819     |              | 25 yr |               | 8.63%          |   |         
|One Westchase Center                           |  |                 | 23,520    |              | 25 yr |               | 7.84%          |   |         
|Collateralized Term Loan(2)                    |  |                 | 71,563    |              | 25 yr |               | LIBOR + 1.625% |   |         
|Walnut Glen Tower                              |  |                 | 33,979    |              | 30 yr |               | 6.92%          |   |         
|Revolving Credit Facility                      |  |                 | 156,000   |              | None  |               | LIBOR + 1.375% |   |         
|Unsecured Term Loan                            |  |                 | 75,000    |              | None  |               | LIBOR + 1.375% |   |         
|Highland Court                                 |  |                 | 4,613     |              | 25 yr |               | 7.27%          |   |         
|Westheimer Central Plaza                       |  |                 | 5,633     |              | 25 yr |               | 8.38%          |   |         
|7101 Wisconsin Avenue                          |  |                 | 20,658    |              | 30 yr |               | 7.25%          |   |         
|2500 Cumberland Parkway                        |  |                 | 14,200    |              | 30 yr |               | 7.46%          |   |         
|Ordway                                         |  |                 | 48,472    |              | 30 yr |               | 7.95%          |   |         
|World Savings Center                           |  |                 | 28,774    |              | 30 yr |               | 7.91%          |   |         
|One OHare Centre                              |  |                 | 40,316    |              | 30 yr |               | 6.80%          |   |         
|3130 Fairview Park Drive                       |  |                 | 22,562    |              | 30 yr |               | 7.00%          |   |         
|Research Office Center                         |  |                 | 44,461    |              | 28 yr |               | 7.64%          |   |         
|Bannockburn Centre                             |  |                 | 26,406    |              | 30 yr |               | 8.05%          |   |         
|Del Mar Loan                                   |  |                 | 44,355    |              | 30 yr |               | 7.41%          |   |         
|Prentiss Properties Corporetum, L.P.           |  |                 |           |              |       |               |                |   |         
|Corporetum Office Campus                       |  |                 | 24,990    |              | 30 yr |               | 7.02%          |   |         
|Prentiss Properties Natomas, L.P.              |  |                 |           |              |       |               |                |   |         
|Natomas Corporate Center                       |  |                 | 36,524    |              | 30 yr |               | 7.02%          |   |         
|Prentiss Properties Real Estate Fund I, L.P.   |  |                 |           |              |       |               |                |   |         
|PPREFI Portfolio Loan(3)                       |  |                 | 180,100   |              | None  |               | 7.58%          |   |         
|Tysons International Partners                  |  |                 |           |              |       |               |                |   |         
|1676 International(4)                          |  |                 | 11,163    |              | 28 yr |               | 7.68%          |   |         
|8260 Greensboro(4)                             |  |                 | 3,994     |              | 28 yr |               | 7.83%          |   |         
|                                               |  |                 |           |              |       |               |                |   |         
|Total                                          |  | $               | 1,098,533 |              |       |               |                |   |         
|                                               |  |                 |           |              |       |               |                |   |         

---

|(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 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 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, 2002.



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. 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, 2002 |   |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | ---------------------- | - |  | -------------------- | - |  | ------------------------------------------------- | - |  | -------------- |  | -------------- | -------
|                |  |                        |   |  |                      |   |  |                                                   |   |  |                |  | (in thousands) |        
|$ 50 million    |  | 1.990                  | % |  | 3.365                | % |  | 1.380                                             | % |  | August 2003    |  | $              | (199   
|$ 50 million    |  | 6.253                  | % |  | 7.628                | % |  | 1.380                                             | % |  | September 2004 |  |                | (3,974 
|$ 60 million    |  | 6.248                  | % |  | 7.623                | % |  | 1.380                                             | % |  | September 2004 |  |                | (4,765 
|$ 15 million    |  | 4.345                  | % |  | 6.495                | % |  | 1.380                                             | % |  | July 2005      |  |                | (846   
|$ 25 million    |  | 4.345                  | % |  | 6.495                | % |  | 1.380                                             | % |  | July 2005      |  |                | (1,410 
|$ 20 million    |  | 5.985                  | % |  | 7.610                | % |  | 1.380                                             | % |  | March 2006     |  |                | (2,231 
|$ 30 million    |  | 5.990                  | % |  | 7.615                | % |  | 1.380                                             | % |  | March 2006     |  |                | (3,351 
|                |  |                        |   |  |                      |   |  |                                                   |   |  |                |  |                |        
|Total           |  |                        |   |  |                      |   |  |                                                   |   |  |                |  | $              | (16,776
|                |  |                        |   |  |                      |   |  |                                                   |   |  |                |  |                |        



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, 2002 capital
expenditures related to our in-service properties totaled $27.2 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, 2002 totaled approximately $24.1 million and $3.1 million, respectively.



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Equity Financing



On June 10, 2002, we entered into a
securities sales agreement with Brinson Patrick Securities Corporation. Under the sales agreement we may sell, with Brinson Patrick acting as our sales agent, up to 3,000,000 of our common shares of beneficial interest, par value $0.01 per share 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.



Using proceeds from our revolving credit facility, on January 3, 2002, we repurchased our operating partnerships outstanding 9.45%, Series C Cumulative Redeemable Perpetual Preferred Units, for approximately $50.6
million, which included accrued and unpaid dividends of $26,250.



During the year ended December 31, 2002, we issued 1.8 million common shares of beneficial interest resulting primarily from option exercises and shares sold pursuant to our dividend reinvestment and employee share purchase plans.
The net proceeds totaling $46.5 million were used to repay a portion of the outstanding borrowings under our revolving credit facility.



During the year ended December 31, 2002, pursuant to a private placement, we issued 613,750 common shares with a cost basis of $14.2
million from common shares held in treasury. We acquired 507,142 treasury shares pursuant to (1) the buy back of 100,000 common shares for gross consideration of $2.5 million; (2) 394,365 common shares surrendered as payment of the exercise price
and statutory tax withholdings, totaling in the aggregate $11.7 million, for certain share options exercised during the period; and (3) the forfeiture of 12,777 restricted share grants that were valued at $304,000 at the date of issue.



At March 25, 2003, we had approximately 506 holders of record
and approximately 7,000 beneficial owners of our common shares. As of March 25, 2003, 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 units of limited partnership interest in the operating partnership, which are redeemable for common shares subject to limitations, were held by 22 entities or persons.



Off-Balance Sheet Arrangements



At December 31, 2002 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; (3) a 1% non-controlling interest in
certain real estate assets; and (4) a 98% economic, non-voting interest in Prentiss Properties Resources, a management services business.



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 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.



Prentiss Properties Resources 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, 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.



Effective January 1, 2003, our operating partnership acquired for approximately $67,000, the voting stock of Prentiss Properties
Resources, all of which was held by Ampulla, LLC, a single member limited liability company owned by Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust. Prior to this transaction, we accounted for our interest in Prentiss
Properties Resources, using the equity method of accounting.



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Subsequent to this
transaction, the operating partnership owns 100% of Prentiss Properties Resources and will consolidate the accounts of Prentiss Properties Resources with and into the accounts of the operating partnership.



The following information summarizes the financial position at
December 31, 2002 for the investments in which we held an interest at December 31, 2002:



|Summary of Financial Position: |  | Total Assets   |         | Total Debt(1) |   | Total Equity |  |   | Companys Investment
|------------------------------ |  | -------------- | ------- | ------------- | - | ------------ |  | - | --------------------
|                               |  | (in thousands)
|Broadmoor Austin Associates    |  | $              | 108,929 |               | $ | 144,698      |  | $ | (36,436             
|Tysons International Partners  |  |                | 94,873  |               |   | 60,628       |  |   | 33,161              
|Other Investments              |  |                |        |               |   |             |  |   |                    
|Prentiss Properties Resources  |  |                | 12,406  |               |   |             |  |   | 6,463               
|                               |  |                |         |               |   |              |  |   |                     
|                               |  |                |         |               |   |              |  |   |                     
|                               |  |                |         |               |   |              |  |   |                     

---

|(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 $179.2 million at December 31, 2002. Our proportionate share of the non- recourse mortgage debt totaled $87.5 million at December 31, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following information summarizes the results of operations for the year ended December 31, 2002 for
investments which impacted our 2002 results of operations:



|Summary of Operations:        |  | Total Revenue  |        | Net Income |   |       | Companys Share of Net Income/(Loss) | 
|----------------------------- |  | -------------- | ------ | ---------- | - | ----- | ------------------------------------ | 
|                              |  | (in thousands) |       
|Broadmoor Austin Associates   |  | $              | 20,118 |            | $ | 4,295 |                                      | 
|Burnett Plaza Associates(1)   |  |                | 4,302  |            |   | 960   |                                      | 
|PPS Partners LLC(2)           |  |                | 44     |            |   | (13   | )                                    | 
|Prentiss Properties Resources |  |                | 14,075 |            |   | 664   |                                      | 
|Tysons International Partners |  |                | 13,092 |            |   | 692   |                                      | 
|                              |  |                |        |            |   |       |                                      | 
|                              |  |                |        |            |   |       |                                      | 
|                              |  |                |        |            |   |       |                                      | 

---

|(1) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2002, 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:



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|Payments Due by Period            
|----------------------------------
|Contractual Obligations           
|                                  
|Mortgages and notes payable       
|Capital lease obligations         
|Operating leases                  
|Unconditional purchase obligations
|Other long-term obligations       
|                                  
|Total contractual cash obligations
|                                  



We are
party to several construction contracts as part of our development activities. The following office properties were under development at December 31, 2002:



|Development properties      |  | Segment             |  | Market                |  | Net rentable square feet(1) |  | Estimated cost(2) |      | Estimated shell completion date(3)
|--------------------------- |  | ------------------- |  | --------------------- |  | --------------------------- |  | ----------------- | ---- | ----------------------------------
|                            |  |                     |  |                       |  | (in thousands)              |  | (in millions)     |      |                                   
|Carlsbad Pacific Center III |  | Southern California |  | San Diego             |  | 40                          |  | $                 | 8.3  |                                   
|Willow Oaks III             |  | Mid-Atlantic        |  | Metro. Washington, DC |  | 182                         |  |                   | 40.6 |                                   
|                            |  |                     |  |                       |  |                             |  |                   |      |                                   
|                            |  |                     |  |                       |  | 222                         |  | $                 | 48.9 |                                   
|                            |  |                     |  |                       |  |                             |  |                   |      |                                   

---

|(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 area of the property allocated to the tenant.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | As of December 31, 2002, we have incurred $41.4 million of the total estimated cost of our
development properties.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(3) |  | We classify our construction projects as development properties until the projects are
substantially complete and ready for their intended use. Typically, this includes shell completion and improvements made to the net rentable area within the building.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, guarantees 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 their leases beyond the maturities of their current in-place leases.



As a condition of the purchase and sale and as security for our guarantee, we provided to the title company at closing, irrevocable
letters of credit, totaling $1.4 million, drawn on a financial institution and identifying the purchaser as beneficiary. The balance of the letters of credit which total $1.3 million at December 31, 2002, expires as follows:



|                               |  | Commitment Expiration Per Period
|------------------------------ |  | --------------------------------
|Other Commercial Commitments   |  | Total Amounts Committed         
|                               |  | (in thousands)                  
|Lines of credit                |  |                                 
|Standby letters of credit      |  | $                               
|Guarantees                     |  |                                 
|Standby repurchase obligations |  |                                 
|Other commercial commitments   |  |                                 
|                               |  |                                 
|Total commercial commitments   |  | $                               
|                               |  |                                 



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Funds from Operations



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 generally accepted accounting principles excluding extraordinary items (as defined by generally accepted
accounting principles) 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 the performance of an equity REIT because, along with cash flow from operating activities, financing and investing activities, it provides investors with an indication of our
ability to incur and service debt, to make capital expenditures and to fund other cash needs. Our funds from operations is not 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 audited Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-K. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles 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 ability to make distributions. The following is a reconciliation of net income, the most directly comparable GAAP measure, to funds from operations:



|                                                                           |  | Year Ended December 31, |        
|-------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                           |  | 2002                    |        
|                                                                           |  | (in thousands)          |        
|Funds from operations                                                      |  |                         |        
|Net income                                                                 |  | $                       | 74,281 
|Add:                                                                       |  |                         |        
|Real estate depreciation and amortization(1)                               |  |                         | 73,368 
|Real estate depreciation and amortization of unconsolidated joint
ventures |  |                         | 3,103  
|Minority interests(2)                                                      |  |                         | 11,251 
|Extraordinary items                                                        |  |                         |       
|Less:                                                                      |  |                         |        
|Merger termination fee, net(3)                                             |  |                         |       
|Gain on sales                                                              |  |                         | (5,575 
|Dividend on perpetual preferred units                                      |  |                         | (8,662 
|                                                                           |  |                         |        
|Funds from operations                                                      |  | $                       | 147,766
|                                                                           |  |                         |        

---

|(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 and preferred 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Funds from operations increased by $3.8 million for the year ended December 31, 2002 from the year ended December 31, 2001 and increased by $9.6 million for the year ended December 31, 2001 from the year ended December 31, 2000 as a
result of the factors discussed in the analysis of operating results.



Recently Issued Accounting Pronouncements



In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The provisions of this statement as they relate to the rescission of statement No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and 9 (c) of this statement as they relate to
statement No. 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. The statement includes two items that could be relevant to real estate companies such as ours. Specifically, the statement rescinds
Statement of Financial Accounting Standards No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item,



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net of the related income tax effect. As a result of this recission, the criteria in APB Opinion No. 30
will now be used to classify those gains and losses, which could result in the gains and losses being reported in income before extraordinary items. The statement amends Statement of Financial Accounting Standards No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The impact from the implementation of this statement, which we believe will not have a material
impact on our financial statements, will be dependent upon (1) the amount of any gains or losses realized as a result of future debt extinguishments and (2) whether we enter into lease modifications that have economic effects similar to
sale-leaseback transactions.



In June 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. The statement addresses significant issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of the statement also includes (1) costs related to terminating a contract that is not a capital lease and (2)
termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The statement is effective for
exit or disposal activities initiated after December 31, 2002. The impact from the implementation of this statement, which we believe will not have a material impact on our financial statements, will be dependent upon whether or not we enter into
transactions that qualify as exit or disposal activities as defined in this statement.



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, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure provisions of the statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to
stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. On January 1, 2003, we adopted the fair value
method of accounting for stock-based compensation and have elected to apply this method using the prospective method as prescribed in Financial Accounting Standards No. 148. The prospective method allows for the application of the recognition
provisions of Financial Accounting Standards No. 123 to all employee awards granted, modified, or settled after the beginning of the fiscal year in which the recognition provisions are first applied. The transition and disclosure provisions of this
statement are effective for financial statements for fiscal years ending after December 15, 2002. The interim disclosure provisions of this statement are effective for interim periods beginning after December 15, 2002. The impact from the
implementation of this statement, which we believe will not have a material impact on our financial statements, will be dependent upon the amount of awards granted, modified, or settled on or subsequent to January 1, 2003.



In November 2002, the Financial Accounting Standards Board
issued FASB Interpretation No. 45, Guarantor s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The impact from the implementation of this interpretation,
which we believe will not have a material impact on our financial statements, will be dependent upon guarantees we enter into subsequent to December 31, 2002.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This interpretation 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



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entity. The disclosure provisions of this interpretation are effective for financial statements issued
after January 31, 2003. A public entity with a variable interest entity created before February 1, 2003, shall apply the consolidation provisions of this interpretation to that entity no later than the beginning of the first interim or annual
reporting period beginning after June 15, 2003. All enterprises with variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this interpretation immediately. At December 31, 2002,
the operating partnership held a 98% non-voting interest in Prentiss Properties Resources which we accounted for using the equity method of accounting. Effective January 1, 2003, we acquired the remaining outstanding interest in Prentiss Properties
Resources. As a result of this transaction, effective January 1, 2003 the accounts of Prentiss Properties Resources will be consolidated with and into the accounts of the operating partnership. Had this transaction not occurred, Prentiss Properties
Resources would have been subject to consolidation as prescribed in this interpretation.



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%.



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.



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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 27%, 18%,
34%, 13% and 8%, respectively, of total revenues for the year ended December 31, 2002. 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 and lack of operating
history 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 2002, we acquired from Burnett Plaza  VEF III, L.P., its 80% interest in the Burnett Plaza joint
venture. This acquisition brought to 100% our interest in the joint venture which owns a 1.0 million net rentable square foot office property in downtown Fort Worth. In addition we acquired a 263,990 net rentable square foot office property located
in Northern Virginia. Our ability to manage our growth effectively will require us to integrate successfully our new acquisitions into our existing management structure. Some of our properties have relatively short or no operating history under our
management. We have had limited control over the operation of these buildings.



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;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, 2002, we had approximately 1,000 tenants, with the following 8 tenants
representing approximately 19% of our aggregate annualized base rent and approximately 17% of our total net rentable square footage leased: International Business Machines, Kaiser Foundation Health Plan, Verizon Communications, MCI WorldCom,
Northrop Grumman Corporation, General Services Administration, Aspen Systems Corporation and American Management Systems. Currently, we derive approximately 39% 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 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



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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.



On July 21, 2002, WorldCom, Inc. announced that WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the United States Bankruptcy
Court. At the time of the announcement, WorldCom subsidiaries had operating leases totaling 273,000 square feet in six of our properties. In November 2002, we received formal notice of rejection of approximately 24,000 square feet of WorldCom
related leases.



At December 31, 2002, we had six
remaining office lease agreements with WorldCom subsidiaries representing 249,045 square feet in five of our office properties. Annualized base rental revenue from these leases equates to approximately $5.6 million, or less than 2% of our annualized
base rental revenue. All rent due as of December 31, 2002 under the office lease agreements has been collected. Accruable rental income related to these leases totaled approximately $730,000 at December 31, 2002, all of which was reserved at
December 31, 2002. Our WorldCom related office leases expire as follows: 17,118 square feet expire in March 2003; 18,039 square feet expire in July 2003; 106,576 square feet expire in April 2005; and 107,312 square feet expire at various times in
2006. Base rental rates under these leases range from $17.50 per square foot to $23.52 per square foot. In addition to the office lease agreements, we have rooftop antenna lease agreements with WorldCom subsidiaries. These leases expire at various
dates through June 30, 2008. Annualized rent from these leases equates to approximately $272,000. In January 2003, we received formal notice of rejection of approximately 71,000 square feet of the Worldcom related office leases expiring in 2006. At
December 31, 2002, approximately 24,000 square feet of the 71,000 square feet, was sub-leased to a tenant unaffiliated with Worldcom.



As of the date of this filing, we are uncertain whether the remaining leases will be accepted or rejected in the bankruptcy proceedings or
whether WorldCom or its subsidiaries will continue to pay in accordance with the lease terms.



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 9.3% 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, 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.



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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 major competitors in each market 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., Prime
Group 
|                   
|Southwest           |  | CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office Properties, Lincoln Property Co., Trammell Crow
Co.
|                   
|Northern California |  | Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Shorenstein Co.                                    
|                   
|Southern California |  | Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty Corp.                                     



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.



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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.



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 $100 million blanket earthquake policy on the properties we own in Northern and Southern California and a $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. We may not
be able to purchase policies in the future with coverage limits and deductibles similar to those that are currently in place. In addition, we would expect our insurance premiums to increase in the future, which may have an adverse impact on our cash
flow.



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 $2.3 million, or 3.1% of our net income for
the year ended December 31, 2002. Our pro-rata share of mortgage debt related to these unconsolidated interests is approximately $87.5 million, or 8.0% of our total mortgage debt outstanding, as of December 31, 2002. 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;
| | - |  | ---------------------------------------------------



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| |  |  | 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.



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.



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, 2002, we had $374.7 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, $250 million was swapped to fixed rate debt through various interest rate protection contracts with maturity dates ranging from August 2003 to March 2006. 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



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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, 2002, 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 distributions payable to holders of preferred units and then to make distributions to us. At
December 31, 2002, 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.



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



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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. For example, our board of trustees has exempted Security Capital Preferred Growth Incorporated from the ownership limitation on the condition that Security
Capital Preferred Growth Incorporated not own more than 11% of the number of outstanding common shares. 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.



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



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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.



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



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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 entered into an employment agreement which will expire in February 2006 and May 2003, 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 and Prentiss Properties Resources, the manager, 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
| | - |  | --------------------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2002, the capital stock of the manager was divided into two classes: voting common stock, all of which was owned by Mr.
Prentiss; and non-voting common stock, all of which we held through the operating partnership. The voting common stock represented 2% of the ownership interests in the manager and the non-voting common stock represented 98% of the ownership
interests in the manager. Mr. Prentiss, as the holder of all of the managers voting common stock, had the ability to elect the directors of the manager. We were not able to elect directors and, therefore, were not able to influence the
day-to-day management decisions of the manager. Effective January 1, 2003, our operating partnership acquired all of the voting interest of Prentiss Properties Resources from Mr. Prentiss. As a result, our operating partnership has sole control of
the decision making processes of Prentiss Properties Resources.



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, 2002, we have authorized 100,000,000 common shares, of which 61,018,645 common shares are
unissued. In addition, we have granted options to purchase 3,926,566 common shares to executives officers, employees and trustees, of which options to purchase 1,421,514 common shares remain outstanding. We have reserved a total of 3,773,585 common
shares and 1,500,566 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, 2002, there were 1,500,566 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 1,500,566 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.



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.



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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, 2002, we had outstanding total indebtedness, including
our pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 44.7% of total market capitalization based on a common share price of $28.28 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 65.9% of our
outstanding debt was subject to fixed rates with a weighted average interest rate of 7.45% at December 31, 2002. Of the remaining $374.7 million, or 34.1%, representing our variable rate debt, $250.0 million was effectively locked at an interest
rate before the spread over LIBOR, of 5.32% 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, 2002, 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, 2002. 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, 2002. The rate assumed in the fair value calculation of fixed rate debt is
equal to 5.75%, representing our estimated borrowing rate for fixed rate debt instruments similar in term to those outstanding at December 31, 2002. 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, 2002.



|                          |  | Expected Maturity Date |        |   | Total |   | Fair Value |     
|------------------------- |  | ---------------------- | ------ | - | ----- | - | ---------- | ----
|                          |  | 2003                   |        |   | 2004  |   |            | 2005
|                          |  | (in thousands)         |       
|Liabilities               |  |                        |        |   |       |   |            |     
|Long-Term Debt:           |  |                        |        |   |       |   |            |     
|Fixed Rate                |  | $                      | 11,661 |   |       | $ | 32,073     |     
|Average Interest Rate     |  |                        | 7.45   | % |       |   | 7.43       | %   
|Variable Rate             |  | $                      | 750    |   |       | $ | 70,813     |     
|Average Interest Rate     |  |                        | 2.99   | % |       |   | 2.99       | %   
|                         
|Interest Rate Derivatives |  |                        |        |   |       |   |            |     
|Interest Rate Swaps:      |  |                        |        |   |       |   |            |     
|Variable to Fixed         |  | $                      | 50,000 |   |       | $ | 110,000    |     
|Avg. Pay Rate             |  |                        | 5.32   | % |       |   | 5.73       | %   
|Avg. Receive Rate         |  |                        | 1.38   | % |       |   | 1.38       | %   



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The table
incorporates only those exposures that exist as of December 31, 2002 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. The extent of this 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-35 of this Form 10-K.



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



None.



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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 15, 2003.



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 15, 2003.



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 15, 2003.



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 15, 2003.



Item 14. Controls and Procedures



Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of 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 significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.



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 Accountants



Consolidated Balance Sheets of Prentiss Properties Trust as of December 31, 2002 and December 31, 2001



Consolidated Statements of Income of Prentiss Properties
Trust for the years ended December 31, 2002, 2001 and 2000



Consolidated Statements of Changes in Shareholders Equity of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000



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Consolidated
Statements of Comprehensive Income of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000



Consolidated Statements of Cash Flows of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000



Notes to Consolidated Financial Statements



| | (2) |  | Financial Statement Schedule
| | --- |  | ----------------------------



Report of Independent Accountants



Schedule III: Real Estate and Accumulated Depreciation



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



|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|3.1         |  | Amended and Restated Declaration of Trust of the Registrant (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         |  | 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).
|           
|3.5         |  | 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).                                                                                         
|           
|3.6         |  | 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).                                                                                                                                                                                                                                                                                            
|           
|3.7         |  | 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).                                              



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|    
|----
|3.8 
|    
|4.1 
|    
|4.2 
|    
|4.3 
|    
|4.4 
|    
|4.5 
|    
|10.1
|    
|10.2
|    
|10.3
|    
|10.4
|    
|10.5
|    
|10.6
|    
|10.7
|    
|10.8



57



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##### Table of Contents



|     
|-----
|10.9 
|     
|10.10
|     
|10.11
|     
|10.12
|     
|10.13
|     
|10.14
|     
|10.15
|     
|10.16
|     
|10.17
|     
|10.18
|     
|10.19
|     
|10.20
|     
|10.21
|     
|10.22



58



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##### Table of Contents



|     
|-----
|10.23
|     
|10.24
|     
|10.25
|     
|10.26
|     
|10.27
|     
|10.28
|     
|10.29
|     
|10.30
|     
|10.31
|     
|10.32
|     
|10.33



59



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##### Table of Contents



|      
|------
|10.34 
|      
|10.35 
|      
|10.36 
|      
|10.37 
|      
|10.38 
|      
|10.39 
|      
|10.40 
|      
|10.41 
|      
|10.42 
|      
|10.43 
|      
|10.44 
|      
|*10.45
|      
|10.46 



60



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##### Table of Contents



|     
|-----
|10.47
|     
|10.48
|     
|*21.1
|     
|*23.1
|     
|*99.1
|     
|*99.2

---

* Filed herewith.



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



We did not file any Reports on Form 8-K for or during the period October 1, 2002 through December 31, 2002.



61



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##### Table of Contents

PRENTISS PROPERTIES TRUST



INDEX TO FINANCIAL STATEMENTS



|FINANCIAL STATEMENTS                                                                                                                         |  | PAGE
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                            
|Report of Independent Accountants                                                                                                            |  | F-2 
|                                                                                                                                            
|Consolidated Balance Sheets of Prentiss Properties Trust as of December 31, 2002 and December 31, 2001                                       |  | F-3 
|                                                                                                                                            
|Consolidated Statements of Income of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000                          |  | F-4 
|                                                                                                                                            
|Consolidated Statements of Changes in Shareholders Equity of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000 |  | F-5 
|                                                                                                                                            
|Consolidated Statements of Comprehensive Income of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000            |  | F-6 
|                                                                                                                                            
|Consolidated Statements of Cash Flows of Prentiss Properties Trust for the years ended December 31, 2002, 2001 and 2000                      |  | F-7 
|                                                                                                                                            
|Notes to Consolidated Financial Statements                                                                                                   |  | F-8 
|                                                                                                                                            
|FINANCIAL STATEMENT SCHEDULE                                                                                                                 |  |     
|                                                                                                                                            
|Report of Independent Accountants                                                                                                            |  | F-34
|                                                                                                                                            
|Schedule III: Real Estate and Accumulated Depreciation                                                                                       |  | F-35



F-1



---

##### Table of Contents



REPORT OF
INDEPENDENT ACCOUNTANTS



To the Board of Trustees and
Shareholders

of Prentiss Properties Trust:



In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders equity, comprehensive
income and cash flows present fairly, in all material respects, the financial position of Prentiss Properties Trust (the Company) at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 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, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and 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.



Dallas, Texas

February 12, 2003



F-2



---

##### Table of Contents



PRENTISS
PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS



(in thousands, except share and per share amounts)

|                                                                                                                                                                                                                            |  | December 31, |          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------
|                                                                                                                                                                                                                            |  | 2002         |          
|ASSETS                                                                                                                                                                                                                      |  |              |          
|Operating real estate:                                                                                                                                                                                                      |  |              |          
|Land                                                                                                                                                                                                                        |  | $            | 300,460  
|Buildings and improvements                                                                                                                                                                                                  |  |              | 1,631,568
|Less: accumulated depreciation                                                                                                                                                                                              |  |              | (178,792 
|                                                                                                                                                                                                                            |  |              |          
|                                                                                                                                                                                                                            |  |              | 1,753,236
|                                                                                                                                                                                                                           
|Construction in progress                                                                                                                                                                                                    |  |              | 41,352   
|Land held for development                                                                                                                                                                                                   |  |              | 65,377   
|Deferred charges and other assets, net                                                                                                                                                                                      |  |              | 169,373  
|Notes receivable                                                                                                                                                                                                            |  |              | 13,354   
|Accounts receivable, net                                                                                                                                                                                                    |  |              | 39,024   
|Cash and cash equivalents                                                                                                                                                                                                   |  |              | 5,080    
|Escrowed cash                                                                                                                                                                                                               |  |              | 10,483   
|Investments in securities                                                                                                                                                                                                   |  |              | 3,927    
|Investments in joint ventures and unconsolidated subsidiaries                                                                                                                                                               |  |              | 21,083   
|                                                                                                                                                                                                                            |  |              |          
|Total assets                                                                                                                                                                                                                |  | $            | 2,122,289
|                                                                                                                                                                                                                            |  |              |          
|                                                                                                                                                                                                                           
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                        |  |              |          
|Mortgages and notes payable                                                                                                                                                                                                 |  | $            | 1,011,027
|Interest rate hedges                                                                                                                                                                                                        |  |              | 16,776   
|Accounts payable and other liabilities                                                                                                                                                                                      |  |              | 79,626   
|Other payables (affiliates)                                                                                                                                                                                                 |  |              | 7,355    
|Distributions payable                                                                                                                                                                                                       |  |              | 26,947   
|                                                                                                                                                                                                                            |  |              |          
|Total liabilities                                                                                                                                                                                                           |  |              | 1,141,731
|                                                                                                                                                                                                                            |  |              |          
|                                                                                                                                                                                                                           
|Minority interest in operating partnership                                                                                                                                                                                  |  |              | 133,649  
|                                                                                                                                                                                                                            |  |              |          
|Minority interest in real estate partnerships                                                                                                                                                                               |  |              | 2,676    
|                                                                                                                                                                                                                            |  |              |          
|                                                                                                                                                                                                                           
|Commitments and contingencies                                                                                                                                                                                               |  |              |          
|                                                                                                                                                                                                                           
|Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585 shares issued
and outstanding                                                                                                                      |  |              | 100,000  
|Common shares $.01 par value, 100,000,000 shares authorized, 43,965,756 and 42,106,896
(includes 4,984,401 and 5,091,009 shares held in treasury) shares issued and outstanding at December 31, 2002 and 2001, respectively |  |              | 439      
|Additional paid-in capital                                                                                                                                                                                                  |  |              | 882,897  
|Common shares in treasury at cost, 4,984,401 and 5,091,009 shares at December 31, 2002
and 2001, respectively                                                                                                               |  |              | (118,476 
|Unearned compensation                                                                                                                                                                                                       |  |              | (1,479   
|Accumulated other comprehensive income                                                                                                                                                                                      |  |              | (15,768  
|(Distributions in excess of earnings)/retained earnings                                                                                                                                                                     |  |              | (3,380   
|                                                                                                                                                                                                                            |  |              |          
|Total shareholders equity                                                                                                                                                                                                  |  |              | 844,233  
|                                                                                                                                                                                                                            |  |              |          
|Total liabilities and shareholders equity                                                                                                                                                                                  |  | $            | 2,122,289
|                                                                                                                                                                                                                            |  |              |          



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



F-3



---

##### Table of Contents



PRENTISS
PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF INCOME



(in thousands, except per share amounts)



|                                                                                                                                   |  | Year Ended December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                   |  | 2002                    |        
|Revenues:                                                                                                                          |  |                         |        
|Rental income                                                                                                                      |  | $                       | 350,122
|Management and other fees, net                                                                                                     |  |                         | 4,386  
|                                                                                                                                   |  |                         |        
|                                                                                                                                   |  |                         | 354,508
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Expenses:                                                                                                                          |  |                         |        
|Property operating and maintenance                                                                                                 |  |                         | 88,842 
|Real estate taxes                                                                                                                  |  |                         | 39,931 
|General and administrative and personnel cost                                                                                      |  |                         | 10,361 
|Interest expense                                                                                                                   |  |                         | 67,081 
|Amortization of deferred financing costs                                                                                           |  |                         | 1,832  
|Depreciation and amortization                                                                                                      |  |                         | 71,734 
|                                                                                                                                   |  |                         |        
|                                                                                                                                   |  |                         | 279,781
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Merger termination fee, net                                                                                                        |  |                         |       
|Loss on investment in securities                                                                                                   |  |                         |       
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Income from continuing operations before minority interests and equity in income of
joint ventures and unconsolidated subsidiaries |  |                         | 74,727 
|                                                                                                                                  
|Minority interests                                                                                                                 |  |                         | (10,899
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                         | 3,154  
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Income from continuing operations                                                                                                  |  |                         | 66,982 
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Discontinued operations:                                                                                                           |  |                         |        
|Income from discontinued operations                                                                                                |  |                         | 2,008  
|Gain from disposition of discontinued operations                                                                                   |  |                         | 5,575  
|Minority interests related to discontinued operations                                                                              |  |                         | (284   
|                                                                                                                                   |  |                         |        
|                                                                                                                                   |  |                         | 7,299  
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Income before gain on sale of properties and extraordinary items                                                                   |  |                         | 74,281 
|                                                                                                                                  
|Gain on sale of properties                                                                                                         |  |                         |       
|Extraordinary items                                                                                                                |  |                         |       
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Net income                                                                                                                         |  | $                       | 74,281 
|Preferred dividends                                                                                                                |  |                         | (8,358 
|                                                                                                                                   |  |                         |        
|Net income applicable to common shareholders                                                                                       |  | $                       | 65,923 
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Basic earnings per common share:                                                                                                   |  |                         |        
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.53   
|Discontinued operations                                                                                                            |  |                         | 0.19   
|Extraordinary items                                                                                                                |  |                         |       
|                                                                                                                                   |  |                         |        
|Net income applicable to common shareholders  basic                                                                               |  | $                       | 1.72   
|                                                                                                                                   |  |                         |        
|Weighted average number of common shares outstanding  basic                                                                       |  |                         | 38,409 
|                                                                                                                                   |  |                         |        
|Diluted earnings per common share:                                                                                                 |  |                         |        
|Income from continuing operations applicable to common shareholders                                                                |  | $                       | 1.52   
|Discontinued operations                                                                                                            |  |                         | 0.19   
|Extraordinary items                                                                                                                |  |                         |       
|                                                                                                                                   |  |                         |        
|Net income applicable to common shareholders  diluted                                                                             |  | $                       | 1.71   
|                                                                                                                                   |  |                         |        
|                                                                                                                                  
|Weighted average number of common shares and common share equivalents outstanding 
diluted                                        |  |                         | 38,649 
|                                                                                                                                   |  |                         |        



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



F-4



---

##### Table of Contents



PRENTISS
PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS EQUITY



For the Three Years Ending December 31, 2002

(dollars in thousands, except per share data)



|                                                              |  | Total |         |   | Preferred shares |   | Common shares |  | Additional paid-in capital |     | Common shares in treasury |   |         | Unearned compensation |   |          | Accumulated other comprehensive income |  |   | (Distributions in excess of earnings)/ retained earnings |  
|------------------------------------------------------------- |  | ----- | ------- | - | ---------------- | - | ------------- |  | -------------------------- | --- | ------------------------- | - | ------- | --------------------- | - | -------- | -------------------------------------- |  | - | -------------------------------------------------------- | -
|Balance at December 31, 1999                                  |  | $     | 831,493 |   |                  | $ | 100,000       |  | $                          | 401 |                           | $ | 789,554 |                       | $ | (63,791  | )                                      |  |   |                                                          |  
|Issuance of common shares (417,670 common shares)             |  |       | 8,989   |   |                  |   |               |  |                            | 4   |                           |   | 8,985   |                       |   |          |                                        |  |   |                                                          |  
|Restricted share grants (191,500 common shares)               |  |       |        |   |                  |   |               |  |                            | 2   |                           |   | 4,279   |                       |   |          |                                        |  | $ | (4,281                                                   | )
|Amortization of share grants                                  |  |       | 1,095   |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   | 1,095                                                    |  
|Purchase of treasury shares (1,512,471 treasury shares)       |  |       | (28,845 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   | (28,845  | )                                      |  |   |                                                          |  
|Distributions declared ($1.895 per common share)              |  |       | (68,902 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Preferred distributions declared ($1.895 per preferred share) |  |       | (7,151  | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Net income                                                    |  |       | 69,585  |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|                                                              |  |       |         |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Balance at December 31, 2000                                  |  |       | 806,264 |   |                  |   | 100,000       |  |                            | 407 |                           |   | 802,818 |                       |   | (92,636  | )                                      |  |   | (3,186                                                   | )
|Issuance of common shares (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 treasury shares (974,394 treasury shares)         |  |       | (25,340 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   | (25,340  | )                                      |  |   |                                                          |  
|Distributions declared ($2.09 per common share)               |  |       | (76,936 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Preferred distributions declared ($2.09 per preferred share)  |  |       | (7,887  | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Unrealized gain on investments in securities                  |  |       | 366     |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Unrealized loss on interest rate hedges                       |  |       | (10,021 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Net income                                                    |  |       | 102,466 |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|                                                              |  |       |         |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Balance at December 31, 2001                                  |  |       | 819,800 |   |                  |   | 100,000       |  |                            | 421 |                           |   | 833,314 |                       |   | (118,228 | )                                      |  |   | (2,556                                                   | )
|Issuance of common shares (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 treasury shares (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 | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Preferred distributions declared ($2.22 per preferred share)  |  |       | (8,358  | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Unrealized loss on investments in securities                  |  |       | (104    | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Unrealized loss on interest rate hedges                       |  |       | (6,009  | ) |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Net income                                                    |  |       | 74,281  |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|                                                              |  |       |         |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  
|Balance at December 31, 2002                                  |  | $     | 844,233 |   |                  | $ | 100,000       |  | $                          | 439 |                           | $ | 882,897 |                       | $ | (118,476 | )                                      |  | $ | (1,479                                                   | )
|                                                              |  |       |         |   |                  |   |               |  |                            |     |                           |   |         |                       |   |          |                                        |  |   |                                                          |  



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



F-5



---

##### Table of Contents



PRENTISS
PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(dollars in thousands)



|                                                            |  | Year Ended December 31,
|----------------------------------------------------------- |  | -----------------------
|                                                            |  | 2002                   
|Net income                                                  |  | $                      
|                                                            |  |                        
|                                                           
|Unrealized gains and losses on securities:                  |  |                        
|Unrealized (losses)/gains arising during the period         |  |                        
|Unrealized losses on interest rate hedges:                  |  |                        
|Cumulative transition adjustment                            |  |                        
|Unrealized losses arising during the period                 |  |                        
|Reclassification adjustment for losses included in earnings |  |                        
|                                                            |  |                        
|Other comprehensive income                                  |  |                        
|                                                            |  |                        
|Comprehensive income                                        |  | $                      
|                                                            |  |                        



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



F-6



---

##### Table of Contents



PRENTISS
PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS



(dollars in thousands)



|                                                                                        |  | Year Ended December 31, |         
|--------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                        |  | 2002                    |         
|Cash Flows from Operating Activities:                                                   |  |                         |         
|Net income                                                                              |  | $                       | 74,281  
|Adjustments to reconcile net income to net cash provided by operating
activities:       |  |                         |         
|Minority interests                                                                      |  |                         | 11,183  
|Extraordinary items                                                                     |  |                         |        
|Gain on sale of real estate                                                             |  |                         | (5,575  
|Loss on investment in securities                                                        |  |                         |        
|Provision for doubtful accounts                                                         |  |                         | 4,626   
|Depreciation and amortization                                                           |  |                         | 73,457  
|Amortization of deferred financing costs                                                |  |                         | 1,832   
|Earnings in excess of distributions from joint ventures and unconsolidated
subsidiaries |  |                         | (162    
|Non-cash compensation                                                                   |  |                         | 1,757   
|Reclassification of accumulated other comprehensive income                              |  |                         | 578     
|Gain on derivative financial instrument                                                 |  |                         | (301    
|Changes in assets and liabilities:                                                      |  |                         |         
|Deferred charges and other assets                                                       |  |                         | (3,585  
|Accounts receivables                                                                    |  |                         | (3,279  
|Escrowed cash                                                                           |  |                         | 3,191   
|Other payables/receivables (affiliates)                                                 |  |                         | 2,971   
|Accounts payable and other liabilities                                                  |  |                         | (363    
|                                                                                        |  |                         |         
|Net cash provided by operating activities                                               |  |                         | 160,611 
|                                                                                        |  |                         |         
|                                                                                       
|Cash Flows from Investing Activities:                                                   |  |                         |         
|Development/redevelopment of real estate                                                |  |                         | (26,294 
|Purchase of real estate                                                                 |  |                         | (113,985
|Purchase of mortgage loan                                                               |  |                         | (47,000 
|Capitalized expenditures for in-service properties                                      |  |                         | (27,187 
|Distributions in excess of earnings of joint ventures and unconsolidated
Subsidiaries   |  |                         |        
|Investment in joint ventures and unconsolidated subsidiaries                            |  |                         |        
|Investments in securities                                                               |  |                         | (670    
|Proceeds from the sale of real estate                                                   |  |                         | 54,631  
|                                                                                        |  |                         |         
|Net cash used in investing activities                                                   |  |                         | (160,505
|                                                                                        |  |                         |         
|                                                                                       
|Cash Flows from Financing Activities:                                                   |  |                         |         
|Net proceeds from sale of common shares                                                 |  |                         | 52,558  
|Purchase of treasury shares                                                             |  |                         | (2,472  
|Redemption of preferred units                                                           |  |                         | (50,535 
|Capital contribution from consolidated joint ventures                                   |  |                         | 1,488   
|Distributions paid to limited partners                                                  |  |                         | (3,320  
|Distributions paid to common shareholders                                               |  |                         | (83,776 
|Distributions paid to preferred shareholders                                            |  |                         | (8,264  
|Distributions paid to preferred unitholders                                             |  |                         | (9,843  
|Payment for early extinguishment of debt                                                |  |                         |        
|Distribution paid to minority interest in real estate partnership                       |  |                         |        
|Proceeds from mortgages and notes payable                                               |  |                         | 559,800 
|Repayments of mortgages and notes payable                                               |  |                         | (456,507
|                                                                                        |  |                         |         
|Net cash (used in)/provided by financing activities                                     |  |                         | (871    
|                                                                                        |  |                         |         
|                                                                                       
|Net change in cash and cash equivalents                                                 |  |                         | (765    
|Cash and cash equivalents, beginning of year                                            |  |                         | 5,845   
|                                                                                        |  |                         |         
|Cash and cash equivalents, end of period                                                |  | $                       | 5,080   
|                                                                                       
|Supplemental Cash Flow Information:                                                     |  |                         |         
|Cash paid for interest                                                                  |  | $                       | 68,753  
|                                                                                        |  |                         |         



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



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##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





(1)    The Organization and Significant 2002 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 a management company, Prentiss Properties Resources and its
subsidiaries. The ownership of the operating partnership was as follows at December 31, 2002 and 2001:



|2002                      |  | Common Units         |  | %      |   |  | Series D Convertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |   |  |                          |  |        |  
|------------------------- |  | -------------------- |  | ------ | - |  | ------------------------------------ |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | -
|                          |  | (units in thousands) |  |        |   |  |                                      | 
|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 | % |  |                          |  |        |  
|                          |  |                      |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|                         
|2001                      |  | Common Units         |  | %      |   |  | Series D Convertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |   |  | Series C Preferred Units |  | %      |  
|                          |  | (units in thousands) | 
|Prentiss Properties Trust |  | 37,016               |  | 96.05  | % |  | 3,774                                |  | 100.00 | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | %
|Third parties             |  | 1,522                |  | 3.95   | % |  |                                     |  | 0.00   | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | % |  | 2,000                    |  | 100.00 | %
|                          |  |                      |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|Total                     |  | 38,538               |  | 100.00 | % |  | 3,774                                |  | 100.00 | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | % |  | 2,000                    |  | 100.00 | %
|                          |  |                      |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |   |  |                          |  |        |  



Our
regional management offices are located in San Diego, Oakland, Dallas, Chicago and Washington, D.C. As of December 31, 2002, we owned interests in a diversified portfolio of 137 primarily suburban Class A office and suburban industrial properties as
follows:



|                      |  | Number of Buildings |  | Net Rentable Square Feet
|--------------------- |  | ------------------- |  | ------------------------
|                      |  | (in thousands)     
|Office properties     |  | 106                 |  | 15,333                  
|Industrial properties |  | 31                  |  | 2,294                   
|                      |  |                     |  |                         
|Total                 |  | 137                 |  | 17,627                  
|                      |  |                     |  |                         



Our
properties include two office properties containing 222,000 net rentable square feet that were in various stages of development at December 31, 2002. As of December 31, 2002, our properties, exclusive of the development properties, were 93% leased
to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 14.9 million net rentable square feet in office, industrial and other properties for third parties.



We have determined that our reportable segments are those that
are based on our method of internal reporting, which disaggregates our business by geographic region. In April 2001, we completed an asset exchange with Brandywine Realty Trust, which included the sale of all of the properties comprising our
Northeast Region, and as a result, at December 31, 2002, we no longer had operations in the Northeast Region. As of December 31, 2002, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern
California; and (5) Southern California.



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##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





Our properties are located
in 12 markets, which are included in our reportable segments as follows:



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



Significant 2002
Transactions



On January 31, 2002, using
proceeds from our revolving credit facility, we acquired from Teachers Insurance and Annuity Association of America the $47.0 million mortgage loan on the Burnett Plaza property. The Burnett Plaza property was owned by Burnett Plaza Associates
pursuant to a joint venture agreement between our operating partnership and Burnett Plaza  VEF III, L.P. an affiliate of Lend Lease Real Estate Investments, as 20% and 80% owners, respectively. The loan, which bore interest at 7.50% per annum,
was originally scheduled to mature February 1, 2002.



On March 7, 2002, we purchased from Burnett Plaza  VEF III, L.P., its 80% interest in Burnett Plaza Associates for a purchase price of approximately $51.2 million. The transaction was funded with proceeds from our revolving
credit facility and in part by the consummation of the private placement of 613,750 of our common shares of beneficial interest. The private placement, which was priced at $28.35 per common share, closed in February 2002 with net proceeds from the
sale totaling approximately $16.5 million.



On
November 18, 2002, using proceeds from our revolving credit facility, we acquired a 263,990 net rentable square foot office building in suburban Washington, D.C. for a purchase price of $55.0 million. The building is 100% leased to a single tenant
until 2011.



Using proceeds from our revolving
credit facility, in January 2002, we contributed $3.0 million to a joint venture established to develop two multi-story office buildings in Del Mar, California. Our contribution represents a 70% controlling interest in the joint venture; therefore,
we consolidate the accounts of the joint venture with and into the operations of our operating partnership. Also using proceeds from our revolving credit facility, we made a loan totaling $6.6 million to the joint venture. The loan which matures in
January 2005, bears interest at 10% per annum for the first twelve months of the loan term and 12% thereafter. The loan requires interest only payments until maturity. On January 25, 2002, the joint venture acquired for $10.5 million, from an
unrelated third party, a 7.4 acre parcel of land in Del Mar, California.



On September 10, 2002, we disposed of seven industrial properties containing 875,000 net rentable square feet. The sale, which included all of the industrial properties within our Mid-Atlantic portfolio, resulted in gross
proceeds of $33.8 million. On October 17, 2002, we disposed of the Academy property, a 194,000 net rentable square foot office property located in the Los Angeles area. The sale, which included our only office property within the Los Angeles market,
resulted in gross proceeds of $22.2 million. The proceeds from both sales were used to repay a portion of the outstanding borrowings under our revolving credit facility. We recorded a gain on sale on our industrial properties totaling $8.5 million,
which was partially offset by a loss of $2.9 million from the Academy property. 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, net 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 before gain/(loss) from our Mid-Atlantic industrial properties and our Academy property for the years ended December 31, 2002, 2001 and 2000, respectively.



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





|Discontinued Operations:                 |  | Years Ended December 31,
|---------------------------------------- |  | ------------------------
|                                         |  | 2002                    
|                                         |  | (in thousands)          
|Property revenues:                       |  |                         
|Rental income                            |  | $                       
|                                         |  |                         
|Property revenues                        |  |                         
|                                         |  |                         
|                                        
|Property expenses:                       |  |                         
|Property operating and maintenance       |  |                         
|Real estate taxes                        |  |                         
|Depreciation and amortization            |  |                         
|                                         |  |                         
|Property expenses                        |  |                         
|                                         |  |                         
|                                        
|Property revenues less property expenses |  | $                       
|                                         |  |                         



In
addition to the property related transactions described above, during the year ended December 31, 2002, we transitioned one office property, located in Austin, Texas from development into operations. The property which includes 223,000 net rentable
square feet was 99% leased at December 31, 2002.



Using proceeds from our revolving credit facility, on January 3, 2002, we repurchased our operating partnerships outstanding 9.45%, Series C Cumulative Redeemable Perpetual Preferred Units, for approximately $50.6 million,
which included accrued and unpaid dividends of $26,250.



During the year ended December 31, 2002, we issued 1.8 million common shares of beneficial interest resulting primarily from option exercises and shares sold pursuant to our dividend reinvestment and employee share purchase plans.
The net proceeds totaling $46.5 million were used to repay a portion of the outstanding borrowings under our revolving credit facility.



During the year ended December 31, 2002, pursuant to a private placement, we issued 613,750 common shares with a cost basis of $14.2
million from our common shares held in treasury. We acquired 507,142 treasury shares pursuant to (1) the buy back of 100,000 common shares for gross consideration of $2.5 million; (2) 394,365 common shares surrendered as payment of the exercise
price and statutory tax withholdings, totaling in the aggregate $11.7 million, for certain share options exercised during the period; and (3) the forfeiture of 12,777 restricted share grants that were valued at $304,000 at the date of issue.



(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. This interpretation 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
are effective for financial statements issued after January 31, 2003. A public entity with a variable interest entity created before February 1, 2003, shall apply the consolidation provisions of this interpretation to that entity no later than the
beginning of the first interim or annual reporting period beginning after June 15, 2003. All enterprises with variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this
interpretation immediately.



At December 31,
2002, the operating partnership held a 98% non-voting interest in Prentiss Properties Resources, which we accounted for using the equity method of accounting. Effective January 1, 2003, we acquired the remaining outstanding interest in Prentiss
Properties Resources, for gross consideration of approximately $67,000. As a result of this transaction, effective January 1,



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



2003 the accounts of Prentiss Properties Resources are consolidated with and into the accounts of our
operating partnership. Had this transaction not occurred, Prentiss Properties Resources would have been subject to consolidation as prescribed in this interpretation.



Real Estate



In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, which includes, within its
scope, real estate acquisitions, we estimate at the date of acquisition the fair value of the various components of each real estate asset acquired and allocate the purchase price to each component accordingly. Generally this includes an allocation
of the purchase price to land, building, leasing costs, leasehold improvements and to an intangible asset or liability representing the difference if any between the contractual in-place leases and the fair value of such in-place leases. We
determine the fair value of the components using a variety of methods and assumptions all of which result in a general approximation of fair value. Differing assumptions and methods could result in different estimates of fair value and thus, a
different purchase price allocation. Financial Accounting Standards No. 141 is effective for business combinations for which the date of acquisition is July 1, 2001, or later. During the period July 1, 2001 through December 31, 2002, we acquired
three real estate properties. Based on estimates of the fair value of the components of each real estate property acquired between July 1, 2001 and December 31, 2002, we allocated the purchase price as follows:



|                                         |  | Year Ended December 31,
|---------------------------------------- |  | -----------------------
|                                         |  | 2002                   
|                                         |  | (in thousands)         
|Land                                     |  | $                      
|Buildings and improvements               |  | $                      
|Leasing costs and leasehold improvements |  | $                      
|Intangible asset/(liability)             |  | $                      



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, 2002. 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.



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, 2002, 2001 and 2000, capitalized interest costs totaled $3.4 million, $5.2 million and $3.4 million,
respectively.



Expenditures for repairs and
maintenance are charged to operations as incurred. Significant betterments are capitalized. 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.



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.



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





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.



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 a 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, 2002, we have an
accumulated unrealized gain of approximately $262,000 from our investments in securities. The unrealized gain is presented in accumulated other comprehensive income in our consolidated statement of changes in shareholders equity.



Investments in Joint Ventures and Unconsolidated Subsidiaries



As of December 31, 2002, we have
investments in joint ventures and unconsolidated subsidiaries which we account for using the equity method of accounting including (i) our 50% interest in Broadmoor Austin Associates; (ii) our 25% interest in Tysons International Partners; and (iii)
our 98% interest in Prentiss Properties Resources.



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. 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 years ended
December 31, 2002, 2001 and 2000, we recognized amortization 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.



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





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.



Management
fees, leasing and other fee 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.



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.



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 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



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



estimate the fair value of our consolidated fixed rate mortgages and notes payable to exceed the
carrying amount by $53.4 million at December 31, 2002.



Fair
Value of Derivative Instruments



Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, 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 2002, we recorded a reduction in fair value of our
derivatives of $6.3 million. The reduction in fair value was recorded as a charge of $6.6 million to other comprehensive income, partially offset by the recognition of a gain in current period earnings of approximately $301,000.



On December 31, 2002, our derivative financial instruments
were reported at their fair value as a liability of $16.8 million. Of the liability, $16.0 million represents an unrealized loss and is presented in accumulated other comprehensive income in our consolidated statement of changes in
shareholders equity.



Accounting for Share-Based
Compensation



We apply APB Opinion 25 and
related Interpretations in accounting for our share-based compensation plans. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation which, if
fully adopted, would change the methods we use in recognizing the cost of our plans. Adoption of the cost recognition provisions of the statement is optional and we have decided not to elect these provisions for years prior to 2003. 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 2002, 2001 and 2000 would approximate the pro forma
amounts below:



|                                             |  | As reported 12/31/02                          |        | Pro forma 12/31/02 |   | As reported 12/31/01 |  | Pro forma 12/31/01 |        | As reported 12/31/00 |   | Pro forma 12/31/00
|-------------------------------------------- |  | --------------------------------------------- | ------ | ------------------ | - | -------------------- |  | ------------------ | ------ | -------------------- | - | ------------------
|                                             |  | (amounts in thousands, except per share data)
|SFAS No. 123 charge                          |  | $                                             |       |                    | $ | 2,155                |  | $                  |       |                      | $ | 2,446             
|APB 25 charge                                |  | $                                             | 1,632  |                    | $ |                     |  | $                  | 1,810  |                      | $ |                  
|Net income applicable to common shareholders |  | $                                             | 65,923 |                    | $ | 65,400               |  | $                  | 94,579 |                      | $ | 93,943            
|Net income per common share-basic            |  | $                                             | 1.72   |                    | $ | 1.70                 |  | $                  | 2.57   |                      | $ | 2.56              
|Net income per common share-diluted          |  | $                                             | 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.



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, 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 method of accounting for our share-based compensation plans and have elected to apply this method using the prospective method as prescribed in Financial
Accounting Standards No. 148.



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





(3)    Deferred Charges and Other Assets, Net



Deferred charges and other assets consisted of the following at December 31, 2002 and 2001:



|                                    |  | 2002           |         |   | 2001 |  
|----------------------------------- |  | -------------- | ------- | - | ---- | -
|                                    |  | (in thousands) |        
|Deferred leasing and tenant charges |  | $              | 228,426 |   |      | $
|Deferred financing costs            |  |                | 14,526  |   |      |  
|Prepaids and other assets           |  |                | 6,478   |   |      |  
|                                    |  |                |         |   |      |  
|                                    |  |                | 249,430 |   |      |  
|Less: accumulated amortization      |  |                | (80,057 | ) |      |  
|                                    |  |                |         |   |      |  
|                                    |  | $              | 169,373 |   |      | $
|                                    |  |                |         |   |      |  



(4)    Notes Receivable



Our notes receivable balance of $13.4 million at December 31, 2002, results from the consummation of two 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 and (2) a non-recourse promissory note totaling $4.4 million, collateralized by the real estate property, maturing March 1, 2005, bearing
interest at 7.95% per annum and requiring interest only payments until maturity.



(5)    Accounts Receivable, Net



Accounts receivable consisted of the following at December 31, 2002 and 2001:



|                                      |  | 2002           |        |   | 2001 |  
|------------------------------------- |  | -------------- | ------ | - | ---- | -
|                                      |  | (in thousands) |       
|Rents and services                    |  | $              | 9,191  |   |      | $
|Accruable rental income               |  |                | 36,198 |   |      |  
|Other                                 |  |                | 1,347  |   |      |  
|                                      |  |                |        |   |      |  
|                                      |  |                | 46,736 |   |      |  
|Less: allowance for doubtful accounts |  |                | (7,712 | ) |      |  
|                                      |  |                |        |   |      |  
|                                      |  | $              | 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 will be 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 $781,000 and $2.4
million at December 31, 2002 and 2001, respectively and is reflected in the other receivable balance presented in the table above.



(6)    Investments in Joint Ventures and Unconsolidated Subsidiaries



The following information summarizes the financial position
at December 31, 2002 and 2001 and the results of operations for the years ended December 31, 2002, 2001 and 2000 for the investments in which we held an interest during the periods presented:



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NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





|Summary of Financial Position:   |  | Total Assets   |         | Total Debt (8) |   | Total Equity  |  |               | Companys Investment
|-------------------------------- |  | -------------- | ------- | -------------- | - | ------------- |  | ------------- | --------------------
|                                 |  | Dec. 31, 2002  |         | Dec. 31, 2001  |   | Dec. 31, 2002 |  | Dec. 31, 2001 |                     
|                                 |  | (in thousands)
|Broadmoor Austin Associates(1)   |  | $              | 108,929 |                | $ | 114,101       |  | $             | 144,698             
|Burnett Plaza Associates(2)      |  |                |        |                |   | 102,484       |  |               |                    
|PPS Partners LLC(3)              |  |                |        |                |   | 126           |  |               |                    
|Prentiss Properties Resources(4) |  |                | 12,406  |                |   | 11,710        |  |               |                    
|Tysons International Partners(5) |  |                | 94,873  |                |   | 99,059        |  |               | 60,628              
|Other Investments(6)             |  |                |        |                |   |              |  |               |                    
|                                 |  |                |         |                |   |               |  |               |                     
|                                 |  |                |         |                |   |               |  |               |                     
|                                 |  |                |         |                |   |               |  |               |                     



|Summary of Operations:               |  | Total Revenue  |        | Net Income |   | Companys Share of Net Income/(Loss)
|------------------------------------ |  | -------------- | ------ | ---------- | - | ------------------------------------
|                                     |  | 2002           |        | 2001       |   | 2000                                
|                                     |  | (in thousands)
|Broadmoor Austin Associates          |  | $              | 20,118 |            | $ | 19,849                              
|Burnett Plaza Associates             |  |                | 4,302  |            |   | 21,483                              
|Lot 21 Associates, L.P(7)            |  |                |       |            |   | 130                                 
|PPS Partners LLC                     |  |                | 44     |            |   | 581                                 
|Prentiss Properties Limited, Inc.(4) |  |                |       |            |   | 4,939                               
|Prentiss Properties Resources        |  |                | 14,075 |            |   | 11,667                              
|Project 127 Partners, L.P(7)         |  |                |       |            |   | 76                                  
|Tysons International Partners        |  |                | 13,092 |            |   | 10,094                              
|                                     |  |                |        |            |   |                                     
|                                     |  |                |        |            |   |                                     
|                                     |  |                |        |            |   |                                     

---

|(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) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On March 28, 2001, Prentiss Properties Resources 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 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. Effective
January 1, 2003, our operating partnership acquired the remaining 2% interest in Prentiss Properties Resources for total consideration of approximately $67.000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Represents a 1% investment in certain real estate entities that we account for using the cost
method of accounting.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(7) |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



(7)    Mortgages and Notes Payable



On May 22, 2002, we renewed our $300 million unsecured revolving credit facility, including an extension of the maturity date from May 23, 2003 to May 23, 2005. The structure of the new facility is
substantially the same as the previous facility, including an initial interest rate of LIBOR plus 137.5 basis points. The interest rate on the facility will fluctuate based on our overall leverage



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FINANCIAL STATEMENTS



with a range between LIBOR plus 125 basis points and LIBOR plus 175 basis points. At December 31,
2002, 30-day LIBOR was 1.38%.



On June 27, 2002,
we completed a $72.1 million, non-recourse mortgage financing collateralized by our Burnett Plaza property in Fort Worth, Texas. The loan has a 3-year term with two, 1-year extension options and a floating rate over LIBOR of 215 basis points. The
proceeds from the loan were used to repay borrowings outstanding under our revolving credit facility. In conjunction with the Burnett Plaza loan, we entered into two interest rate swaps totaling $40 million, which convert floating rate 30-day LIBOR
to fixed rates. Both swap transactions commenced in June 2002 and mature July 2005 and fix LIBOR at a rate of 4.345 percent.



The following table sets forth our mortgages and notes payable as of December 31, 2002 and 2001:



|Description                 |  | 2002           |           | 2001 |   | Amortization |  | Interest Rate |  | Maturity      
|--------------------------- |  | -------------- | --------- | ---- | - | ------------ |  | ------------- |  | --------------
|                            |  | (in thousands)
|Collateralized term loan(1) |  | $              | 71,563    |      | $ | 72,313       |  | 25 yr         |  | LIBOR + 1.625%
|Revolving credit facility   |  |                | 156,000   |      |   | 118,500      |  | None          |  | LIBOR + 1.375%
|Unsecured term loan         |  |                | 75,000    |      |   | 75,000       |  | None          |  | LIBOR + 1.375%
|PPREFI portfolio loan(2)    |  |                | 180,100   |      |   | 180,100      |  | None          |  | 7.58%         
|Mortgage notes payable(3)   |  |                | 528,364   |      |   | 461,821      |  | (4)           |  | (5)           
|                            |  |                |           |      |   |              |  |               |  |               
|                            |  | $              | 1,011,027 |      | $ | 907,734      |  |               |  |               
|                            |  |                |           |      |   |              |  |               |  |               

---

|(1) |  | The term loan is collateralized by four properties with an aggregate net book value of real
estate of $83.1 million.
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(2) |  | The PPREFI portfolio loan is collateralized by 36 properties with an aggregate net book value
of real estate of $249.2 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The mortgage loans are collateralized by 31 properties with an aggregate net book value of
real estate of $722.9 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excluding the $72.1 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 25 to 30 years.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Excluding the Burnett Plaza financing, which has an interest rate equal to LIBOR plus 215
basis points, the interest rates range from 6.63% to 8.63% with a weighted average interest rate of 7.39% at December 31, 2002. Maturity dates range from December 2003 through June 2013 with a weighted average maturity of 6.4 years from December 31,
2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Years ending December 31: |  | (in thousands)
|------------------------- |  | --------------
|2003                      |  | $             
|2004                      |  |               
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|Thereafter                |  |               
|                          |  |               
|                          |  | $             
|                          |  |               



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, 2002.



(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.



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FINANCIAL STATEMENTS





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). 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 $7.8 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, 2002. 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.



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NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





|Notional Amount |  | Swap Rate Paid (Fixed) |  | Effective Fixed Rate |  | Swap Rate Received (Variable) at December 31, 2002 |  | Swap Maturity  |  | Fair Value    
|--------------- |  | ---------------------- |  | -------------------- |  | -------------------------------------------------- |  | -------------- |  | --------------
|                |  |                        |  |                      |  |                                                    |  |                |  | (in thousands)
|$50 million     |  | 1.990%                 |  | 3.365%               |  | 1.380%                                             |  | August 2003    |  | $(199)        
|$50 million     |  | 6.253%                 |  | 7.628%               |  | 1.380%                                             |  | September 2004 |  | (3,974)       
|$60 million     |  | 6.248%                 |  | 7.623%               |  | 1.380%                                             |  | September 2004 |  | (4,765)       
|$15 million     |  | 4.345%                 |  | 6.495%               |  | 1.380%                                             |  | July 2005      |  | (846)         
|$25 million     |  | 4.345%                 |  | 6.495%               |  | 1.380%                                             |  | July 2005      |  | (1,410)       
|$20 million     |  | 5.985%                 |  | 7.610%               |  | 1.380%                                             |  | March 2006     |  | (2,231)       
|$30 million     |  | 5.990%                 |  | 7.615%               |  | 1.380%                                             |  | March 2006     |  | (3,351)       
|                |  |                        |  |                      |  |                                                    |  |                |  |               
|Total           |  |                        |  |                      |  |                                                    |  |                |  | $(16,776)     
|                |  |                        |  |                      |  |                                                    |  |                |  |               



Cash
payments made under our interest rate hedges exceeded cash receipts from our interest rate hedges by $8.2 million and $3.2 million for the years ended December 31, 2002 and 2001, respectively. Cash received exceeded cash paid by approximately
$215,000 for the year ended December 31, 2000.



(9)    Accounts Payable and Other Liabilities



Accounts payable and other liabilities consisted of the following at December 31, 2002 and 2001:



|                                |  | 2002           |        | 2001
|------------------------------- |  | -------------- | ------ | ----
|                                |  | (in thousands)
|Accrued interest expense        |  | $              | 5,400  |     
|Accrued real estate taxes       |  |                | 28,494 |     
|Advance rent and deposits       |  |                | 19,598 |     
|Deferred compensation liability |  |                | 3,927  |     
|Other liabilities               |  |                | 22,207 |     
|                                |  |                |        |     
|                                |  | $              | 79,626 |     
|                                |  |                |        |     



(10)    Distributions Payable



In December 2002, we declared a cash distribution for the fourth quarter of 2002 in the amount of $.56 per share, payable on January 10, 2003, to common shareholders of record on December 27, 2002. 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 $24.8 million and were paid January 10, 2003.



In addition, quarterly distributions totaling
$2.2 million in the aggregate were declared in December 2002, 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 3, 2003 and January 15, 2003, respectively.



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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, 2002, which expire on various dates through 2022, are as follows:



|Years ending December 31: |  | (in thousands)
|------------------------- |  | --------------
|2003                      |  | $             
|2004                      |  |               
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|Thereafter                |  |               
|                          |  |               
|                          |  | $             
|                          |  |               



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



|Market                |  | (in thousands)
|--------------------- |  | --------------
|Metro. Washington, DC |  | $             
|Dallas/Fort Worth     |  |               
|Chicago               |  |               
|Oakland               |  |               
|Austin                |  |               
|San Diego             |  |               
|Sacramento            |  |               
|Denver                |  |               
|Houston               |  |               
|Atlanta               |  |               
|Los Angeles           |  |               
|Suburban Detroit      |  |               
|                      |  |               
|                      |  | $             
|                      |  |               



For the
years ended December 31, 2002 and December 31, 2001, 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 $24.8 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 2002. The distributions were paid in January 2003.



Pursuant to our long-term incentive plan, during the year ended December 31, 2002, we issued 30,600 restricted share grants to various key employees. The shares, which had a market value of approximately $859,000 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.



Prior to March 7,
2002, we owned a 20% non-controlling interest in Burnett Plaza Associates and accounted for our interest using the equity method of accounting. On March 7, 2002, we acquired the remaining 80% interest in Burnett Plaza Associates and consolidated the
accounts with and into the accounts of our operating partnership. As a result of the consolidation, we reclassified our $10.3 million investment from investment in joint ventures and unconsolidated subsidiaries to the respective asset and liability
accounts on our consolidated balance sheet. In addition, as a result of the acquisition of the remaining 80% interest in the joint venture, we assumed liabilities totaling approximately $2.5 million and receivables totaling approximately $978,000.



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NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





During the
year ended December 31, 2002, we marked-to-market our investments in securities and our interest rate hedges. During the year ended December 31, 2002, we recorded unrealized losses of $104,000 and $6.6 million on our investments in securities and
interest rate hedges, respectively.



During the
year ended December 31, 2002, common shares in treasury increased by $248,000, representing a decrease of $14.2 million related to the consummation of the private placement of 613,750 common shares with Salomon Smith Barney Inc., offset by an
increase of $14.5 million related to (1) the buy back of 100,000 common shares for gross consideration of $2.5 million and (2) non-cash activities including $11.7 million attributable to 394,365 common shares surrendered as payment of the exercise
price and statutory tax withholdings for certain share options exercised during the period and $304,000, representing 12,777 restricted share grants forfeited as a result of an employee termination during the period.



As a result of the sale of our Mid-Atlantic industrial
properties and the Academy office property, we removed accumulated depreciation and accumulated amortization of $7.1 million and $351,000, respectively. In addition, receivables, other assets and liabilities totaling $786,000, $346,000 and $491,000,
respectively were removed.



(13) Related Party Transactions



On March 28, 2001, Prentiss Properties
Resources 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. Currently, we account for our non-controlling interest in the management service company and its subsidiaries using the equity method of accounting. Effective January 1, 2003, our operating
partnership acquired the remaining 2% interest in Prentiss Properties Resources and as a result, beginning January 1, 2003, the accounts of Prentiss Properties Resources will be consolidated with and into the accounts of our operating partnership.



The management service company and its
subsidiaries incur certain personnel and other overhead-related expenses on behalf of our operating partnership, which are subsequently reimbursed. Such expenses totaled $4.6 million, $4.0 million and $3.7 million for the years ended December 31,
2002, 2001 and 2000, respectively. In addition, our operating partnership funds short-term capital needs of the management service company, which are subsequently reimbursed. We had outstanding short-term borrowings due to the management service
company of $7.4 million at December 31, 2002 and $4.4 million at December 31, 2001. The short-term borrowings were classified as other payables (affiliates) in our consolidated balance sheets at December 31, 2002 and December 31, 2001.



(14) 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 $306,000, $333,000 and $325,000 for the years ended December 31, 2002, 2001 and 2000, 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 $314,000, $300,000 and $0 during the years ended December 31, 2002, 2001 and 2000, 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 39,766, 65,340 and 45,364 common shares
were issued, in accordance with the share purchase plan, during the years ended December 31, 2002, 2001, and 2000, respectively. At December 31, 2002, we have 243,314 shares available for future issuance.



During the year ended December 31, 2000, we adopted a deferred
compensation plan. Pursuant to the plan, officers and other selected key employees of our operating partnership or management service company 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



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FINANCIAL STATEMENTS



benefit of such participant. The trust may deliver to the participant shares or the fair market value
of such shares beginning 6 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 and 2002 plan years, the deferred compensation plan did not provide for a discount on our common shares. The investments (including 86,529 of our common share purchased in the open market) are carried at their market value of $3.9
million and included as investments in securities on our consolidated balance sheet. The corresponding deferred compensation liability of approximately $3.9 million is included in accounts payable and other liabilities. As a result of the change in
the fair value of our investments in securities, we recognized a loss of $104,000 and a gain of $366,000 in other comprehensive income during the years ended December 31, 2002 and 2001, respectively. We recognized a corresponding charge to
compensation expense equal to $(104,000) and $366,000, respectively related to the change in the obligation payable to participants.



(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, 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. In 2002, 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 4,265, 4,750 and 5,100 common shares were granted pursuant to the plan during the years ended December 31, 2002, 2001, and 2000, respectively.



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 company. 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 2002 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, 2002, 2001 and 2000, we granted 206,500, 459,000 and 745,875 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 2002, 2001 and 2000 we issued 30,600, 89,700 and 191,500 restricted shares which vest 100% on the third anniversary of the date of grant.



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FINANCIAL STATEMENTS



A summary of the status of our options as of December 31, 2002, 2001 and 2000 and the
changes during the years ended on those dates is presented below:



|                                     |  | 2002                           |  | 2001                            |       | 2000                          
|------------------------------------ |  | ------------------------------ |  | ------------------------------- | ----- | ------------------------------
|                                     |  | # Shares of underlying options |  | Weighted average exercise price |       | # Shares of underlying options
|Outstanding at beginning of the year |  | 2,179,175                      |  | $                               | 23.65 |                               
|Granted                              |  | 244,000                        |  | $                               | 28.43 |                               
|Exercised                            |  | 997,661                        |  | $                               | 23.01 |                               
|Forfeited                            |  | 4,000                          |  | $                               | 26.24 |                               
|Expired                              |  |                               |  | $                               |      |                               
|                                     |  |                                |  |                                 |       |                               
|Outstanding at end of year           |  | 1,421,514                      |  | $                               | 24.93 |                               
|Exercisable at end of year           |  | 679,099                        |  | $                               | 25.23 |                               
|                                     |  |                                |  |                                 |       |                               
|Weighted-average fair value          |  | $1.19                          |  | $1.01                           |       | $1.48                         



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:



|                        |  | 2002  |   |  | 2001  |   |  | 2000  |  
|----------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|Expected term           |  | 5.00  |   |  | 5.00  |   |  | 5.00  |  
|Expected dividend yield |  | 7.81  | % |  | 8.20  | % |  | 8.21  | %
|Expected volatility     |  | 13.64 | % |  | 13.36 | % |  | 14.53 | %
|Risk-free interest rate |  | 4.27  | % |  | 4.79  | % |  | 6.20  | %



The
following table summarizes information about share options outstanding at December 31, 2002:



|                        |  | Options Outstanding            |  | Options Exercisable            
|----------------------- |  | ------------------------------ |  | -------------------------------
|Range of exercise price |  | Number outstanding at 12/31/02 |  | Weighted average exercise price
|$15.00 to $20.00        |  | 166,412                        |  | $19.94                         
|$20.01 to $25.00        |  | 740,336                        |  | $24.14                         
|$25.01 to $30.00        |  | 477,266                        |  | $27.40                         
|$30.01 +                |  | 37,500                         |  | $31.35                         
|                        |  |                                |  |                                
|$15.00 +                |  | 1,421,514                      |  | $24.93                         
|                        |  |                                |  |                                



At
December 31, 2002, we had 262,880 and 974,134 common shares that remain available for future issuance under our trustees and employees plans, respectively.



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FINANCIAL STATEMENTS





(16) Capital Shares



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, 2002, 38,981,355 and 3,773,585 common shares and Series D Convertible Preferred Shares were issued and outstanding, respectively. 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.



At the operating partnership level, 40,481,921 common units were issued and outstanding at December 31, 2002. The units included
38,981,355 held by Prentiss Properties Trust and 1,500,566 held by limited partners of our operating partnership. The 1,500,566 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, 2002, no Series B Preferred Shares were issued or outstanding.



In September 1999, we privately placed 2,000,000, $25.0 par value, 9.45% Series C Cumulative Redeemable
Perpetual Preferred Units of our operating partnership with Belair Real Estate Corporation and Belcrest Realty Corporation. In connection with the private placement, on September 17, 1999, we designated 2,000,000 Series C Preferred Shares. Using
proceeds from our revolving credit facility, on January 3, 2002, we repurchased our operating partnerships outstanding 9.45%, Series C Cumulative Redeemable Perpetual Preferred Units, for approximately $50.6 million, which included accrued and
unpaid dividends of $26,250.



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 Cumulative 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.



At December 31, 2002, the Series B Cumulative Redeemable Perpetual Preferred Units and Series E Preferred Units are accounted for at their redemption value in the line item minority interest in operating partnership on our
consolidated balance sheet.



(17) 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, 2002, 2001 and 2000:



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FINANCIAL STATEMENTS





|                                                                        |  | 2002                                  |        |   | 2001 |   |         | 2000 | 
|----------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------- | ---- | 
|                                                                        |  | (in thousands, except per share data) |       
|Reconciliation of the numerator used for basic earnings per share       |  |                                       |        |   |      |   |         |      | 
|Income from continuing operations                                       |  | $                                     | 66,982 |   |      | $ | 86,315  |      | 
|Preferred dividends                                                     |  |                                       | (8,358 | ) |      |   | (7,887  | )    | 
|Gain on sale of properties                                              |  |                                       |       |   |      |   | 13,895  |      | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|Income from continuing operations applicable to common shareholders     |  | $                                     | 58,624 |   |      | $ | 92,323  |      | 
|                                                                       
|Discontinued operations                                                 |  |                                       | 7,299  |   |      |   | 2,623   |      | 
|Extraordinary items                                                     |  |                                       |       |   |      |   | (367    | )    | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|Net income applicable to common shareholders                            |  | $                                     | 65,923 |   |      | $ | 94,579  |      | 
|                                                                       
|Reconciliation of the denominator used for basic earnings per
share     |  |                                       |        |   |      |   |         |      | 
|Weighted average common shares outstanding                              |  |                                       | 38,409 |   |      |   | 36,736  |      | 
|Basic earnings per share                                                |  | $                                     | 1.72   |   |      | $ | 2.57    |      | 
|                                                                       
|Reconciliation of the numerator used for dilutive earnings per
share    |  |                                       |        |   |      |   |         |      | 
|Income from continuing operations                                       |  | $                                     | 66,982 |   |      | $ | 86,315  |      | 
|Preferred dividends                                                     |  |                                       | (8,358 | ) |      |   |        |      | 
|Gain on sale of properties                                              |  |                                       |       |   |      |   | 13,895  |      | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|Income from continuing operations applicable to common shareholders     |  | $                                     | 58,624 |   |      | $ | 100,210 |      | 
|                                                                       
|Discontinued operations                                                 |  |                                       | 7,299  |   |      |   | 2,623   |      | 
|Extraordinary items                                                     |  |                                       |       |   |      |   | (367    | )    | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|                                                                        |  | $                                     | 65,923 |   |      | $ | 102,466 |      | 
|                                                                       
|Reconciliation of the denominator used for dilutive earnings per
share  |  |                                       |        |   |      |   |         |      | 
|Weighted average common shares outstanding                              |  |                                       | 38,409 |   |      |   | 36,736  |      | 
|Preferred shares(1)                                                     |  |                                       |       |   |      |   | 3,774   |      | 
|Options                                                                 |  |                                       | 240    |   |      |   | 339     |      | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|Weighted average common shares and common share equivalents outstanding |  |                                       | 38,649 |   |      |   | 40,849  |      | 
|                                                                        |  |                                       |        |   |      |   |         |      | 
|Diluted earnings per share                                              |  | $                                     | 1.71   |   |      | $ | 2.51    |      | 
|                                                                        |  |                                       |        |   |      |   |         |      | 

---

|(1) |  | Preferred shares for the year ended December 31, 2002 and 2000 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 income applicable to common shareholders for the years ended
December 31, 2002 and 2000 as compared to the year ended December 31, 2001, for which the numerator is net income.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(18) 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



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FINANCIAL STATEMENTS



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.



Development Activity



We are party to several construction contracts as part of our
development activities. The following office properties were under development at December 31, 2002:



|Development properties      |  | Segment             |  | Market                |  | Net rentable square feet(1) |  | Estimated cost(2) |  | Estimated shell completion date(3)
|--------------------------- |  | ------------------- |  | --------------------- |  | --------------------------- |  | ----------------- |  | ----------------------------------
|                            |  |                     |  |                       |  | (in thousands)              |  | (in millions)     |  |                                   
|Carlsbad Pacific Center III |  | Southern California |  | San Diego             |  | 40                          |  | $  8.3            |  | October 2001                      
|Willow Oaks III             |  | Mid-Atlantic        |  | Metro. Washington, DC |  | 182                         |  | 40.6              |  | January 2002                      
|                            |  |                     |  |                       |  |                             |  |                   |  |                                   
|                            |  |                     |  |                       |  | 222                         |  | $48.9             |  |                                   
|                            |  |                     |  |                       |  |                             |  |                   |  |                                   

---

| | (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 area of the property allocated to the tenant.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | As of December 31, 2002, we have incurred $41.4 million of the total estimated cost of our development properties.
| | --- |  | ------------------------------------------------------------------------------------------------------------------

| | (3) |  | We classify our construction projects as development properties until the projects are substantially complete and ready for their intended use. Typically, this
includes shell completion and improvements made to the net rentable area within the building.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 $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 $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 be impossible to obtain insurance covering terrorist attacks. In addition, we would expect our insurance premiums to increase in the
future, which may have an adverse impact on our cash flow. We may not be able to purchase policies in the future with coverage limits and deductibles similar to those that were available before September 11, 2001. 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, guarantees 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 their leases beyond the maturities of their current in-place leases.



As a condition of the purchase and sale and as
security for our guarantee, we provided to the title company at closing, irrevocable letters of credit, totaling $1.4 million, drawn on a financial institution and identifying the purchaser as beneficiary. The balance of the letters of credit which
total $1.3 million at December 31, 2002, expires as follows:



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FINANCIAL STATEMENTS





|     |  | Letters of Credit
|---- |  | -----------------
|     |  | (in thousands)   
|2003 |  | $                
|2004 |  |                  
|2005 |  |                  
|2006 |  |                  
|     |  |                  
|     |  | $                
|     |  |                  



We
reduced gain on sale by $1.0 million which represents our estimate of the probable payment under the guarantee. This amount is included in accounts payable and other liabilities on our consolidated balance sheet at December 31, 2002.



(19) Recently Issued Accounting Pronouncements



In April 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The provisions of this statement as they relate to the rescission
of statement No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and 9 (c) of this statement as they relate to statement No. 13 shall be effective for transactions occurring after May 15, 2002, with
early application encouraged. The statement includes two items that could be relevant to real estate companies such as ours. Specifically, the statement rescinds Statement of Financial Accounting Standards No. 4, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result of this recission, the criteria in APB Opinion No. 30 will now be used to classify those gains and
losses, which could result in the gains and losses being reported in income before extraordinary items. The statement amends Statement of Financial Accounting Standards No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The impact from the implementation of this statement, which we believe will not have a material impact on our financial statements, will be
dependent upon (1) the amount of any gains or losses realized as a result of future debt extinguishments and (2) whether we enter into lease modifications that have economic effects similar to sale-leaseback transactions.



In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. The statement addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and
disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of the statement also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who
are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The statement is effective for exit or disposal activities initiated
after December 31, 2002. The impact from the implementation of this statement, which we believe will not have a material impact on our financial statements, will be dependent upon whether or not we enter into transactions that qualify as exit or
disposal activities as defined in this statement.



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, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of the statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation.
Finally, this statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. On January 1, 2003, we adopted the fair value method of accounting for
stock-based compensation and have elected to apply this method using the prospective method as prescribed in Financial Accounting Standards No. 148. The prospective method allows for the application of the recognition provisions of Financial
Accounting Standards No. 123 to all employee awards granted, modified, or settled after the beginning of the fiscal year in which the recognition provisions are first applied. The transition and disclosure provisions of this statement are effective
for financial statements for fiscal years ending after December 15, 2002. The interim disclosure provisions of this statement are effective for interim periods beginning after December 15, 2002. The impact from the implementation of this statement,
which we believe will not have a material impact on our financial statements, will be dependent upon the amount of awards granted, modified, or settled on or subsequent to January 1, 2003.



In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This



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FINANCIAL STATEMENTS



interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The impact from the implementation of this interpretation, which we believe will not
have a material impact on our financial statements, will be dependent upon guarantees we enter into subsequent to December 31, 2002.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This interpretation 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 are effective for financial statements issued after January 31, 2003. A public entity with a
variable interest entity created before February 1, 2003, shall apply the consolidation provisions of this interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. All
enterprises with variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this interpretation immediately. At December 31, 2002, our operating partnership held a 98% non-voting
interest in Prentiss Properties Resources which we accounted for using the equity method of accounting. Effective January 1, 2003, we acquired the remaining outstanding interest in Prentiss Properties Resources for consideration of approximately
$67,000. As a result of this transaction, effective January 1, 2003, the accounts of Prentiss Properties Resources will be with and into the accounts of our operating partnership. Had this transaction not occurred, Prentiss Properties Resources
would have been subject to consolidation as prescribed in this interpretation. We have no other entities that qualify as variable interest entities at December 31, 2002.



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FINANCIAL STATEMENTS





(20) 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, 2002, 2001, and 2000, respectively:



For the Year Ended and As of December 31, 2002



|                                                                                 |  | Mid-Atlantic   |         | Midwest |   | Northeast |  | Southwest |   | Northern California |   |         | Southern California |   |         | Total segments |  | Corporate not allocable to segments |         |   | Consolidated total |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | ------- | - | --------- |  | --------- | - | ------------------- | - | ------- | ------------------- | - | ------- | -------------- |  | ----------------------------------- | ------- | - | ------------------ | -
|                                                                                 |  | (in thousands) |        
|Revenues:                                                                        |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|Rental income                                                                    |  | $              | 92,894  |         | $ | 61,724    |  | $         |  |                     | $ | 119,324 |                     | $ | 46,452  |                |  | $                                   | 29,728  |   |                    | $
|Management and other fees, net                                                   |  |                | 433     |         |   | 22        |  |           |  |                     |   | 1,034   |                     |   | 280     |                |  |                                     | (59     | ) |                    |  
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|Total revenues                                                                   |  |                | 93,327  |         |   | 61,746    |  |           |  |                     |   | 120,358 |                     |   | 46,732  |                |  |                                     | 29,669  |   |                    |  
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|                                                                                
|Expenses:                                                                        |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|Property operating and maintenance                                               |  |                | 21,858  |         |   | 14,591    |  |           |  |                     |   | 32,175  |                     |   | 14,553  |                |  |                                     | 5,665   |   |                    |  
|Real estate taxes                                                                |  |                | 7,077   |         |   | 10,875    |  |           |  |                     |   | 16,158  |                     |   | 3,529   |                |  |                                     | 2,292   |   |                    |  
|General & administrative and personnel costs                                     |  |                | 425     |         |   | 302       |  |           |  |                     |   | 379     |                     |   | 358     |                |  |                                     | 171     |   |                    |  
|Interest expense                                                                 |  |                |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |  
|Amortization of deferred financing costs                                         |  |                |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |  
|Depreciation and amortization                                                    |  |                | 17,857  |         |   | 12,424    |  |           |  |                     |   | 26,661  |                     |   | 7,417   |                |  |                                     | 7,289   |   |                    |  
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|Total expenses                                                                   |  |                | 47,217  |         |   | 38,192    |  |           |  |                     |   | 75,373  |                     |   | 25,857  |                |  |                                     | 15,417  |   |                    |  
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|                                                                                
|Income from continuing operations before minority interests and equity in
income |  |                | 46,110  |         |   | 23,554    |  |           |  |                     |   | 44,985  |                     |   | 20,875  |                |  |                                     | 14,252  |   |                    |  
|                                                                                
|Minority interests                                                               |  |                |        |         |   |          |  |           |  |                     |   |        |                     |   |        |                |  |                                     |        |   |                    |  
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                | 1,875   |         |   | 1,007     |  |           |  |                     |   | 2,282   |                     |   | (386    | )              |  |                                     | (146    | ) |                    |  
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|Income from continuing operations                                                |  | $              | 47,985  |         | $ | 24,561    |  | $         |  |                     | $ | 47,267  |                     | $ | 20,489  |                |  | $                                   | 14,106  |   |                    | $
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  
|                                                                                
|Total assets                                                                     |  | $              | 617,295 |         | $ | 383,559   |  | $         |  |                     | $ | 267,050 |                     | $ | 180,379 |                |  | $                                   | 639,416 |   |                    | $
|                                                                                 |  |                |         |         |   |           |  |           |   |                     |   |         |                     |   |         |                |  |                                     |         |   |                    |  



F-29



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





For the
Year Ended and As of December 31, 2001



|                                                                                 |  | Mid-Atlantic   |         | Midwest |   | Northeast |  |   | Southwest |   | Northern California |   |         | Southern California |   | Total segments |   | Corporate not allocable to segments |   |         | Consolidated total |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | ------- | - | --------- |  | - | --------- | - | ------------------- | - | ------- | ------------------- | - | -------------- | - | ----------------------------------- | - | ------- | ------------------ | -
|                                                                                 |  | (in thousands) |        
|Revenues:                                                                        |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|Rental income                                                                    |  | $              | 89,101  |         | $ | 68,918    |  | $ | 8,166     |   |                     | $ | 93,314  |                     | $ | 44,160         |   |                                     | $ | 27,911  |                    | $
|Management and other fees, net                                                   |  |                | 726     |         |   | 79        |  |   | 748       |   |                     |   | 1,596   |                     |   | 280            |   |                                     |   | 120     |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|Total revenues                                                                   |  |                | 89,827  |         |   | 68,997    |  |   | 8,914     |   |                     |   | 94,910  |                     |   | 44,440         |   |                                     |   | 28,031  |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|                                                                                
|Expenses:                                                                        |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|Property operating and maintenance                                               |  |                | 19,705  |         |   | 13,757    |  |   | 1,631     |   |                     |   | 24,228  |                     |   | 12,646         |   |                                     |   | 4,829   |                    |  
|Real estate taxes                                                                |  |                | 6,574   |         |   | 11,911    |  |   | 558       |   |                     |   | 13,156  |                     |   | 3,343          |   |                                     |   | 2,146   |                    |  
|General & administrative and personnel costs, net                                |  |                | 560     |         |   | 308       |  |   | 192       |   |                     |   | 541     |                     |   | 25             |   |                                     |   | 579     |                    |  
|Interest expense                                                                 |  |                |        |         |   |          |  |   |          |   |                     |   |        |                     |   |               |   |                                     |   |        |                    |  
|Amortization of deferred financing costs                                         |  |                |        |         |   |          |  |   |          |   |                     |   |        |                     |   |               |   |                                     |   |        |                    |  
|Depreciation and amortization                                                    |  |                | 16,303  |         |   | 10,289    |  |   | 1,587     |   |                     |   | 20,068  |                     |   | 6,898          |   |                                     |   | 6,768   |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|Total expenses                                                                   |  |                | 43,142  |         |   | 36,265    |  |   | 3,968     |   |                     |   | 57,993  |                     |   | 22,912         |   |                                     |   | 14,322  |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|                                                                                
|Merger termination fee, net                                                      |  |                |        |         |   |          |  |   |          |   |                     |   |        |                     |   |               |   |                                     |   |        |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|                                                                                
|Income from continuing operations before minority interests and equity in
income |  |                | 46,685  |         |   | 32,732    |  |   | 4,946     |   |                     |   | 36,917  |                     |   | 21,528         |   |                                     |   | 13,709  |                    |  
|                                                                                
|Minority interests                                                               |  |                |        |         |   |          |  |   |          |   |                     |   |        |                     |   |               |   |                                     |   |        |                    |  
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                | 935     |         |   | 1,070     |  |   | (291      | ) |                     |   | 4,305   |                     |   | (51            | ) |                                     |   | 370     |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|Income from continuing operations                                                |  | $              | 47,620  |         | $ | 33,802    |  | $ | 4,655     |   |                     | $ | 41,222  |                     | $ | 21,477         |   |                                     | $ | 14,079  |                    | $
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  
|                                                                                
|Total assets                                                                     |  | $              | 592,023 |         | $ | 383,018   |  | $ |          |   |                     | $ | 550,069 |                     | $ | 270,216        |   |                                     | $ | 196,132 |                    | $
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |         |                     |   |                |   |                                     |   |         |                    |  



F-30



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##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





For the
Year Ended and As of December 31, 2000



|                                                                                 |  | Mid-Atlantic   |         | Midwest |   | Northeast |  |   | Southwest |   | Northern California |   | Southern California |  | Total segments |         | Corporate not allocable to segments |   |         | Consolidated total |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | ------- | - | --------- |  | - | --------- | - | ------------------- | - | ------------------- |  | -------------- | ------- | ----------------------------------- | - | ------- | ------------------ | -
|                                                                                 |  | (in thousands) |        
|Revenues:                                                                        |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Rental income                                                                    |  | $              | 75,534  |         | $ | 80,445    |  | $ | 29,037    |   |                     | $ | 80,089              |  | $              | 36,737  |                                     | $ | 25,974  |                    | $
|Management and other fees, net                                                   |  |                | 447     |         |   | 43        |  |   | 517       |   |                     |   | 2,590               |  |                | 208     |                                     |   | 229     |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Total revenues                                                                   |  |                | 75,981  |         |   | 80,488    |  |   | 29,554    |   |                     |   | 82,679              |  |                | 36,945  |                                     |   | 26,203  |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Expenses:                                                                        |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Property operating and maintenance                                               |  |                | 17,943  |         |   | 15,769    |  |   | 5,919     |   |                     |   | 22,178              |  |                | 10,056  |                                     |   | 4,022   |                    |  
|Real estate taxes                                                                |  |                | 5,351   |         |   | 13,295    |  |   | 2,204     |   |                     |   | 11,639              |  |                | 3,008   |                                     |   | 2,212   |                    |  
|General & administrative and personnel costs, net                                |  |                | 510     |         |   | 311       |  |   | 544       |   |                     |   | 408                 |  |                | 95      |                                     |   | 690     |                    |  
|Interest expense                                                                 |  |                |        |         |   |          |  |   |          |   |                     |   |                    |  |                |        |                                     |   |        |                    |  
|Amortization of deferred financing costs                                         |  |                |        |         |   |          |  |   |          |   |                     |   |                    |  |                |        |                                     |   |        |                    |  
|Depreciation and amortization                                                    |  |                | 14,284  |         |   | 11,640    |  |   | 5,922     |   |                     |   | 18,182              |  |                | 5,238   |                                     |   | 6,142   |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Total expenses                                                                   |  |                | 38,088  |         |   | 41,015    |  |   | 14,589    |   |                     |   | 52,407              |  |                | 18,397  |                                     |   | 13,066  |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|                                                                                
|Merger termination fee, net                                                      |  |                |        |         |   |          |  |   |          |   |                     |   |                    |  |                |        |                                     |   |        |                    |  
|                                                                                
|Loss on investment in securities                                                 |  |                |        |         |   |          |  |   |          |   |                     |   |                    |  |                |        |                                     |   |        |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Income from continuing operations before minority interests and equity in
income |  |                | 37,893  |         |   | 39,473    |  |   | 14,965    |   |                     |   | 30,272              |  |                | 18,548  |                                     |   | 13,137  |                    |  
|                                                                                
|Minority interests                                                               |  |                |        |         |   |          |  |   |          |   |                     |   |                    |  |                |        |                                     |   |        |                    |  
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                | 252     |         |   | 429       |  |   | (469      | ) |                     |   | 4,189               |  |                | 999     |                                     |   | 638     |                    |  
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|Income from continuing operations                                                |  | $              | 38,145  |         | $ | 39,902    |  | $ | 14,496    |   |                     | $ | 34,461              |  | $              | 19,547  |                                     | $ | 13,775  |                    | $
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  
|                                                                                
|Total assets                                                                     |  | $              | 457,762 |         | $ | 413,338   |  | $ | 214,258   |   |                     | $ | 516,723             |  | $              | 267,173 |                                     | $ | 206,172 |                    | $
|                                                                                 |  |                |         |         |   |           |  |   |           |   |                     |   |                     |  |                |         |                                     |   |         |                    |  



F-31



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##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS





(21) Selected Quarterly
Financial Data (Unaudited)



The following
schedule is a summary of the quarterly results of operations for the years ended December 31, 2002, 2001 and 2000:



|                                    |  | First Quarter                                 |        | Second Quarter |   | Third Quarter |  | Fourth Quarter |        | Total
|----------------------------------- |  | --------------------------------------------- | ------ | -------------- | - | ------------- |  | -------------- | ------ | -----
|                                    |  | (amounts in thousands, except per share data)
|Year ended December 31, 2002        |  |                                               |        |                |   |               |  |                |        |      
|Revenue                             |  | $                                             | 84,793 |                | $ | 90,037        |  | $              | 89,013 |      
|Income from continuing operations   |  | $                                             | 17,602 |                | $ | 16,569        |  | $              | 16,970 |      
|Net income                          |  | $                                             | 18,220 |                | $ | 17,341        |  | $              | 22,894 |      
|Net income per common share-basic   |  | $                                             | 0.43   |                | $ | 0.40          |  | $              | 0.53   |      
|Net income per common share-diluted |  | $                                             | 0.43   |                | $ | 0.39          |  | $              | 0.53   |      
|                                   
|Year ended December 31, 2001        |  |                                               |        |                |   |               |  |                |        |      
|Revenue                             |  | $                                             | 86,363 |                | $ | 83,625        |  | $              | 85,310 |      
|Income from continuing operations   |  | $                                             | 23,559 |                | $ | 26,911        |  | $              | 17,465 |      
|Net income                          |  | $                                             | 29,323 |                | $ | 36,472        |  | $              | 17,848 |      
|Net income per common share-basic   |  | $                                             | 0.75   |                | $ | 0.94          |  | $              | 0.43   |      
|Net income per common share-diluted |  | $                                             | 0.72   |                | $ | 0.90          |  | $              | 0.43   |      
|                                   
|Year ended December 31, 2000        |  |                                               |        |                |   |               |  |                |        |      
|Revenue                             |  | $                                             | 78,995 |                | $ | 83,286        |  | $              | 82,396 |      
|Income from continuing operations   |  | $                                             | 14,948 |                | $ | 15,784        |  | $              | 19,443 |      
|Net income                          |  | $                                             | 16,947 |                | $ | 17,835        |  | $              | 18,258 |      
|Net income per common share-basic   |  | $                                             | 0.42   |                | $ | 0.44          |  | $              | 0.45   |      
|Net income per common share-diluted |  | $                                             | 0.42   |                | $ | 0.44          |  | $              | 0.45   |      



(22) 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-32



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##### Table of Contents

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, 2002, 2001 and 2000:



|                                                                                 |  | 2002           |        |   | 2001 |   |         | 2000 | 
|-------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | ---- | 
|                                                                                 |  | (in thousands) |       
|GAAP net income                                                                  |  | $              | 74,281 |   |      | $ | 102,466 |      | 
|                                                                                 |  |                |        |   |      |   |         |      | 
|GAAP loss (net income) of taxable subsidiaries included above                    |  |                | (651   | ) |      |   | 339     |      | 
|                                                                                 |  |                |        |   |      |   |         |      | 
|GAAP net income from REIT operations                                             |  |                | 73,630 |   |      |   | 102,805 |      | 
|                                                                                 |  |                |        |   |      |   |         |      | 
|GAAP to tax adjustments:(1)                                                      |  |                |        |   |      |   |         |      | 
|Depreciation and amortization                                                    |  |                | 14,495 |   |      |   | 5,551   |      | 
|Gains and losses from capital transactions(2)                                    |  |                | (296   | ) |      |   | (17,645 | )    | 
|Straight-line rent adjustment, net of rents received in advance                  |  |                | (7,177 | ) |      |   | (8,231  | )    | 
|Capitalized operating expenses and interest cost related to development
projects |  |                | (3,017 | ) |      |   | (4,955  | )    | 
|Interest income                                                                  |  |                | 481    |   |      |   | 1,439   |      | 
|Compensation expense                                                             |  |                | (4,542 | ) |      |   | (3,199  | )    | 
|Other differences, net                                                           |  |                | 3,502  |   |      |   | (467    | )    | 
|                                                                                 |  |                |        |   |      |   |         |      | 
|Total GAAP to tax adjustments                                                    |  |                | 3,446  |   |      |   | (27,507 | )    | 
|                                                                                 |  |                |        |   |      |   |         |      | 
|                                                                                
|Adjusted taxable income subject to distribution requirement(3)                   |  | $              | 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 2002 and 2001 and 95% in 2000, respectively.
| | --- |  | ------------------------------------------------------------------------------------



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, 2002,
2001, and 2000:



|                  |  | 2002           |       |  | 2001  |   |  | 2000 |      
|----------------- |  | -------------- | ----- |  | ----- | - |  | ---- | -----
|                  |  | (in thousands) |      
|Ordinary income   |  | $              | 1.788 |  | 80.73 | % |  | $    | 1.801
|Return of capital |  | $              | 0.427 |  | 19.27 | % |  | $    | 0.185
|Capital gains     |  | $              | 0.00  |  | 0.00  | % |  | $    | 0.104
|                  |  |                |       |  |       |   |  |      |      
|                  |  | $              | 2.215 |  |       |   |  | $    | 2.090
|                  |  |                |       |  |       |   |  |      |      



(23) Subsequent
Events



At December 31, 2002, the operating
partnership held a 98% non-voting interest in Prentiss Properties Resources, which we accounted for using the equity method of accounting. Effective January 1, 2003, we acquired from Ampulla, LLC, a single member limited liability company owned by
Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust, the remaining outstanding interest in Prentiss Properties Resources, for gross consideration of approximately $67,000. As a result of this transaction, effective January 1,
2003 the accounts of Prentiss Properties Resources are consolidated with and into the accounts of our operating partnership.



On January 31, 2003, using proceeds from our revolving credit facility, we acquired a 339,471 net rentable square foot office building in
Dallas, Texas for gross consideration of $28.0 million. At acquisition, the building was 68% leased.



F-33



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##### Table of Contents



Report of
Independent Accountants on

Financial Statement Schedule



To the Board of Trustees and Shareholders

of Prentiss Properties Trust:



Our audits of the consolidated financial statements referred to in our report dated February 12, 2003, appearing on page F-2 of this Annual Report to
shareholders of Prentiss Properties Trust on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related consolidated financial statements.



Dallas, Texas

February 12, 2003



F-34



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##### Table of Contents



Schedule III



PRENTISS PROPERTIES TRUST

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2002

(dollars in thousands)



|Property name               |  | Market            |      | Encumbrances |                            | Initial cost |   | Costs capitalized subsequent to acquisition |  | Gross amount carried at close of period |        | Accumulated depreciation |   | Year of construction |  |   | Date acquired |  |   | Depreciable lives(years)
|--------------------------- |  | ----------------- | ---- | ------------ | -------------------------- | ------------ | - | ------------------------------------------- |  | --------------------------------------- | ------ | ------------------------ | - | -------------------- |  | - | ------------- |  | - | ------------------------
|                            |  |                   | Land |              | Buildings and improvements |              |   | Land and improvements                       |  | Building and improvements               |        | Total                    |   |                      |  |  
|Operating Properties        |  |                   |      |              |                            |              |   |                                             |  |                                         |        |                          |   |                      |  |   |               |  |   |                         
|Cumberland Office Park      |  | Atlanta           |      | $            | 14,200                     |              | $ | 10,550                                      |  | $                                       | 28,773 |                          | $ | 4,924                |  | $ | 10,550        |  | $ | 33,697                  
|Barton Skyway I-IV          |  | Austin            |      |              |                            |              |   | 13,639                                      |  |                                         | 89,980 |                          |   | 189                  |  |   | 13,639        |  |   | 90,169                  
|Cielo Center                |  | Austin            |      |              |                            |              |   | 7,083                                       |  |                                         | 40,334 |                          |   | 216                  |  |   | 7,083         |  |   | 40,550                  
|Spyglass Point              |  | Austin            |      |              |                            |              |   | 1,612                                       |  |                                         | 6,465  |                          |   | 1                    |  |   | 1,612         |  |   | 6,466                   
|Chicago Industrial          |  | Chicago           |      |              | 11,630                     |              |   | 2,871                                       |  |                                         | 17,615 |                          |   | 627                  |  |   | 2,871         |  |   | 18,242                  
|123 North Wacker Drive      |  | Chicago           |      |              |                            |              |   | 13,163                                      |  |                                         | 74,599 |                          |   | 6,271                |  |   | 13,163        |  |   | 80,870                  
|1717 Deerfield Road         |  | Chicago           |      |              | 14,200                     |              |   | 3,237                                       |  |                                         | 18,481 |                          |   | 105                  |  |   | 3,237         |  |   | 18,586                  
|1800 Sherman Avenue         |  | Chicago           |      |              |                            |              |   | 2,278                                       |  |                                         | 13,099 |                          |   | 61                   |  |   | 2,278         |  |   | 13,160                  
|701 Warrenville Road        |  | Chicago           |      |              |                            |              |   | 1,564                                       |  |                                         | 8,863  |                          |   | 6                    |  |   | 1,564         |  |   | 8,869                   
|Bannockburn Centre          |  | Chicago           |      |              | 26,406                     |              |   | 7,927                                       |  |                                         | 23,835 |                          |   |                     |  |   | 7,927         |  |   | 23,835                  
|Corporetum Office Campus    |  | Chicago           |      |              | 24,990                     |              |   | 7,607                                       |  |                                         | 43,104 |                          |   | 681                  |  |   | 7,607         |  |   | 43,785                  
|O'Hare Plaza II             |  | Chicago           |      |              | 11,400                     |              |   | 3,854                                       |  |                                         | 22,017 |                          |   | 407                  |  |   | 3,854         |  |   | 22,424                  
|One O'Hare Centre           |  | Chicago           |      |              | 40,316                     |              |   | 10,160                                      |  |                                         | 57,514 |                          |   | 538                  |  |   | 10,160        |  |   | 58,052                  
|Salton                      |  | Chicago           |      |              |                            |              |   | 2,180                                       |  |                                         | 5,351  |                          |   |                     |  |   | 2,180         |  |   | 5,351                   
|Bachman East                |  | Dallas/Fort Worth |      |              |                            |              |   | 1,305                                       |  |                                         | 8,773  |                          |   | 51                   |  |   | 1,305         |  |   | 8,824                   
|Bachman West                |  | Dallas/Fort Worth |      |              | 2,819                      |              |   | 828                                         |  |                                         | 4,688  |                          |   | 80                   |  |   | 828           |  |   | 4,768                   
|Burnett Plaza               |  | Dallas/Fort Worth |      |              | 72,100                     |              |   | 3,600                                       |  |                                         | 87,523 |                          |   | 531                  |  |   | 3,600         |  |   | 88,054                  
|Cottonwood Office Center    |  | Dallas/Fort Worth |      |              | 8,348                      |              |   | 1,735                                       |  |                                         | 9,865  |                          |   |                     |  |   | 1,735         |  |   | 9,865                   
|IBM Call Center             |  | Dallas/Fort Worth |      |              | 13,390                     |              |   | 1,418                                       |  |                                         | 6,063  |                          |   | 3                    |  |   | 1,418         |  |   | 6,066                   
|Lakeview Center             |  | Dallas/Fort Worth |      |              |                            |              |   | 753                                         |  |                                         | 5,020  |                          |   | 13                   |  |   | 753           |  |   | 5,033                   
|Millennium Center           |  | Dallas/Fort Worth |      |              |                            |              |   | 989                                         |  |                                         | 6,392  |                          |   | 614                  |  |   | 989           |  |   | 7,006                   
|Park West C2                |  | Dallas/Fort Worth |      |              | 33,982                     |              |   | 8,360                                       |  |                                         | 29,640 |                          |   | 6,238                |  |   | 9,696         |  |   | 34,542                  
|Park West E1                |  | Dallas/Fort Worth |      |              | 12,100                     |              |   | 2,857                                       |  |                                         | 16,499 |                          |   |                     |  |   | 2,857         |  |   | 16,499                  
|Park West E2                |  | Dallas/Fort Worth |      |              | 7,900                      |              |   | 2,079                                       |  |                                         | 11,863 |                          |   |                     |  |   | 2,079         |  |   | 11,863                  
|Walnut Glen Tower           |  | Dallas/Fort Worth |      |              | 33,979                     |              |   | 4,300                                       |  |                                         | 32,669 |                          |   | 3,496                |  |   | 5,612         |  |   | 34,853                  
|WestPoint Office Building   |  | Dallas/Fort Worth |      |              | 12,610                     |              |   | 2,844                                       |  |                                         | 12,165 |                          |   | 37                   |  |   | 2,844         |  |   | 12,202                  
|Carrara Place               |  | Denver            |      |              |                            |              |   | 4,687                                       |  |                                         | 26,561 |                          |   | 39                   |  |   | 4,687         |  |   | 26,600                  
|Highland Court              |  | Denver            |      |              | 4,613                      |              |   | 1,588                                       |  |                                         | 9,010  |                          |   | 54                   |  |   | 1,588         |  |   | 9,064                   
|Orchard Place I&II          |  | Denver            |      |              |                            |              |   | 1,531                                       |  |                                         | 8,653  |                          |   | 42                   |  |   | 1,531         |  |   | 8,695                   
|PacifiCare Building         |  | Denver            |      |              | 12,060                     |              |   | 3,045                                       |  |                                         | 17,392 |                          |   | 325                  |  |   | 3,045         |  |   | 17,717                  
|Panorama Point              |  | Denver            |      |              |                            |              |   | 1,241                                       |  |                                         | 7,043  |                          |   | 62                   |  |   | 1,241         |  |   | 7,105                   
|International Energy Center |  | Houston           |      |              |                            |              |   | 854                                         |  |                                         | 4,871  |                          |   | 152                  |  |   | 854           |  |   | 5,023                   
|One Westchase Center        |  | Houston           |      |              | 23,520                     |              |   | 7,864                                       |  |                                         | 44,564 |                          |   | 557                  |  |   | 7,864         |  |   | 45,121                  
|Westheimer Central Plaza    |  | Houston           |      |              | 5,633                      |              |   | 2,266                                       |  |                                         | 12,845 |                          |   | 142                  |  |   | 2,266         |  |   | 12,987                  
|Los Angeles Industrial      |  | Los Angeles       |      |              | 31,300                     |              |   | 6,429                                       |  |                                         | 36,431 |                          |   | 1,141                |  |   | 6,429         |  |   | 37,572                  
|12601 Fair Lakes Circle     |  | Metro. Wash., DC  |      |              |                            |              |   | 6,600                                       |  |                                         | 43,478 |                          |   |                     |  |   | 6,600         |  |   | 43,478                  
|13825 Sunrise Valley Drive  |  | Metro. Wash., DC  |      |              | 8,052                      |              |   | 2,099                                       |  |                                         | 11,983 |                          |   | 133                  |  |   | 2,099         |  |   | 12,116                  
|2411 Dulles Corner Road     |  | Metro. Wash., DC  |      |              | 16,700                     |              |   | 3,973                                       |  |                                         | 22,682 |                          |   | 180                  |  |   | 3,973         |  |   | 22,862                  
|3130 Fairview Park Drive    |  | Metro. Wash., DC  |      |              | 22,562                     |              |   | 3,141                                       |  |                                         | 21,314 |                          |   |                     |  |   | 3,141         |  |   | 21,314                  
|3141 Fairview Park Drive    |  | Metro. Wash., DC  |      |              | 12,800                     |              |   | 4,000                                       |  |                                         | 15,980 |                          |   | 480                  |  |   | 4,007         |  |   | 16,453                  
|4401 Fair Lakes Court       |  | Metro. Wash., DC  |      |              | 3,200                      |              |   | 933                                         |  |                                         | 5,232  |                          |   | 211                  |  |   | 933           |  |   | 5,443                   
|6600 Rockledge Drive        |  | Metro. Wash., DC  |      |              |                            |              |   |                                             |  |                                         | 22,428 |                          |   | 44                   |  |   |               |  |   | 22,472                  
|7101 Wisconsin Avenue       |  | Metro. Wash., DC  |      |              | 20,658                     |              |   | 5,170                                       |  |                                         | 29,298 |                          |   | 1,751                |  |   | 5,170         |  |   | 31,049                  
|8521 Leesburg Pike          |  | Metro. Wash., DC  |      |              | 15,275                     |              |   | 2,130                                       |  |                                         | 5,955  |                          |   | 5,331                |  |   | 2,259         |  |   | 11,157                  
|Calverton Office Park       |  | Metro. Wash., DC  |      |              |                            |              |   | 2,885                                       |  |                                         | 25,965 |                          |   | 1,045                |  |   | 2,885         |  |   | 27,010                  
|Campus Point                |  | Metro. Wash., DC  |      |              |                            |              |   | 5,730                                       |  |                                         | 24,469 |                          |   | 200                  |  |   | 5,730         |  |   | 24,669                  
|Fairmont Building           |  | Metro. Wash., DC  |      |              |                            |              |   | 3,750                                       |  |                                         | 17,656 |                          |   | 333                  |  |   | 3,750         |  |   | 17,989                  
|Greenwood Center            |  | Metro. Wash., DC  |      |              |                            |              |   | 3,092                                       |  |                                         | 21,818 |                          |   | 110                  |  |   | 3,092         |  |   | 21,928                  



F-35



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##### Table of Contents

|Property name                    |  | Market           |      | Encumbrances |                            | Initial cost |   | Costs capitalized subsequent to acquisition |  | Gross amount carried at close of period |           | Accumulated depreciation |   | Year of construction |  |   | Date acquired |  |   | Depreciable lives(years)
|-------------------------------- |  | ---------------- | ---- | ------------ | -------------------------- | ------------ | - | ------------------------------------------- |  | --------------------------------------- | --------- | ------------------------ | - | -------------------- |  | - | ------------- |  | - | ------------------------
|                                 |  |                  | Land |              | Buildings and improvements |              |   | Land and improvements                       |  | Building and improvements               |           | Total                    |   |                      |  |  
|Oakwood Center                   |  | Metro. Wash., DC |      |              |                            |              |   | 2,660                                       |  |                                         | 12,224    |                          |   | 241                  |  |   | 2,660         |  |   | 12,465                  
|Park West at Dulles              |  | Metro. Wash., DC |      |              |                            |              |   | 3,000                                       |  |                                         | 15,221    |                          |   | 1,013                |  |   | 3,000         |  |   | 16,234                  
|Plaza 1900                       |  | Metro. Wash., DC |      |              |                            |              |   | 6,274                                       |  |                                         | 31,323    |                          |   | 263                  |  |   | 6,274         |  |   | 31,586                  
|Research Office Center I-III     |  | Metro. Wash., DC |      |              | 44,461                     |              |   | 9,124                                       |  |                                         | 47,761    |                          |   | 81                   |  |   | 9,106         |  |   | 47,860                  
|Willow Oaks I&II                 |  | Metro. Wash., DC |      |              | 42,898                     |              |   | 10,857                                      |  |                                         | 61,485    |                          |   | 27                   |  |   | 10,857        |  |   | 61,512                  
|Lake Merritt Tower I             |  | Oakland          |      |              |                            |              |   | 6,504                                       |  |                                         | 36,853    |                          |   | 115                  |  |   | 6,504         |  |   | 36,968                  
|The Ordway                       |  | Oakland          |      |              | 48,472                     |              |   | 23,316                                      |  |                                         | 54,402    |                          |   | 886                  |  |   | 23,316        |  |   | 55,288                  
|World Savings Center             |  | Oakland          |      |              | 28,774                     |              |   | 7,714                                       |  |                                         | 30,856    |                          |   | 993                  |  |   | 7,714         |  |   | 31,849                  
|Natomas Corporate Center         |  | Sacramento       |      |              | 36,524                     |              |   | 11,208                                      |  |                                         | 63,466    |                          |   | 362                  |  |   | 11,208        |  |   | 63,828                  
|Carlsbad Pacific Center I&II     |  | San Diego        |      |              |                            |              |   | 4,204                                       |  |                                         | 9,811     |                          |   | 312                  |  |   | 4,204         |  |   | 10,123                  
|Carlsbad Pacifica                |  | San Diego        |      |              |                            |              |   | 1,532                                       |  |                                         | 6,129     |                          |   | 162                  |  |   | 1,532         |  |   | 6,291                   
|Del Mar Gateway                  |  | San Diego        |      |              | 26,613                     |              |   | 5,260                                       |  |                                         | 23,419    |                          |   | 99                   |  |   | 5,260         |  |   | 23,518                  
|Executive Center Del Mar         |  | San Diego        |      |              | 17,742                     |              |   | 3,952                                       |  |                                         | 12,063    |                          |   | 175                  |  |   | 3,952         |  |   | 12,238                  
|Plaza I&II                       |  | San Diego        |      |              |                            |              |   | 2,811                                       |  |                                         | 11,246    |                          |   | 263                  |  |   | 2,811         |  |   | 11,509                  
|San Diego Industrial             |  | San Diego        |      |              |                            |              |   | 6,282                                       |  |                                         | 25,128    |                          |   | 1,014                |  |   | 6,282         |  |   | 26,142                  
|The Campus                       |  | San Diego        |      |              |                            |              |   | 1,195                                       |  |                                         | 4,779     |                          |   | 174                  |  |   | 1,195         |  |   | 4,953                   
|One Northwestern Plaza           |  | Sub. Detroit     |      |              | 17,800                     |              |   |                                             |  |                                         | 27,448    |                          |   | 301                  |  |   |               |  |   | 27,749                  
|                                 |  |                  |      |              |                            |              |   |                                             |  |                                         |           |                          |   |                      |  |   |               |  |   |                         
|Total Operating Properties       |  |                  |      |              | 780,027                    |              |   | 297,694                                     |  |                                         | 1,590,432 |                          |   | 43,902               |  |   | 300,460       |  |   | 1,631,568               
|                                
|Construction in Progress         |  |                  |      |              |                            |              |   |                                             |  |                                         |           |                          |   |                      |  |   |               |  |   |                         
|Willow Oaks III                  |  | Metro. Wash., DC |      |              |                            |              |   | 3,603                                       |  |                                         | 26,698    |                          |   |                      |  |   | 3,603         |  |   | 26,698                  
|Carlsbad Pacific Center III      |  | San Diego        |      |              |                            |              |   | 2,067                                       |  |                                         | 4,802     |                          |   |                      |  |   | 2,067         |  |   | 4,802                   
|                                 |  |                  |      |              |                            |              |   |                                             |  |                                         |           |                          |   |                      |  |   |               |  |   |                         
|Total Construction in Progress   |  |                  |      |              |                           |              |   | 5,670                                       |  |                                         | 31,500    |                          |   |                      |  |   | 5,670         |  |   | 31,500                  
|                                
|Land Held for Future Development |  |                  |      |              |                            |              |   | 56,382                                      |  |                                         | 8,775     |                          |   |                      |  |   | 56,382        |  |   | 8,775                   
|                                 |  |                  |      |              |                            |              |   |                                             |  |                                         |           |                          |   |                      |  |   |               |  |   |                         
|Total Real Estate                |  |                  |      | $            | 780,027                    |              | $ | 359,746                                     |  | $                                       | 1,630,707 |                          | $ | 43,902               |  | $ | 362,512       |  | $ | 1,671,843               
|                                 |  |                  |      |              |                            |              |   |                                             |  |                                         |           |                          |   |                      |  |   |               |  |   |                         

---

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

|(2) |  | The real estate project was developed by the company.
|--- |  | -----------------------------------------------------

|(3) |  | Buildings & improvements25 to 40 years.
|--- |  | ----------------------------------------

|(4) |  | Construction in progress, as presented above, includes the land and building cost. It does not include tenant concessions or leasing commission capitalized to the
project.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The aggregate cost for federal income tax purposes was approximately $1,907,837.
|--- |  | --------------------------------------------------------------------------------



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##### Table of Contents



Operating Real Estate and
Accumulated Depreciation



A summary of
activity for operating real estate and accumulated depreciation for the years ended December 31, 2002, 2001 and 2000 is as follows:



|                                                                                    |  | 2002           |           |   | 2001 |   |           | 2000 | 
|----------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | ---- | 
|                                                                                    |  | (in thousands) |          
|Operating real estate:                                                              |  |                |           |   |      |   |           |      | 
|Balance at beginning of the period                                                  |  | $              | 1,807,039 |   |      | $ | 1,869,694 |      | 
|Beginning construction in progress moved to operating real estate during the
period |  |                | 29,084    |   |      |   | 78,389    |      | 
|Additions to and improvement of real estate                                         |  |                | 150,554   |   |      |   | 143,008   |      | 
|Cost of operating real estate sold                                                  |  |                | (54,649   | ) |      |   | (284,052  | )    | 
|                                                                                    |  |                |           |   |      |   |           |      | 
|Balance at end of the period                                                        |  | $              | 1,932,028 |   |      | $ | 1,807,039 |      | 
|                                                                                    |  |                |           |   |      |   |           |      | 
|Accumulated depreciation:                                                           |  |                |           |   |      |   |           |      | 
|Balance at beginning of the period                                                  |  | $              | 146,349   |   |      | $ | 126,630   |      | 
|Depreciation expense                                                                |  |                | 42,229    |   |      |   | 39,250    |      | 
|Accumulated depreciation of real estate sold or retired                             |  |                | (9,786    | ) |      |   | (19,531   | )    | 
|                                                                                    |  |                |           |   |      |   |           |      | 
|Balance at end of the period                                                        |  | $              | 178,792   |   |      | $ | 146,349   |      | 
|                                                                                    |  |                |           |   |      |   |           |      | 



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##### Table of Contents



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 25, 2003
|----- |  | --------------



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 25, 2003 |  | /s/ Michael V. PrentissMichael V. Prentiss Chairman of the Board and Trustee             
|              
|March 25, 2003 |  | /s/ Thomas F. AugustThomas F. August President and Chief Executive Officer Trustee       
|              
|March 25, 2003 |  | /s/ Michael A. ErnstMichael A. Ernst Executive Vice President and Chief Financial Officer
|              
|March 25, 2003 |  | /s/ Thomas P. SimonThomas P. Simon Senior Vice President and Chief Accounting Officer    
|              
|March 25, 2003 |  | /s/ Thomas J. Hynes, Jr.Thomas J. Hynes, Jr. Trustee                                     
|              
|March 25, 2003 |  | /s/ Barry J.C. ParkerBarry J.C. Parker Trustee                                           
|              
|March 25, 2003 |  | /s/ Dr. Leonard M. Riggs, Jr.Dr. Leonard M. Riggs, Jr. Trustee                           
|              
|March 25, 2002 |  | /s/ Ronald G. SteinhartRonald G. Steinhart Trustee                                       
|              
|March 25, 2003 |  | /s/ Lawrence A. WilsonLawrence A. Wilson Trustee                                         





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CERTIFICATIONS



I, Thomas F. August, certify that:



1. I have reviewed this annual report on Form 10-K of Prentiss Properties Trust;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



5. The
registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a) all significant deficiencies in the design
or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls;
and



b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: March 25, 2003



Thomas F. AugustThomas F. August Chief Executive Officer




63



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##### Table of Contents



I, Michael A.
Ernst, certify that:



1. I have reviewed this
annual report on Form 10-K of Prentiss Properties Trust;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation
Date); and



c) presented in this
annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and



6. The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: March 25, 2003



Michael A. ErnstMichael A. Ernst Chief Financial Officer




64