<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

(Mark One)
   [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1996

                                      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

                           PRENTISS PROPERTIES TRUST
            (Exact name of registrant as specified in its charter)


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


                                (214) 654-0886
             (Registrant's telephone number, including area code)

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


                                                  
                                                  NAME OF EACH EXCHANGE 
         TITLE OF EACH CLASS                       ON WHICH REGISTERED
--------------------------------------           --------------------------- 
 COMMON SHARES OF BENEFICIAL INTEREST            THE NEW YORK STOCK EXCHANGE
      $0.01 PAR VALUE PER SHARE                  

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

                                      N/A
                               (Title of class)

     Indicate by check mark whether the registrant (i) 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 (ii) 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. [ ]

     The aggregate market value of the voting shares held by non-affiliates of
the registrant, as of March 14, 1997, was approximately $564.4 million.

     The number of common shares, $.01 par value, outstanding was 20,280,397 as
of March 14, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None
<PAGE>
 
                           PRENTISS PROPERTIES TRUST

                                     INDEX

                                                                   FORM 10-K
                                                                     REPORT
ITEM NO.                                                              PAGE
-------                                                            ---------

                                    PART I
 
  1.  Business........................................................  3
  2.  Properties......................................................  4
  3.  Legal Proceedings...............................................  6
  4.  Submission of Matters to a Vote of Security Holders.............  6

                                    PART II
 
  5.  Market for Registrant's Common Equity and Related Shareholder 
        Matters......................................................   6
  6.  Selected Financial and Operating Data..........................   7
  7.  Management's Discussion and Analysis of Financial Condition 
        and Results of Operations....................................  10
  8.  Financial Statements and Supplementary Data....................  15
  9.  Changes in and Disagreements with Accountants on Accounting 
        and Financial Disclosure.....................................  15

                                   PART III
 
 10.  Trustees and Executive Officers of the Company.................  15
 11.  Executive Compensation.........................................  19
 12.  Security Ownership of Certain Beneficial Owners and Management.  23
 13.  Certain Relationships and Related Transactions.................  27

                                    PART IV

 14.  Exhibits, Financial Statement Schedule, and Reports on 
        Form 8-K.....................................................  27

                                       2
<PAGE>
 
ITEM 1.  BUSINESS

Formation Transactions

     Prentiss Properties Trust (the "Company") was formed under the laws of the
state of Maryland on July 12, 1996, to be a self-administered and self-managed
real estate investment trust ("REIT").  The Company acquired a sole general
partnership interest in Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") through the Company's wholly-owned subsidiary Prentiss
Properties I, Inc., a Delaware corporation and owns an approximate 86.0% limited
partnership interest in the Operating Partnership.

     The Company has been formed to succeed to substantially all of the
interests of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in (i)
a portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates (the "Prentiss Group").  The acquisition,
property management, leasing, development and construction businesses will be
carried out by the Operating Partnership and the Company's majority-owned
affiliates, Prentiss Properties Limited, Inc. and Prentiss Properties Limited
II, Inc. (collectively, the "Manager").

     On October 22, 1996, the Company commenced operations after completing an
initial public offering of 16,000,000 common shares of beneficial interest,
$0.01 par value per share("Common Shares").  The Company issued an additional
2,400,000 Common Shares on November 1, 1996, pursuant to the exercise of the
underwriters' over-allotment option.  The combined 18,400,000 Common Shares were
issued at a price per share of $20.00 (the "Offering").  The Company used
approximately $87.4 million of the net proceeds of the Offering and issued
1,879,897 Common Shares of the Company for a total consideration of
approximately $125.0 million to purchase certain limited partners' interests in
the Operating Partnership.  The Company contributed the remaining net proceeds
of the Offering to the Operating Partnership.  Subsequent to these transactions,
the Company held an approximate 86.0% interest in the Operating Partnership.

     The Prentiss Group members, who, prior to the Offering, collectively served
as the general partner of the Operating Partnership, contributed to the
Operating Partnership all of their interests in the Operating Partnership, the
Initial Properties (as defined below) that were not owned by the Operating
Partnership, and certain management contracts of PPL (the "Contracts") in
exchange for 3,295,995 limited partnership units in the Operating Partnership
("Units").

     Upon completion of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company owned 87 properties
(the "Initial Properties"), which consisted of 28 office (the "Initial Office
Properties") and 59 industrial (the "Initial Industrial Properties") containing
an aggregate of 8.9 million net rentable square feet.  Between the closing of
the Offering and December 31, 1996, the Company acquired eight additional
properties, (the "1996 Acquired Properties").  As of December 31, 1996, the
Company owned 95 properties, 33 office and 62 industrial (the "Properties")
containing 9.9 million square feet and located in 12 major markets throughout
the U.S.

     The 1996 Acquired Properties consist of five Class "A" suburban office
properties (the "1996 Acquired Office Properties") totaling approximately
850,000 square feet and three suburban industrial properties (the "1996 Acquired
Industrial Properties") totaling approximately 226,000 square feet.  The 1996
Acquired Office Properties are located in the Chicago, Illinois; Denver,
Colorado; and Northern Virginia markets.  The 1996 Acquired Industrial
Properties are located in the Chicago, Illinois market.  The purchase price of
the 1996 Acquired Properties totaled approximately $116.6 million (excluding
closing costs), which was funded principally with borrowings under the Line of
Credit totaling $72.8 million, other indebtedness incurred or assumed directly
by the Company totaling $35.0 million and approximately $8.8 million of cash
reserves.

     The location, acquisition date, number of buildings, net rentable square
feet and contract purchase price of the 1996 Acquired Properties is set forth in
the following table.  See "Item 2. Properties" for additional information
relating to the Company's Properties.

                                       3
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                          NUMBER OF  NET RENTABLE    PURCHASE
1996 ACQUIRED PROPERTIES                   LOCATION    ACQUISITION DATE   BUILDINGS  SQUARE FEET       PRICE
------------------------                   --------    ----------------   ---------  ------------  -------------
                                                                                                   (in millions)
<S>                                       <C>          <C>                <C>        <C>           <C>
 
1717 Deerfield Road                       Chicago, IL  December 11, 1996          1       137,904        $ 21.6
O'Hare Plaza II                           Chicago, IL  December 13, 1996          1       233,650          25.5
FHP Denver                                Denver, CO   December 20, 1996          1       198,370          20.2
2411 Dulles Corner Park                   Northern VA  December 31, 1996          1       176,522          26.5
2455 Horsepen Road                        Northern VA  December 31, 1996          1       104,150          14.0
                                                                                  -     ---------        ------
                                                                                                         
Total 1996 Acquired Office Properties                                             5       850,596        $107.8
                                                                                  -     ---------        ------
 
155 Alexandra Way                         Chicago, IL  November 25, 1996          1       110,000        $  3.9
Wood Dale 1 & 2                           Chicago, IL  November 25, 1996          2       116,076           4.9
                                                                                  -     ---------        ------

Total 1996 Acquired Industrial                                                    3       226,076        $  8.8
 Properties                                                                       -     ---------        ------

Total 1996 Acquired Properties                                                    8     1,076,672        $116.6
                                                                                  =     =========        ======
</TABLE>

In addition to the 1996 Acquired Properties, as described above, the Company has
acquired one office and one industrial property subsequent to December 31, 1996
(the "1997 Acquired Properties").  The following table sets forth the
information related to the 1997 Acquired Properties.
<TABLE>
<CAPTION>
 
                                                                    NUMBER OF  NET RENTABLE    PURCHASE
1997 ACQUIRED PROPERTIES            LOCATION     ACQUISITION DATE   BUILDINGS  SQUARE FEET       PRICE
------------------------          -------------  -----------------  ---------  ------------  -------------
                                                                                             (in millions)
<S>                               <C>            <C>                <C>        <C>           <C>
4401 Fair Lakes Court             Northern VA    January 14, 1997           1        58,621         $ 6.1
5211 South 3rd Street             Milwaukee, WI  February 20, 1997          1       360,000           9.8
                                                                            -       -------         -----

Total 1997 Acquired Properties                                              2       418,621         $15.9
                                                                            =       =======         =====
</TABLE>

     Upon the closing of the Offering, the Operating Partnership closed a three-
year revolving credit facility (the "Line of Credit") with Bank One, Texas, N.A.
and NationsBank of Texas, N.A., initially in the amount of $100 million, which
was subsequently increased to $150 million on January 24, 1997.  The Operating
Partnership may borrow under the Line of Credit to finance the acquisition of
additional properties and for other corporate purposes, including to obtain
additional working capital.  Borrowings under the Line of Credit will bear
interest at the 30-day, 60-day or 90-day London Interbank Offered Rate ("LIBOR")
at the option of the Company, plus 2.00% initially per annum (which was reduced
to 1.75% on January 24, 1997), and is collaterialized by first mortgage liens on
certain of the Initial Properties (and may be collaterialized by other
properties acquired by the Company) and will be guaranteed by the Company.  At
December 31, 1996, the Company had aggregate borrowings from sources other than
its Line of Credit of $56.0 million and $72.8 million of borrowings under its
Line of Credit.  Reference is made to "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for additional information regarding the Company's Line of
Credit and other outstanding indebtedness.


ITEM 2.  PROPERTIES

     The Properties consist of the 33 office properties (the "Office
Properties") comprising approximately 4.7 million net rentable square feet and
the 62 industrial properties (the "Industrial Properties") comprising
approximately 5.3 million net rentable square feet. All of the Properties are
wholly owned by the Company (through its subsidiaries), except the Broadmoor
Austin Properties, which are owned by a joint venture in which the Company owns
a 49.9% managing general partnership interest, and One Northwestern Plaza, in
which the Company owns a 100% leasehold interest.

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
PROPERTY DATA

 
                                                                                NET     PERCENT     TOTAL BASE
                                                  YEAR(S)                     RENTABLE   LEASED      RENT FOR
                                                  BUILT/        NUMBER OF      SQUARE    AS OF      YEAR ENDED
PROPERTY NAME                  MARKET            RENOVATED      BUILDINGS      FEET    12/31/96    12/31/96(1)
-------------                  ------            ---------      ---------     ------   --------    -----------
                                                                                                  (IN THOUSANDS)
<S>                            <C>               <C>            <C>           <C>      <C>         <C>
OFFICE PROPERTIES:
 FHP Denver.................  Denver, CO           1983            1          198,370        95%      $   2,816
 Cumberland Office Park.....  Atlanta, GA        1972-1980         9          530,228        97           6,282
 1717 Deerfield Road........  Chicago, IL          1985            1          137,904       100           2,299
 O'Hare Plaza II............  Chicago, IL          1986            1          233,650        87           4,482
 One Northwestern Plaza.....  Sub. Detroit, MI     1989            1          241,751        96           4,648
 Broadmoor Austin...........  Austin, TX           1991            7        1,112,236       100           8,824
 Park West C2...............  Dallas, TX           1989            1          344,216        94           5,447
 Park West E1...............  Dallas, TX           1982            1          182,739       100           2,956
 Park West E2...............  Dallas, TX           1985            1          200,590        99           1,956
 5307 East Mockingbird......  Dallas, TX        1979/1993          1          118,316        88             938
 Walnut Glen Tower..........  Dallas, TX           1985            1          464,289        93           7,263
 Cottonwood Office Center...  Dallas, TX           1986            3          164,111       100           1,981
 Plaza on Bachman Creek.....  Dallas, TX           1986            1          125,903        98           1,242
 3141 Fairview Park Drive...  Northern VA          1988            1          192,108        88           2,597
 8521 Leesburg Pike.........  Northern VA       1984/1993          1          145,257       100           2,177
 2411 Dulles Corner Park....  Northern VA          1990            1          176,522       100           3,859
 2455 Horsepen Road.........  Northern VA          1989            1          104,150       100           2,193
                                                                  --        ---------       ---       ---------
Subtotal/weighted average for Office Properties                   33        4,672,340        97%      $  61,960
                                                                  ==        =========       ===       =========
 
INDUSTRIAL PROPERTIES:
 Pacific Gateway Center.....  Los Angeles, CA    1972-1984        18        1,252,708       100%      $   5,053
 155 Alexandra Way..........  Chicago, IL          1988            1          110,000       100             385
 Wood Dale 1 & 2............  Chicago, IL          1988            2          116,076       100             541
 8869 Greenwood.............  Baltimore, MD      1986-1987         1           89,582       100             274
 1329 Western Ave...........  Baltimore, MD        1988            1          185,600        95             734
 Deep Run 1&2...............  Baltimore, MD        1988            2          169,112       100             619
 4611 Mercedes Drive........  Baltimore, MD        1990            1          178,133       100             689
 9050 Junction Drive........  Baltimore, MD        1989            1          108,350       100             428
 Northland Park.............  Kansas City, MO    1975-1980         4          925,007       100           2,244
 North Topping Street.......  Kansas City, MO    1975-1980         1          119,118       100             283
 Airworld Drive.............  Kansas City, MO    1975-1980         1          200,000       100             113
 107th Terrace..............  Kansas City, MO    1975-1980         1           97,755       100             257
 Nicholson III..............  Dallas, TX           1981            3          155,712        94             483
 13425 Branchview...........  Dallas, TX           1970            1          121,250       100             285
 1002 Avenue T..............  Dallas, TX           1981            1          100,000       100             245
 1625 Vantage Drive.........  Dallas, TX           1984            1           50,000       100             193
 West Loop Business Park....  Houston, TX          1986            5           75,231        88             468
 Airport Properties.........  Milwaukee, WI      1970-1980        12          572,953        85           1,994
 Oak Creek Properties.......  Milwaukee, WI      1970-1979         2          232,000       100             674
 North West Properties......  Milwaukee, WI      1973-1987         3          413,371        83           1,055
                                                                  --        ---------       ---       ---------
Subtotal/weighted average for Industrial Properties.........      62        5,271,958        97%      $  17,017
                                                                  ==        =========       ===       =========
Consolidated total/ weighted average for all Properties.....      95        9,944,298        97%      $  78,977
                                                                  ==        =========       ===       =========
</TABLE>
(1)  "Base Rent" means the fixed base rental amount paid by a tenant under the
      terms of the related lease agreement, which amount generally does not
      include payments on account of real estate taxes, operating expense
      escalations and utility charges. The Base Rent presented represents Base
      Rent for each Property for the period January 1, 1996 through December 31,
      1996.

                                       5
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS

     The Company nor its affiliates (other than in a representative capacity),
is presently subject to any material litigation or, to the Company's knowledge,
has any litigation been threatened against it or its affiliates other than
routine actions and administrative proceedings substantially all of which are
expected to be covered by liability insurance and in the aggregate are not
expected to have a material adverse effect on the business or financial
condition of the Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders of the Company during
the fourth quarter of 1996, through the solicitation of proxies or otherwise.


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

  Market Information

     The Company's Common Shares commenced trading on The New York Stock
Exchange (the "NYSE") on October 17, 1996 under the symbol "PP." The following
table sets forth the high and low sale prices for the Common Shares as traded
from October 17, 1996 through December 31, 1996.

                                                        HIGH    LOW
                                                        ----    ---
October 17, 1996 through December 31, 1996 .........   25-1/8  20-1/2

  Shareholder Information

     At March 14, 1997, the Company had approximately 81 holders of record and
approximately

1,800 beneficial owners, of its Common Shares.  In addition, the Units of
limited partner interest in the Operating Partnership (which are redeemable for
Common Shares subject to certain limitations) were held by 9 entities and
or persons.

  Distribution Information

     The Company has adopted a policy of paying regular quarterly distributions
on its Common Shares and cash distributions have been paid on the Company's
Common Shares with respect to the period since its inception.  The following
table sets forth information regarding the declaration and payment of
distributions by the Company since its commencement of operations on October 22,
1996.

<TABLE> 
<CAPTION>  
             PERIOD WHICH               DISTRIBUTION  DISTRIBUTION     PER SHARE
             DISTRIBUTION                  RECORD       PAYMENT      DISTRIBUTION
               RELATES                      DATE          DATE          AMOUNT
             ------------               ------------  ------------  ---------------
<S>                                     <C>           <C>           <C>
 
October 22, 1996 - December 31, 1996..    12/31/96       1/17/97         $0.31(1)
</TABLE>

    (1) Represents the pro rata portion (for the period from October 22, 1996
        (inception of operations) through December 31, 1996) of a quarterly
        distribution of $0.40 per share.

     The foregoing distribution represents an approximate 57% return of capital
in 1996.  In order to maintain its qualification as a REIT, the Company must
make annual distributions to its shareholders of at least 95% of its taxable
income (which does not include net capital gains).  During the period from
October 22, 1996 to December 31, 1996 the Company declared distributions
totaling $0.31 per share, of which approximately $0.13 per share was required to
satisfy the 95% distribution test for maintaining its qualification as a REIT.
Under certain circumstances the Company may be required to make distributions in
excess of cash available for distribution in 

                                       6
<PAGE>
 
order to meet such REIT distribution requirements. In such event, the Company
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 its qualification as a REIT for federal income tax purposes.

     The Company has declared a cash distribution for the first quarter of 1997
in the amount of $.40 per share, payable on April 17, 1997 to holders of record
on March 31, 1997.  The Company currently anticipates that it will maintain at
least the current distribution rate for the immediate future, unless actual
results of operations, economic conditions or other factors differ from its
current expectations.  Future distributions, if any, paid by the Company will be
at the discretion of the Board of Trustees of the Company and will depend on the
actual cash flow of the Company, its financial condition, capital requirements,
the annual distribution requirements under the REIT provisions of the internal
revenue code and such other factors as the Board of Trustees of the Company deem
relevant.

  Recent Sales of Unregistered Securities

     On July 24, 1996, the Company was capitalized with the issuance to Michael
V. Prentiss of 50 Common Shares at $20 per share for an aggregate purchase price
of $1,000.  The Common Shares were purchased as an investment and for the
purpose of organizing the Company.  The Company issued these Common Shares in
reliance on an exemption from registration under Section 4(2) of the Securities
Act.

     On October 22, 1996, the Company privately placed an aggregate of 1,879,897
Common Shares with three institutional investors, in exchange for a portion of
such investors' interests in the Operating Partnership.  The Common Shares were
acquired for investment and the transaction occurred in connection with the
Offering and related Formation Transactions.  The Company issued these Common
Shares in reliance upon an exemption from registration under Section 4(2) of the
Securities Act.

     Effective January 1, 1997, the Company issued an aggregate of 500 Common
Shares of the Company to the Independent Trustees (defined in Item 10. "Trustees
and Executive Officers of the Company") in accordance with the Trustees Plan as
described in "Item 11. Executive Compensation--Trustees Plan."


ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA

     The following sets forth selected financial and operating data for the
Company on a pro forma and historical consolidated basis and the Predecessor
Company (as defined in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations") on a historical combined basis.
The following data should be read in conjunction with the 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
pro forma statement of operations and other data for the year ended December 31,
1996 include the historical results of the Company's operations from its
commencement of operations on October 22, 1996 to December 31, 1996, and the
historical results of the Predecessor Company's operations for the period of
January 1, 1996 to October 21, 1996, adjusted to assume that the Offering and
related Formation Transactions and the application of the net proceeds therefrom
and the acquisition of properties had occurred at the beginning of the pro forma
period presented.   The pro forma financial information is not necessarily
indicative of what the financial position and result of operations of the
Company would have been as of the dates and for the periods indicated, nor does
it purport to represent or project the financial position and results of
operations for future periods.

     Historical operating results of the Company and Predecessor Company,
including net income, may not be comparable to future operating results. In
addition, the Company believes that the book value of the Properties, which
reflects historical costs of such real estate assets less accumulated
depreciation, is not indicative of the fair value of the Properties.

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                  COMPANY                                     PREDECESSOR COMPANY HISTORICAL
                                      ---------------------------   -------------------------------------------------------------- 
                                                     HISTORICAL                                   YEAR ENDED DEC. 31,
                                      PRO FORMA     OCT. 22, 1996     JAN. 1, 1996    --------------------------------------------
                                         1996     - DEC. 31, 1996   - OCT. 21, 1996     1995        1994       1993         1992
                                      ----------  ----------------  ----------------  --------------------------------------------
<S>                                   <C>         <C>               <C>               <C>         <C>         <C>        <C>
                                     
STATEMENTS OF OPERATIONS DATA:       
Rental income.....................      $81,937         $  13,485          $ 27,086    $ 29,423    $ 25,256   $ 14,412   $  8,169
Fee and other income(1)...........        2,476               302            17,510      25,741      26,702     23,609     24,278
                                        -------         ---------          --------    --------    --------   --------   --------
  Total revenues..................       84,413            13,787            44,596      55,164      51,958     38,021     32,447
Operating expenses(1).............       25,968             4,670            24,845      31,127      33,178     28,667     31,925
Real estate taxes.................        7,986             1,162             3,085       3,030       2,691      1,631        712
Interest expense..................        9,796               846             5,951       3,882       3,191      1,444        491
Real estate depreciation and         
 amortization.....................       16,392             2,696             5,993       7,060       5,451      3,312      1,900
Other depreciation and amortization           -                 -                 -         106         106        106        106
Equity in joint venture and           
 unconsolidated subsidiaries(1)...        4,736             1,427                18          11          13         (4)         2
                                        -------         ---------          --------    --------    --------   --------   --------
Income (loss) before gain on sale of
property and minority interest....       29,007             5,840             4,740       9,970       7,354      2,857     (2,685)
Gain on sale of property..........                                              378           -       1,718          -          -
Minority interest(2)..............       (4,055)             (844)                -           -           -          -          -
                                        -------         ---------          --------    --------    --------   --------   --------
  Net income (loss)...............      $24,952         $   4,996          $  5,118    $  9,970    $  9,072   $  2,857   $ (2,685)
                                        =======         =========          ========    ========    ========   ========   ========
Net income per share..............         1.23               .25                            
Weighted average number shares
 outstanding......................       20,280            20,002                            

BALANCE SHEET DATA (END OF PERIOD):
 Real estate, before accumulated
  depreciation(3).................                        501,035                      $153,148    $151,673   $ 89,116   $ 42,561
 Real estate, after accumulated
    depreciation (3)..............                        482,528                       141,368     144,366     85,549     41,182
 Cash.............................                          7,226                         1,033       9,133      1,605      8,004
 Total assets.....................                        531,026                       154,635     164,307    117,819     53,327
 Debt on real estate(3)...........                        128,800                        46,442      46,732     20,473     10,186
 Total liabilities................                        151,977                        50,769      51,713     23,773     11,480
 Shareholders' equity.............                        325,221                       103,866     112,594     94,046     41,847
OTHER DATA (END OF PERIOD):
EBITDA (Company's 86.0% share)(4).      $55,549         $   9,843          $ 17,594    $ 22,106    $ 17,879   $ 10,681   $  3,879
                                        =======         =========          ========    ========    ========   ========   ========
Funds from Operations (Company's
 86.0% share)(5)..................      $40,907         $   7,684          $  9,983    $ 15,578    $ 11,945   $  6,238   $    257
                                        =======         =========          ========    ========    ========   ========   ========
Cash flow from operating activities.                    $  10,275          $ 12,268    $ 16,238    $ 13,059   $  6,115   $   (755)
Cash flow from investing activities.                    $(353,809)         $(32,985)   $ (4,301)   $(40,909)  $(71,977)  $(20,133)
Cash flow from financing activities.                    $ 350,759          $ 21,283    $(20,037)   $ 35,378   $ 59,463   $ 25,690
PROPERTY DATA (END OF PERIOD):(6)
Number of Properties..............           95                95                57          55          54         47         23
Total GLA in sq. ft...............        9,944             9,944             6,642       6,323       5,976      4,793      2,733
Occupancy %.......................          97%               97%               95%         97%         96%        95%        97%
</TABLE>

(1) The Manager's operations are combined with the property operations in the
    historical statements of the Predecessor Company and are accounted for under
    the equity method in the Company's historical and pro forma statements;
    therefore, the historical statements of the Predecessor Company include the
    Manager's revenues and expenses on a gross basis in the respective income
    and expense line items and the Company's historical and pro forma statements
    present the Manager's net operations in the line item titled "Equity in
    joint venture and unconsolidated subsidiaries."

    Equity in joint venture and unconsolidated subsidiaries includes the
    Company's 49.9% interest in the partnership owning the Broadmoor Austin
    Properties (the "Broadmoor Austin Partnership") on a historical and pro
    forma basis, and the Predecessor Company's 25%, in the Broadmoor Austin
    Properties, which is accounted for on the equity method for all periods
    presented. For more information on the operations and accounts of the
    Broadmoor Austin Partnership, refer to footnote (6) in the footnotes to the
    consolidated financial statements and combined financial statements of the
    Company and Predecessor Company, respectively.

    Equity in joint venture and unconsolidated subsidiaries on a historical
    basis also includes the Predecessor Company's 15% general partnership
    interest in the Park West C2 Property. The operations and accounts are
    consolidated on a historical and pro forma basis for the Company.

(2) Represents an approximate 14.0% interest in the Operating Partnership which
    is owned by the minority interest holders on a historical and pro forma
    basis.

(3) In accordance with generally accepted accounting principles (GAAP), the
    balance sheet as of December 31, 1996 reflects the Company's investment in
    the Broadmoor Austin Properties using the equity method of accounting. As a
    result, the Company's 49.9% share of the Broadmoor Austin Partnership's real
    estate and related debt are not shown in the line items titled "Real
    estate, before accumulated depreciation," "Real estate, after accumulated
    depreciation" and "Debt on real estate." The following schedule
    represents the Balance Sheet Data as of December 31, 1996 on a pro forma
    basis as if the Company's share of the Broadmoor Austin Partnership's real
    estate and related debt thereon were included. This presentation is provided
    for informational purposes only:

                                       8
<PAGE>
 
<TABLE>
<CAPTION>
 

                                                                    
                                              12/31/96              ADJUSTMENTS             PRO FORMA 12/31/96
                                            BALANCE SHEET    FOR COMBINING BROADMOOR'S      BALANCE SHEET DATA
                                          DATA AS PRESENTED       49.9% OWNERSHIP           BROADMOOR COMBINED
                                          -----------------  -------------------------      ------------------
<S>                                       <C>                <C>                            <C> 
  Real estate, before accumulated                 $ 501,035                    $69,781                $570,816
   depreciaation........................
  Real estate, after accumulated                  $ 482,528                    $57,812                $540,340
   depreciation.........................
  Debt on real estate...................          $ 128,800                    $69,860                $198,660
</TABLE>
 (4) EBITDA means operating income before mortgage and other interest, income
     taxes, depreciation and amortization. The Company believes EBITDA is useful
     to investors as an indicator of the Company's ability to service debt and
     pay cash distributions. EBITDA, as calculated by the Company, is not
     comparable to EBITDA reported by other REITs that do not define EBITDA
     exactly as the Company defines that term. EBITDA does not represent cash
     generated from operating activities in accordance with GAAP, 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 Company's EBITDA for the
     respective periods is calculated as follows:
<TABLE>
<CAPTION>
 
 
                                               COMPANY                                  PREDECESSOR COMPANY HISTORICAL
                                      ---------------------------------  ----------------------------------------------------------
                                                          HISTORICAL
                                                        -------------                               YEAR ENDED DEC. 31,
                                      PRO FORMA         OCT. 22, 1996      JAN. 1, 1996  ------------------------------------------
                                         1996           DEC. 31, 1996    -OCT. 21, 1996  1995      1994         1993        1992
                                      ---------         -------------     -------------  -----     ----         ----        ----
<S>                                   <C>               <C>               <C>            <C>       <C>         <C>         <C>
EBITDA
Net Income (loss)..........          $24,952             $ 4,996           $ 5,118     $ 9,970     $ 9,072     $ 2,857     $(2,685)
Add:
 Interest expense..........            9,796                 846             5,951       3,882       3,191       1,444         491
 Real estate depreciation             
  and amortization.........           16,392               2,696             5,993       7,060       5,451       3,312       1,900
 Other depreciation and                
  amortization.............                -                   -                 -         106         106         106         106
 EBITDA of unconsolidated              
  subsidiaries.............            4,634               1,700                 -           -           -           -           -
 EBITDA of unconsolidated                                                     
  joint venture............            9,394               1,810             3,792       4,698       4,700       4,697       4,700
Minority interest..........            4,055(1)              824(1)              -           -           -           -           -
Less:                                
 Gain on sale of property..                -                   -              (378)          -      (1,718)          -           -
 Equity in joint venture
  and unconsolidated
   subsidiaries............           (4,736)             (1,427)              (18)        (11)        (13)          4          (2)
                                     -------             -------           -------     -------     -------     -------     -------
EBITDA.....................          $64,487             $11,445           $20,458     $25,705     $20,789     $12,420     $ 4,510
                                     -------             -------           -------     -------     -------     -------     -------
EBITDA (Company's 86.0%              
 share)....................          $55,459             $ 9,843           $17,594     $22,106     $17,879     $10,681     $ 3,879
---------------------------          =======             =======           =======     =======     =======     =======     =======
</TABLE>
     (1) Represents the minority interest applicable to the holders of limited
         partnership Units.

(5)  The Company generally considers funds from operations an appropriate
     measure of liquidity of an equity REIT because industry analysts have
     accepted it as a performance measure of equity REITs. "Funds from
     Operations," as defined by the National Association of Real Estate
     Investment Trusts ("NAREIT"), means net income (computed in accordance
     with GAAP) excluding gains (or losses) from debt restructuring and sales of
     property, plus depreciation and amortization on real estate assets, and
     after adjustments for unconsolidated partnerships and joint ventures. The
     Company's Funds from Operations are not comparable to Funds from Operations
     reported by other REITs that do not define that term using the current
     NAREIT definition. The Company believes that in order to facilitate a clear
     understanding of the combined historical operating results of the Prentiss
     Group and the Company, Funds from Operations should be examined in
     conjunction with net income (loss) as presented in the audited consolidated
     and combined financial statements and notes thereto of the Company and
     Predecessor Company included elsewhere in this Form 10-K. Funds from
     Operations does not represent cash generated from operating activities in
     accordance with GAAP and should not be considered as an alternative to net
     income as an indication of the Company's performance or to cash flows as a
     measure of liquidity or ability to make distributions. The Company's and
     Predecessor Company's Funds from Operations for the respective periods is
     calculated as follows:
<PAGE>
<TABLE>
<CAPTION>
 
 
                                                  COMPANY                          PREDECESSOR COMPANY HISTORICAL
                                          ---------------------------    ---------------------------------------------------
                                                          HISTORICAL
                                                        -------------                            YEAR ENDED DEC. 31,
                                           PRO FORMA    OCT. 22, 1996      JAN. 1, 1996  ------------------------------------
                                              1996      DEC. 31, 1996    -OCT. 21, 1996  1995      1994       1993       1992
                                           ---------    -------------     -------------  -----     ----       ----       ---- 
<S>                                        <C>          <C>               <C>            <C>       <C>        <C>        <C>
                                                             (IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
FUNDS FROM OPERATIONS                               
Net Income (loss)....................      $24,952         $4,996            $ 5,118    $ 9,970   $ 9,072    $2,857  $(2,685)
Add:                                             
 Real estate depreciation and               
  amortization.......................       16,392          2,696              5,993      7,060     5,451     3,312    1,900     
 Real estate depreciation and                
  amortization of unconsolidated joint       
  venture............................        2,167            419                875      1,084     1,084     1,084    1,084    
 Minority interest...................        4,055(1)         824(1)               -          -         -         -        -
Less:                                      
 Gain on sale of property............            -              -               (378)         -    (1,718)        -        -
                                           -------         ------            -------    -------   -------    ------  -------      
Funds from Operations................      $47,566         $8,935            $11,608    $18,114   $13,889    $7,253  $   299
                                           -------         ------            -------    -------   -------    ------  -------
Funds from Operations (Company's 86.0      
 share)...............................     $40,907         $7,684            $ 9,983    $15,578   $11,945    $6,238  $   257
                                           =======         ======            =======    =======   =======    ======  =======     
</TABLE>
   (1) Represents the minority interest applicable to the holders of limited
       partnership Units.

                                       9
<PAGE>
 
(6) With respect to the Property Data of the Predecessor Company, the
    information includes the Broadmoor Austin Properties, Park West C2, 3141
    Fairview Park Drive and Plaza on Bachman Creek Properties only for the end
    of the periods subsequent to the Prentiss Group's acquisition of an
    ownership interest in the respective Properties.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the "Selected
Financial and Operating Data" and the historical consolidated and combined
financial statements and related notes thereto for the Company and the
Predecessor Company, respectively, appearing elsewhere in this Form 10-K. The
following discussion is based primarily on the consolidated financial statements
of the Company for the period subsequent to the Offering and on the combined
financial statements of the Predecessor Company for the periods prior to the
Offering.  The combined financial statements of the Predecessor Company include
(i) the results of operations from 47 properties for the periods presented, (ii)
the results of operations of the 3141 Fairview Park Drive property for the
portion of the periods after a Prentiss Group member acquired the property,
(iii) the results of operations of the Plaza on Bachman Creek for the portion of
the periods after a Prentiss Group member acquired the property, (iv) a 25%
equity interest in the Broadmoor Austin properties, (v) a 15% equity interest in
the Park West C2 property for the portion of the periods in which the Prentiss
Group owned a non-controlling interest, and (vi) results of operations of the
Prentiss Properties Service Business conducted primarily by Prentiss Properties
Limited, Inc. ("PPL") in the periods presented. The properties owned by the
Operating Partnership, prior to the Formation Transactions, consist of
Cumberland Office Park, 5307 East Mockingbird, Walnut Glen Tower, 8521 Leesburg
Pike, all of the industrial properties in Baltimore, Maryland, except 9050
Junction Drive, and all of the industrial properties in Kansas City, Missouri;
Dallas, Texas; and Milwaukee, Wisconsin.

     Historical results set forth in the "Selected Financial and Operating
Data," the combined financial statements of the Predecessor Company, and the
consolidated financial statements of the Company should not be taken as an
indication of future operations of the Company.

OVERVIEW

     The Company was formed under the laws of the state of Maryland on July 12,
1996, to be a self-administered and self-managed real estate investment trust
("REIT").  The Company acquired a sole general partnership interest in Prentiss
Properties Acquisition Partners, L.P. (the "Operating Partnership") through the
Company's wholly-owned subsidiary Prentiss Properties I, Inc., a Delaware
corporation and owns an approximate 86.0% limited partnership interest in the
Operating Partnership.

     The Company has been formed to succeed to substantially all of the
interests of PPL and its affiliates in (i) a portfolio of office and industrial
properties and (ii) the national acquisition, property management, leasing,
development and construction businesses of PPL and its affiliates (the "Prentiss
Group").  The acquisition, property management, leasing, development and
construction businesses will be carried out by the Operating Partnership and the
Company's majority-owned affiliates, Prentiss Properties Limited, Inc. and
Prentiss Properties Limited II, Inc. (collectively, the "Manager").

     On October 22, 1996, the Company commenced operations after completing an
initial public offering of 16,000,000 Common Shares.  The Company issued an
additional 2,400,000 Common Shares on November 1, 1996 pursuant to the exercise
of the underwriters' over-allotment option.  The combined 18,400,000 Common
Shares were issued at a price per share of $20.00 (the "Offering").  The Company
used approximately $87.4 million of the net proceeds of the Offering and issued
1,879,897 Common Shares of the Company for a total consideration of
approximately $125.0 million to purchase certain limited partners' interests in
the Operating Partnership.  The Company contributed the remaining net proceeds
of the Offering to the Operating Partnership.  Subsequent to these transactions,
the Company held an approximate 86.0% interest in the Operating Partnership.

                                       10
<PAGE>
 
     The Prentiss Group members, who, prior to the Offering, collectively served
as the general partner of the Operating Partnership, contributed to the
Operating Partnership all of their interests in the properties and certain
management contracts of PPL (the "Contracts") in exchange for 3,295,995 limited
partnership units in the Operating Partnership ("Units").

     At December 31, 1996, the Company owned 95 properties containing
approximately 9.9 million square feet, compared to the 55 properties containing
approximately 6.3 million square feet owned by the Predecessor Company at
December 31, 1995. The property acquisitions containing approximately 300,000
square feet were made by the Predecessor Company between December 31, 1995 and
October 21, 1996. Concurrent with the Offering, the Company acquired 30
properties with approximately 2.2 million square feet and an additional 25%
interest in a joint venture owning seven properties in which the Predecessor
Company had an existing 25% ownership interest. Subsequent to the Offering,
through December 31, 1996, the Company acquired eight properties containing
approximately 1.1 million square feet.

RESULTS OF OPERATIONS

     The results of operations for the years ended December 31, 1995 and 1994
includes the operations of the Predecessor Company.  The results of operations
for the year ended December 31, 1996 includes the operations of the Predecessor
Company for the period January 1, 1996 through October 21, 1996 and the
operations of the Company from October 22, 1996 through December 31, 1996.


Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995

     Rental revenues increased by $11.1 million, or 37.9%, due primarily to the
Properties acquired after December 31, 1995.  Revenues for the Properties
acquired prior to December 31, 1995 increased by $0.6 million, or 2%, due
primarily to increases in rental income at the Cumberland Office Park of $0.4
million, 5307 E. Mockingbird of $0.3 million, Walnut Glen of $0.2 million and
8521 Leesburg Pike of $0.5 million, offset by decreases of $0.4 million, $0.3
million and $0.1 million at the Kansas City and Milwaukee Industrial Properties
and other Properties, respectively.  The decreases at the Kansas City Industrial
Properties resulted primarily from the expiration of a 200,000 square foot lease
during the first half of 1996.  In February 1997, 100% of this Property was
leased and the recognition of rental income commenced.  The decrease in the
Milwaukee Industrial Properties resulted primarily from the March 1996
bankruptcy of a tenant previously occupying approximately 70,000 square feet.
The Company is currently marketing the space for lease.

     With respect to Properties acquired prior to December 31, 1995, property
operating and maintenance expenses increased by $0.6 million for the year ended
December 31, 1996 from the year ended December 31, 1995, $0.3 million of which
relates to bad debt expense recognized on the above-mentioned bankrupt tenant.
The additional costs relates primarily to the Properties with increased rental
income during 1996.

     Real estate taxes, on these Properties, increased by $0.3 million,
resulting primarily from increased property tax appraisals received on the
Cumberland Office Park and Walnut Glen Properties. The Company continues to
contest these increases.

Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994

     Total Revenues increased by $3.2 million, or 6.2%, to $55.2 million for the
year ended December 31, 1995 from $52.0 million for the same period in 1994.
Rental revenues increased $4.2 million, or 16.5%, to $29.4 million from $25.3
million, primarily as a result of the Company's acquisition of certain
Industrial Properties in Baltimore, Maryland, and 8521 Leesburg Pike in late
1994 and two additional Industrial Properties in Kansas City, Missouri, in May
1994.  These Property additions accounted for approximately $2.9 million of the
increase in rental income; the remaining increase in rental income of
approximately $1.2 million was the result of increased rental rates and
occupancy rates in the existing portfolio which are estimated at $0.9 million
and $0.3 million, respectively.  Fee and other income decreased $1.0 million, or
3.6%, to $25.7 million from $26.7 million, primarily due to a decrease in
development fees of $5.1 million and a decrease in leasing and tenant services
fees of $1.9 million, offset by an increase in sale fees, other fees and other
income of $6.1 million. The decrease in development fees was primarily due to
the recognition of a significant fee in 1994 coupled with low development

                                       11
<PAGE>
 
activity during 1995. The leasing and tenant services fee decreases were due to
higher space rollover and leasing activity in 1994. Sale fees and other fees
increased due to property sales and fees received as a result of contract
termination payments.

     Total Expenses increased by $0.6 million, or 1.3%, to $45.2 million for the
year ended December 31, 1995, from $44.6 million for the same period in 1994.
Operating expenses decreased by $.1 million, or 0.2%, to $41.3 million from
$41.4 million. Operating expenses includes a decrease of $1.1 million in
compensation of the Manager's shareholders. Shareholder compensation was based
on earnings of the Manager and was a means of distributing those earnings to the
shareholders. The Manager had other decreases in operating expenses of $1.8
million which primarily was related to personnel cost reductions. Operating
expenses of the properties increased by $2.8 million. This increase was
comprised of an increase in property operating and maintenance expenses of $0.9
million, an increase of $0.3 million in real estate taxes and an increase of
$1.6 million in depreciation and amortization. Approximately $2.0 of the
increase in property operating expense was attributable to the property
additions discussed previously and the remainder of the increase, $0.9 million
was attributable to increased occupancy and an increase in amortization expense.
Mortgage interest expense increased $0.7 million, or 21.7%, to $3.9 million for
the year ended December 31, 1995 from $3.2 million for 1994. This increase was
primarily the result of new financing related to acquisitions during the period
along with additional financing obtained on the Dallas industrial properties.

     Gains on sale of property for the year ended December 31, 1994, was $1.7
million.  This gain was the result of the sale of an industrial building in
Ontario, California. The property was purchased in 1993.

     Net income for the year ended December 31, 1995 increased by $0.9 million,
or 9.9%, to $10.0 million from $9.1 million for 1994. As discussed above, the
increase in net income was the result of an increase in total revenues of $3.2
million, offset by an increase in total expenses of $0.6 million, and a decrease
in gains on sale of property of $1.7 million.


LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents were $7.2 million and $1.0 million at December
31, 1996 and December 31, 1995, respectively. The increase in cash and cash
equivalents is primarily a result of cash flows provided by operating and
financing activities exceeding cash flow used in investing activities. Net cash
provided by operating activities was $22.5 million for the year ended December
31, 1996 compared to the $16.2 million for the year ended December 31, 1995. The
increase is due primarily to the transactions related to the property
acquisitions and the operations of the Company subsequent to the Offering.

     Net cash used in investing activities increased from $4.3 million for the
year ended December 31, 1995 to $386.8 million for the year ended December 31,
1996.  This increase is due primarily to the transactions related to the
Offering and acquisition of real estate assets subsequent to the Offering.

     Net cash provided by financing activities of $372.0 million for the year
ended December 31, 1996 increased from a cash use of $20.0 million for the year
ended December 31, 1995.  This increase is primarily attributable to
transactions related to the Offering and mortgage loans and other indebtedness
incurred in the acquisition of real estate assets acquired subsequent to the
Offering.

     Cash and cash equivalents were $1.0 million and $9.1 million at December
31, 1995 and 1994, respectively. The decrease in cash and cash equivalents is
primarily a result of cash flows used by investing activities exceeding those
provided by operating and financing activities. Net cash provided by operating
activities in 1995 increased by $3.2 million compared to 1994. The increase was
primarily attributable to the incremental increase in cash flow from operations
provided by properties acquired in 1994 and an approximately $1.9 million
increase in earnings from the Manager. The increase in the Manager's earnings
was primarily due to reductions in operating expenses. Net cash used by
investing activities in 1995 decreased by $36.6 million compared to 1994. The
decrease was primarily a result of the acquisition of properties in 1994. These
acquisitions were funded primarily through capital contributions and the
addition of new real estate loans. Net cash provided by (used in) financing
activities in 1995 decreased by $55.4 million compared to 1994. The decrease was
primarily attributable 

                                       12
<PAGE>
 
to partner distributions of $15.3 million in 1995, compared to partner
contributions, and new real estate loans of $12.1 million and $27.1 million,
respectively, in 1994.

     At December 31, 1996, the Company had total outstanding indebtedness of
approximately $198.7 million (the ''Mortgage Debt''), including the Company's
pro rata share of the Broadmoor Austin Properties debt (Joint Venture Debt).
The Mortgage debt was collateralized by 66 of the Properties. The Mortgage Debt
represents approximately 25.2% of the Company's approximate $788 million Total
Market Capitalization (based on the $25 closing price of individual shares at
December 31, 1996). Approximately $40.0 million of the Mortgage Debt consists of
a mortgage loan that the Company obtained from an affiliate of Lehman Brothers
Inc. and approximately $72.8 million represents borrowings the Company has made
under the Line of Credit.  The following table sets forth certain information
regarding the Mortgage Debt at December 31, 1996:

                            REMAINING MORTGAGE DEBT
<TABLE>
<CAPTION>
                                                                                           
                              PRINCIPAL      INTEREST                                      ANNUAL
        DESCRIPTION             AMOUNT         RATE       AMORTIZATION      MATURITY      PAYMENT
---------------------------  ------------  -------------  ------------  ----------------  --------
<S>                          <C>           <C>            <C>           <C>               <C>
Walnut Glen................     10,000             7.50%      None      January 31, 2001       750
FHP Denver.................      6,000             7.30%      None      November 1, 2000       438
Broadmoor Austin...........     69,860             9.75%      None       April 1, 2001       6,811
Line of Credit.............     72,800(1)    LIBOR + 1.75%    None      October 14, 1999     5,278
Other Mortgage Debt........     40,000(2)    LIBOR + 1.65%    None      November 1, 1999     2,860
                              --------                                                     -------
Total/Weighted Average.....   $198,660             8.12%                                   $16,137
                              ========                                                     =======
</TABLE>
(1) The Line of Credit is collateralized by 33 Properties, including 16 Office
    Properties.  The 30-day LIBOR of 5.50% as of December 31, 1996, was used for
    the calculation of the weighted average rate in the table above.

(2) The Other Mortgage Debt is collateralized by 24 Industrial Properties.  The
    30-day LIBOR of 5.50% as of December 31, 1996 was used for the calculation
    of the weighted average rate in the table above.

     On January 24, 1997, the Company increased the amount available under the
Line of Credit from $100 million to $150 million and reduced the interest rate
on borrowings under the Line of Credit from LIBOR plus 200 basis points to LIBOR
plus 175 basis points.  The Company currently has no amounts outstanding under
the Line of Credit.

     On February 27, 1997, the Company closed on a ten-year fixed rate mortgage
loan with an initial total available balance of $180.1 million, and $96.1
million outstanding (the "Mortgage Loan").  The Mortgage Loan is secured by
liens on 54 Properties.  The Mortgage Loan was obtained from an affiliate of
Lehman Brothers Inc. ("Lehman"), the Managing Underwriter of the IPO.  The
Mortgage Loan bears interest at a rate of approximately 7.57% and matures on
February 27, 2007.  A portion of the proceeds of the Mortgage Loan were used to
repay approximately $88.2 million of outstanding indebtedness under the Line of
Credit.  The balance of the proceeds from the Mortgage Loan will be used to fund
a portion of the purchase prices of future acquisitions.  Lehman has advised the
Company that it intends to place the Mortgage Loan with investors sometime in
the future.

     Pursuant to the Debt Limitation, the Company's combined indebtedness plus
its pro rata share of Joint Venture Debt is limited so that, at the time such
debt is incurred, it does not exceed 50% of the Company's Total Market
Capitalization. The Predecessor Company had total outstanding indebtedness of
30.9% and 29.3% as of December 31, 1995 and December 31, 1994, respectively.  As
of December 31, 1996, the Company had the approximate capacity to borrow up to
an additional $390.6 million under the Debt Limitation. The amount of
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's Declaration of Trust and Bylaws and are solely
within the discretion of the Company's Board of Trustees.

     The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Code. The Company anticipates that these needs will be fully funded from the
Company's initial working capital and the 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 the
Line of Credit.

                                       13
<PAGE>
 
     The Company expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional equity securities from the Company and the Operating
Partnership. The Company also intends to use proceeds from the Line of Credit to
fund property acquisitions, development, redevelopment, expansions and capital
improvements on an interim basis.

     The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and operations of the Manager.  The Manager's sole source of income
is fees generated by its office and industrial real estate management, leasing,
development and construction businesses.


FUNDS FROM OPERATIONS

     The Company generally considers Funds from Operations an appropriate
measure of liquidity of an equity REIT because industry analysts have accepted
it as a performance measure of equity REITs.  "Funds from Operations", as
defined by the NAREIT, means net income (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures.  The Company believes that in
order to facilitate a clear understanding of its operating results, Funds from
Operations should be examined in conjunction with net income (loss) as presented
in the audited consolidated and combined financial statements of the Company and
Predecessor Company, respectively.  Funds from Operations does not represent
cash generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions.
<TABLE>
<CAPTION>
 
                                                                                     PREDECESSOR COMPANY HISTORICAL
                                            COMPANY             ------------------------------------------------------------------
                                            HISTORICAL                                            YEAR ENDED DEC. 31,
                                            OCT. 22, 1996       JAN. 1, 1996 -      ----------------------------------------------
                                            DEC. 31, 1996       OCT. 21, 1996           1995      1994       1993      1992
                                            -------------       --------------      ----------------------------------------------
<S>                                        <C>                 <C>                 <C>       <C>        <C>       <C>
FUNDS FROM OPERATIONS                                      
Net Income (loss)..........                     $4,996                $ 5,118        $ 9,970   $ 9,072     $2,857   $(2,685)
Add:                                                                            
 Real estate depreciation                                  
  and amortization.........                      2,696                  5,993          7,060     5,451      3,312     1,900
 Real estate depreciation                                 
  and amortization of                                      
  unconsolidated joint                                                           
  venture..................                        419                    875          1,084     1,084      1,084     1,084
 Minority interest.........                        824(1)                                  -         -          -         -
Less:                                                                            
 Gain on sale of property..                                              (378)             -    (1,718)         -         -
                                                ------                -------        -------   -------     ------   -------  
Funds from Operations......                     $8,935                $11,608        $18,114   $13,889     $7,253   $   299
                                                ======                =======        =======   =======     ======   =======
Funds from Operations                                                            
 (Company's 86.0% share)...                     $7,684                $ 9,983        $15,578   $11,945     $6,238   $   257
                                                ======                =======        =======   =======     ======   =======
 
</TABLE>
(1) Represents the minority interest applicable to the holders of limited
    partnership Units.

     The Company's share of Funds from Operations increased by $2.1 million for
the year ended December 31, 1996 from the year ended December 31, 1995, and
increased by $3.6 million for the year ended December 31, 1995 from the year
ended December 31, 1994 as a result of the factors discussed in the analysis of
operating results.

INFLATION

     Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on the Company of the adverse effects of inflation. Leases
also vary in terms from one month to 15 years, further reducing the impact on
the Company of the adverse effects of inflation.

                                       14
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Index to Financial Statements and Financial Statement Schedule on page
F-1 of this Form 10-K.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.

                                    PART III

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE COMPANY

     The Board of Trustees currently consists of seven members (the "Trustees"),
five of whom are independent of the Company (the "Independent Trustees").  The
Independent Trustees are those Trustees of the Company who are not officers or
employees of the Company, nor do they have any affiliation to an officer or
employee or any affiliate of (i) any subsidiary of the Company, or (ii) any
partnership which is an affiliate of the Company.  The Board of Trustees is
divided into three classes who serve staggered three-year terms with the term of
each Trustee expiring at the annual meeting of shareholders held three years
after his election.

TRUSTEES AND EXECUTIVE OFFICERS

  The following table sets forth certain information with respect to the
Trustees and executive officers of the Company.
 
           NAME              AGE                    POSITION
---------------------------  ---  --------------------------------------------

Michael V. Prentiss           53  Chief Executive Officer and Chairman of the
                                  Board of Trustees (Term will expire in 1999)
Thomas F. August              48  President, Chief Operating Officer and
                                  Trustee (Term will expire in 1998)
Thomas J. Hynes, Jr.          57  Independent Trustee (Term will expire in
                                  1999)
Barry J. C. Parker            49  Independent Trustee (Term will expire in
                                  1999)
Dr. Leonard M. Riggs, Jr.     54  Independent Trustee (Term will expire in
                                  1998)
Ronald G. Steinhart           56  Independent Trustee (Term will expire in
                                  1998)
Lawrence A. Wilson            61  Independent Trustee (Term will expire in
                                  1997)*
Dennis J. DuBois              51  Executive Vice President and Managing
                                  Director, Southwest Region
Richard J. Bartel             46  Executive Vice President--Financial
                                  Operations and Administration, and
                                  Chief Administrative Officer
Mark R. Doran                 42  Executive Vice President, Chief Financial
                                  Officer and Treasurer
Lawrence J. Krueger           41  Executive Vice President and Managing
                                  Director, Midwest Region
James B. Meyer                37  Senior Vice President and Managing
                                  Director, Southeast Region
David C. Robertson            40  Senior Vice President and Managing
                                  Director, Western Region
Robert K. Wiberg              41  Senior Vice President and Managing
                                  Director, Mid-Atlantic Region

  *Mr. Wilson was nominated for re-election which will be voted on at the Annual
   meeting on May 6, 1997.

  The following are biographical summaries of the Trustees and executive
officers of the Company:

  Michael V. Prentiss serves as Chairman of the Board and Chief Executive
Officer of the Company and has served in such capacity since its formation in
October 1996. Mr. Prentiss, the founder of PPL, has over 25 years experience in
real estate development, acquisitions, and investment management and has
acquired or developed properties with an aggregate value in excess of $2
billion. From 1987 to 1992 he served as President and Chief Executive Officer of
PPL, and since 1992, he has served as its Chairman and Chief Executive Officer.
From 1978 to 1987, Mr. Prentiss served as President of Cadillac Fairview Urban
Development, Inc. ("Cadillac Urban"), Executive Vice President and member of the
Board of Trustees of Cadillac Fairview Corporation Limited ("Cadillac
Fairview"), and a member of Cadillac Fairview's Executive Committee.  Cadillac
Urban was the largest 

                                       15
<PAGE>
 
business unit of Cadillac Fairview, responsible for all of its office, mixed-use
and suburban office park development activity in the U.S. and Canada. Prior to
1978, Mr. Prentiss was President of Ackerman Development Company. Mr. Prentiss
is a Baker Scholar graduate of the Harvard Graduate School of Business
Administration. He holds a Bachelor of Science degree in Civil Engineering and a
B.A. degree in Business Administration from Washington State University.

  Thomas F. August serves as President and Chief Operating Officer and Trustee
of the Company and has served in such capacity since its formation in October
1996.  Mr. August has served as President and Chief Operating Officer of PPL
since 1992. From 1987 to 1992, Mr. August served as Executive Vice President and
Chief Financial Officer of PPL. From 1985 to 1987, Mr. August served in
executive capacities with Cadillac Urban. Prior to joining Cadillac Urban in
1985, Mr. August was Senior Vice President of Finance for Oxford Properties,
Inc., in Denver, Colorado, an affiliate of a privately-held Canadian real estate
firm. Previously, he was a Vice President of Citibank, responsible for real
estate lending activities in the upper Midwest. Mr. August holds a B.A. degree
from Brandeis University and an M.B.A. degree from Boston University.

  Thomas J. Hynes, Jr. serves as an Independent Trustee of the Company and has
served in such capacity since its formation in October 1996.  Mr. Hynes, Jr. is
President and Chief Executive Officer of Meredith & Grew Incorporated, a Boston-
based real estate brokerage firm, and has served in that capacity since 1988.
Mr. Hynes, Jr. has been employed by Meredith & Grew Incorporated since 1965 in
which time he has held various offices. Mr. Hynes, Jr. holds a B.A. degree from
Boston College.

  Barry J.C. Parker serves as an Independent Trustee of the Company and has
served in such capacity since its formation in October 1996.  Mr. Parker is the
immediate past Chairman of the Board, President and Chief Executive Officer of
County Seat, Inc., a nationwide chain of 750 specialty apparel stores. Prior to
joining County Seat, Inc. in 1985, Mr. Parker worked for the Children's Place,
Inc. for 10 years and held various offices with that company including Senior
Vice President and Chief Financial Officer, and Vice President and General
Merchandising Manager. Mr. Parker worked for Federated Department Stores, Inc.
prior to 1975 and held various management positions with that company's F&R
Lazarus Department Store division. Mr. Parker holds a B.A. degree from
Washington University in St. Louis and an M.B.A. degree from the University of
Pennsylvania's Wharton School of Finance and Commerce.

  Dr. Leonard M. Riggs, Jr. serves as an Independent Trustee of the Company and
has served in such capacity since its formation in October 1996.  Dr. Riggs is
Chairman and Chief Executive Officer of EmCare, Holdings Inc., a publicly-held
physician practice management company specializing in emergency medicine. Dr.
Riggs founded EmCare Holdings, Inc. as Emergency Health Service Associates in
1972. Dr. Riggs has also served as the Director of Emergency Medicine at Baylor
University Medical Center since 1974. Dr. Riggs is past president of the
American College of Emergency Physicians and is a director and member of the
compensation committee of American Oncology Resources, Inc. He holds a B.S.
degree from Centenary College of Shreveport, Louisiana and an M.D. degree from
the University of Texas Southwestern Medical School in Dallas, Texas.

  Ronald G. Steinhart serves as an Independent Trustee of the Company and has
served in such capacity since its formation in October 1996.  Mr. Steinhart is
Chairman and Chief Executive Officer, Commercial Banking Group, Banc One 
Corporation and has served in that capacity since 1995. He was also appointed as
Regional Executive for Banc One Corporation's operations in Oklahoma, Arizona,
Colorado and Utah earlier this year. Prior to 1995, Mr. Steinhart served as
President and Chief Operating Officer of Banc One Texas, N.A. to which he was
appointed in 1992 in connection with the merger of Team Bank into Banc One
Texas, N.A. Prior to that merger, Mr. Steinhart served as Chairman and Chief
Executive Officer of Team Bank, which he founded as Deposit Guaranty Bank in
1988. Mr. Steinhart served as President and Chief Operating Officer of
InterFirst Corporation from 1981 to 1987. Prior to joining InterFirst
Corporation in 1980, Mr. Steinhart organized investors to charter and purchase
six banks. Mr. Steinhart holds a B.A. degree in accounting and a M.S. in finance
from the University of Texas in Austin. He is also a Certified Public
Accountant.

  Lawrence A. Wilson serves as an Independent Trustee of the Company and has
served in such capacity since its formation in October 1996. Mr. Wilson is
President and Chief Executive Officer of HCB Contractors, a construction and
project management company that is a subsidiary of the Beck Group. Mr. Wilson
also serves as a director of TU Electric. Mr. Wilson holds a L.L.B. degree from
the Woodrow Wilson College of Law in Atlanta, Georgia and is a graduate of the
Emory University Advanced Management Program.

                                       16
<PAGE>
 
  Dennis J. DuBois serves as Executive Vice President and the Managing Director
of the Company's Southwest Region.  He is also responsible for development and
construction activities for the approximately 1.6 million square foot Park West
Office Park, and Park West Commerce Center, a 366-acre industrial park, both in
suburban Dallas. Mr. DuBois served as Executive Vice President of PPL since 1994
and from 1987 to 1993 as its General Counsel. He has more than 22 years of real
estate experience in acquisitions, development and leasing of major buildings
and mixed-use urban properties. Beginning in 1981, Mr. DuBois served as General
Counsel for Cadillac Urban. Before joining Cadillac Urban in 1981, Mr. DuBois
was a partner in a prominent Baltimore law firm. Mr. DuBois holds a B.A. degree
from the University of Massachusetts and a J.D. from the University of Maryland
Law School. He is a member of the Order of the Coif and a member of the Bar in
the state of Maryland.

  Richard J. Bartel serves as Executive Vice President--Financial Operations and
Administration and Chief Operating Officer--Property Management of the Company.
Since 1995, Mr. Bartel has served in similar capacities for PPL, overseeing the
operating aspects of its property management business, including quality
control, management training and day-to-day operations. He also directs
financial operations and administration, including accounting and reporting,
taxes, insurance and human resources. Mr. Bartel served as Senior Vice President
of Financial Operations of PPL from 1989 to 1995, Vice President of Financial
Operations of PPL from 1987 to 1989 and Vice President of Financial Operations
of Cadillac Urban from 1986 to 1987. Mr. Bartel holds a B.S. degree in
Accounting from the University of Illinois and a Masters in Management from
Northwestern University's Kellogg Graduate School of Management. He is also a
Certified Public Accountant.

  Mark R. Doran serves as Executive Vice President, Chief Financial Officer and
Treasurer of the Company. Mr. Doran is responsible for acquisition, development
and investment activities of the Company, as well as securing interim and long-
term financing and establishing and maintaining relationships with project
financing sources. In 1992 and 1993, Mr. Doran served as Senior Vice President
and Treasurer of PPL, and in 1990 and 1991 he served as its Vice President and
Treasurer. Prior to joining PPL in 1990, Mr. Doran served as Senior Vice
President for Lincoln Property Company, where he was responsible for the
financing of Lincoln's commercial projects throughout the United States. Mr.
Doran holds an M.B.A. degree and a B.B.A. degree in Accounting from Baylor
University and is a member of the Urban Land Institute.

  Lawrence J. Krueger serves as Executive Vice President and the Managing
Director of the Company's Midwest region. Mr. Krueger has served in that
capacity for PPL since 1994. He also has primary responsibility for the
development and construction of the 525-acre Continental Executive Parke office
and light industrial complex in suburban Chicago. He served as Senior Vice
President--Development of PPL from 1990 to 1994, Vice President--Development of
PPL from 1987 to 1990 and Vice President--Development Cadillac Urban from 1986
to 1997. Mr. Krueger holds a B.A. degree in Business from Indiana University and
a Masters degree in Urban Land Economics and Real Estate Investment Analysis
from the University of Wisconsin, Madison. He is a member of the National
Association of Industrial and Office Parks, the Industrial Development Research
Council and the Japan-American Society of Chicago.

  James B. Meyer serves as Senior Vice President and the Managing Director of
the Company's Southeast region. Mr. Meyer has served as Senior Vice President
and Managing Director of PPL since 1995, was Senior Vice President from 1994 to
1995 and was a Vice President from 1990 to 1994. Mr. Meyer was also responsible
for the acquisition of the 500,000 square foot Cumberland Office Park in Atlanta
and the development and sale of One Atlantic Center (IBM Tower), a 1.1 million
net rentable square foot landmark building in Midtown Atlanta. Prior to 1990,
Mr. Meyer worked in various capacities for Cadillac Fairview, which he joined in
1984. Mr. Meyer holds an M.B.A. from the University of Pennsylvania's Wharton
School of Finance and Commerce and a B.S. degree in civil engineering from
Purdue University. He has served on the Boards of the Midtown Alliance, Downtown
Atlanta Partnership, and numerous other civic and professional organizations.

  David C. Robertson serves as Senior Vice President and the Managing Director
of the Company's Western region. Mr. Robertson has served as a Senior Vice
President and Managing Director of PPL since 1995, a Vice President since 1993
and a General Manager since 1990. From 1986 to 1990, he worked in various
capacities for Cadillac Fairview. Before joining Cadillac Fairview in 1986, Mr.
Robertson was responsible for the management of various properties for Gerald D.
Hines Interests and Henry S. Miller Management Corporation in Dallas. Mr.
Robertson holds a California Real Estate License, and is a candidate for the
Certified Property Manager designation from the Institute of Real Estate
Management. He received a B.S. in banking and finance from 

                                       17
<PAGE>
 
Mississippi State University, and is actively involved in the Institute of Real
Estate Management and the Building Owners and Managers Association.

  Robert K. Wiberg serves as Senior Vice President and the Managing Director of
the Company's Mid-Atlantic region. Mr. Wiberg has served as a Senior Vice
President and Managing Director of PPL since 1995 and a Vice President for
Development and Acquisitions since 1990. Prior to joining Cadillac Fairview in
1984, Mr. Wiberg was employed by Coldwell Banker in its Los Angeles office. As
Vice President of Development and Acquisitions, Mr. Wiberg was responsible for
PPL's development in Washington, D.C. and Northern Virginia, including the
Fairview Park project. Mr. Wiberg holds an M.B.A. degree from the University of
California, at Berkeley; a Masters degree in City and Regional Planning from
Harvard University, and a B.A. degree from Cornell University.

TERMS OF OFFICE; RELATIONSHIPS

     The officers of the Company are elected annually by the Board of Trustees
at a meeting held preceding each annual meeting of shareholders, or as soon
thereafter as necessary and convenient in order to fill vacancies or newly
created offices.  Each officer holds office until his successor is duly elected
and qualified or until death, resignation or removal, if earlier.  Any officer
or agent elected or appointed by the Board of Trustees may be removed by the
Board of Trustees whenever in its judgment the best interests of the Company
will be served thereby, but such removal shall be without prejudice to the
contractual rights, if any, of the person so removed.

     There are no family relationships among any of the Trustees or executive
officers of the Company.  Except as described above, none of the Company's
Trustees hold trusteeships in any company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange
Act") or pursuant to Section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940.  There are no
arrangements or understandings between any Trustee or officer and any other
person pursuant to which that Trustee was nominated or officer was selected.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16 (a) of the Exchange Act requires officers and Trustees, and
persons who beneficially own more than ten percent (10%) of the Company's
shares, to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("SEC").  Officers, Trustees and
greater than ten percent (10%) beneficial owners are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.

     Based solely on a review of the copies furnished to the Company and
representations from the officers and Trustees, the Company believes that all
Section 16(a) filing requirements for the year ended December 31, 1996
applicable to its officers, Trustees and greater than ten percent (10%)
beneficial owners were satisfied, with the exception of the following:

     On October 22, 1996, Mr. Mark R. Doran acquired beneficial ownership of 400
of the Company's Common Shares. Mr. Doran reported his acquisition of the 400
Common Shares of the Company on his Form 5 which was filed on February 3, 1997.

     Based on written representations from the officers and Trustees, the
Company believes that no other Forms 5 for Trustees, officers and greater than
ten percent (10%) beneficial owners were required to be filed with the SEC for
the period ended December 31, 1996.

                                       18
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

The following table sets forth the base compensation in effect during the fiscal
year ending December 31, 1996.
<TABLE>
<CAPTION>
 
                                             ANNUAL COMPENSATION                            LONG TERM COMPENSATION
                                   ---------------------------------------  -------------------------------------------------------
                                                                                                SECURITIES
                                                        OTHER ANNUAL          RESTRICTED        UNDERLYING          ALL OTHER
                                                        COMPENSATION            STOCK             OPTIONS,        COMPENSATION
NAME AND PRINCIPAL POSITION  YEAR  SALARY($)(1)  BONUS       ($)              AWARDS ($)          SARS(#)            ($)(2)
---------------------------  ----  -----------   -----  ------------        ----------------  --------------      ------------
<S>                          <C>   <C>           <C>    <C>                 <C>               <C>                  <C> 
 
Michael V. Prentiss,
 Chairman of the Board,      
 Trustee, and CEO            1996       35,014    N/A         5,283               None                 386,762         None
Thomas F. August,            
 President and COO           1996       34,041    N/A          None               None                 173,944         None
Richard J. Bartel,
 Executive Vice President    1996       31,123    N/A          None               None                  85,000         None
Mark R. Doran, Executive
 Vice President and CFO      1996       29,178    N/A          None               None                  75,000         None
Dennis J. DuBois,
 Executive Vice President    1996       29,178    N/A          None               None                  64,366         None
Lawrence J. Krueger,
 Executive Vice President    1996       31,123    N/A          None               None                 125,000         None
 
</TABLE>
(1) Salaries presented represent the amounts paid to the respective executive
    officers for the period October 22, 1996 (inception of operations) through
    December 31, 1996.

(2) The executive officers, receive health and disability insurance benefits
    which do not exceed 10% of their respective salaries. These benefits are
    also provided to all other employees of the Company.

Option Grants

     The following table sets forth information regarding grants of share
options to the Company's executive officers during the 1996 fiscal year.  The
options were granted pursuant to the Company's 1996 Plan.  No stock appreciation
rights ("SARs") were granted during the 1996 fiscal year.
<TABLE>
<CAPTION>
 
                                                                                                         POTENTIAL REALIZABLE VALUE
                                                                                                                    AT
                                                                                                        ASSUMED ANNUAL RATE OF SHARE
                                                                                                            PRICE APPRECIATION FOR
                                                                                                                  OPTION
                                                    INDIVIDUAL GRANTS                                              TERM
                         -----------------------------------------------------------------------------------------------------------

                          NUMBER OF
                         SECURITIES                 OPTIONS
                         UNDERLYING      % OF      GRANTED TO   EXERCISE OR   MARKET PRICE
                           OPTIONS      OPTIONS    EMPLOYEE IN   BASE PRICE    ON DATE OF    EXPIRATION
NAME                     GRANTED (#)  GRANTED(1)   FISCAL YEAR   ($/SHARE)   GRANT ($/SHARE)    DATE     0%($)    5%($)    10%($)
----                     -----------  ----------   -----------  -----------  --------------- ----------  ----     -----    ------
<S>                      <C>          <C>           <C>          <C>           <C>                <C>     <C>    <C>      <C>
                      
Michael V. Prentiss          386,762     23.4%        386,762     $ 20.00         $ 20.00        10/16/06  0   4,864,615  12,327,961

Thomas F. August             173,944     10.5%        173,944     $ 20.00         $ 20.00        10/16/06  0   2,187,833   5,544,430

Richard J. Bartel             75,000      4.5%         75,000     $ 20.00         $ 20.00        10/16/06  0     943,335   2,390,610

Richard J. Bartel             10,000       .6%         10,000     $23.375         $23.375        12/17/06  0     147,003     372,537

Mark R. Doran                 50,000      3.0%         50,000     $ 20.00         $ 20.00        10/16/06  0     628,890   1,593,740

Mark R. Doran                 25,000      1.5%         25,000     $23.375         $23.375        12/17/06  0     367,508     931,342

Dennis J. DuBois              39,366      2.4%         39,366     $ 20.00         $ 20.00        10/16/06  0     495,138   1,254,783

Dennis J. DuBois              25,000      1.5%         25,000     $23.375         $23.375        12/17/06  0     367,508     931,342

Lawrence J. Krueger           75,000      4.5%         75,000     $ 20.00         $ 20.00        10/16/06  0     943,335   2,390,610

Lawrence J. Krueger           50,000      3.0%         50,000     $23.375         $23.375        12/17/06  0     735,015   1,862,684

</TABLE>

   (1) Represents the percentage of options granted to all employees during the
       year.

                                       19
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                NUMBER OF SECURITIES UNDERLYING      VALUE OF UNEXERCISED OPTIONS AT

                                                                UNEXERCISED OPTIONS AT YEAR END                 YEAR END
                                 SHARES                        --------------------------------      -------------------------------
                                ACQUIRED       VALUE           
         NAME                 ON EXERCISE     REALIZED          EXERCISABLE       UNEXERCISABLE      EXERCISABLE     UNEXERCISABLE
         ----                --------------   --------          -----------       -------------      -----------     -------------
<S>                          <C>             <C>                <C>               <C>                <C>             <C>
Michael V. Prentiss                -             -                    -               386,762              -           1,933,810
Thomas F. August                   -             -                    -               173,944              -             869,720
Richard J. Bartel                  -             -                    -                75,000              -             375,000
Richard J. Bartel                  -             -                    -                10,000              -              16,250
Mark R. Doran                      -             -                    -                50,000              -             250,000
Mark R. Doran                      -             -                    -                25,000              -              40,625
Dennis J. DuBois                   -             -                    -                39,366              -             196,830
Dennis J. DuBois                   -             -                    -                25,000              -              40,625
Lawrence J. Krueger                -             -                    -                75,000              -             375,000
Lawrence J. Krueger                -             -                    -                50,000              -              81,250
</TABLE>
EMPLOYMENT AGREEMENTS

  Messrs. Prentiss and August entered into employment agreements with the
Company on October 22, 1996. Each agreement is for an initial term of three
years, which will be automatically renewed for successive one-year periods
unless otherwise terminated. The agreements provide for base annual compensation
(as set forth in ''--Executive Compensation'' above) and incentive compensation
to be determined by the Compensation Committee (within the terms set forth in
''--Incentive Compensation" below). Each employment agreement provides that the
Compensation Committee may approve increases in the base salaries. Each of the
employment agreements provides for certain severance payments in the event of
disability or termination by the Company without cause or by the employee with
cause. No other employee of the Company is employed pursuant to an employment
agreement.

  The terms of Messrs. Prentiss' and August's employment agreements require that
Messrs. Prentiss and August devote substantially all of their business time to
the affairs of the Company. These agreements also, subject to certain
exceptions, prohibit them from engaging, directly or indirectly, during the term
of their employment or the Noncompetition Period (as defined below), in any
activity anywhere in the U.S. that competes with the Company (the "Competitive
Activities"). These provisions of each employment agreement survive the
termination of such agreement until the expiration of the Noncompetition Period.
The "Noncompetition Period" is the period beginning on the date of the
termination of employment with the Company and ending on the second anniversary
of such date.

  Mr. DuBois entered into a noncompetition agreement with the Company that,
subject to certain limited exceptions, prohibits him from engaging, directly or
indirectly, in Competitive Activities in the Southeastern U.S. and the
Southwestern U.S., respectively, during the Noncompetition Period. In the event
of an involuntary termination of Mr. DuBois' employment, the agreement does not
prohibit him from engaging in Competitive Activities, but, during the
Noncompetition Period, does prohibit him from (1) soliciting any employee of the
Company to leave his or her job and (ii) soliciting any client or identified
potential client of the Company during the Noncompetition Period.

1996 SHARE INCENTIVE PLAN

  Prior to the Offering, the Board of Trustees adopted, and the sole shareholder
of the Company approved, the 1996 Plan for the purpose of attracting and
retaining executive officers, Trustees and employees. The 1996 Plan is
administered by the Compensation Committee of the Board of Trustees, or its
delegate. The Compensation Committee may not delegate its authority with respect
to grants and awards to individuals subject to Section 16 of the Exchange Act.
As used in this summary, the term ''Administrator'' means the Compensation
Committee or its delegate, as appropriate.

  Officers and other employees of the Company, the Operating Partnership and
designated subsidiaries, including the Manager, generally will be eligible to
participate in the 1996 Plan. The Administrator selects the individuals who will
participate in the 1996 Plan (the ''Participants''). No Participant may be
granted, in any calendar year, options that cover more than 390,000 Common
Shares or SARs that cover more than 390,000 Common Shares.  Options granted with
tandem SARs shall be treated as a single award for purposes of applying the
limitation in the preceding sentence.  No Participant may be issued, in any
calendar year, more than 50,000 

                                       20
<PAGE>
 
Common Shares pursuant to an award of Restricted Shares (defined below) or
Performance Shares (defined below) for more than 50,000 Common Shares.

  The 1996 Plan authorizes the issuance of up to 2,030,000 Common Shares. The
Plan provides for the grant of (i) share options not intended to qualify as
incentive share options under Section 422 of the Code, (ii) Performance Shares,
(iii) SARs, issued alone or in tandem with options, (iv) Restricted Shares,
which are contingent upon the attainment of performance goals or subject to
vesting requirements or other restrictions and (v) incentive awards. The
Administrator shall prescribe the conditions which must occur for Restricted
Shares to vest or for Performance Shares to vest and incentive awards to be
earned.

  In connection with the grant of options under the 1996 Plan, the Administrator
will determine the option exercise period and any vesting requirements. The
initial options granted under the Plan will have 10-year terms and will become
exercisable for one-third of the covered shares (disregarding fractional shares,
if any) on the first and second anniversaries of the date of grant, and for the
balance of the shares on the third anniversary of the date of grant subject to
acceleration of vesting upon a change in control of the Company (as defined in
the 1996 Plan). An option may be exercised for any number of whole shares less
than the full number for which the option could be exercised. A Participant will
have no rights as a shareholder with respect to Common Shares subject to his or
her option until the option is exercised. To the extent an option has not become
exercisable at the time of a Participant's termination of employment, it will be
forfeited unless the Administrator exercises its discretion to accelerate
vesting for the Participant. If a Participant is terminated due to dishonesty or
similar reasons, all unexercised options, whether vested or unvested, will be
forfeited. Any Common Shares subject to options which are forfeited (or expire
without exercise) pursuant to the vesting requirement or other terms established
at the time of grant will again be available for grant under the 1996 Plan. The
exercise price of options granted under the 1996 Plan may not be less than the
fair market value of the Common Shares on the date of grant. Payment of the
exercise price of an option granted under the 1996 Plan may be made in cash,
cash equivalents acceptable to the Compensation Committee or, if permitted by
the option agreement, by exchanging Common Shares having a fair market value
equal to the option exercise price.

  On the effective date of the Offering, options for 1,219,438 Common Shares
were granted to employees and officers, including the officers named in
"Executive Compensation" above, at an exercise price equal to $20.00.  On
November 4, 1996, the Board of Trustees authorized the grant of 1,500 options to
employees with ten or more years of service with the Company.  Through December
31, 1996, 37,500 options were granted at an exercise price equal to $20.625 per
share.  On December 17, 1996, the Board of Trustees authorized the grant of
395,000 options in total to various officers and employees at an exercise price
equal to $23.375 per share.

  No option, SAR, Restricted Shares, incentive award or Performance Shares may
be granted under the 1996 Plan after December 31, 2006. The Board may amend or
terminate the 1996 Plan at any time, but an amendment will not become effective
without shareholder approval if the amendment materially (i) increases the
number of shares that may be issued under the 1996 Plan (other than an
adjustment or automatic increase described above); (ii) changes the eligibility
requirements; or (iii) increases the benefits that may be provided under the
1996 Plan. No amendment will affect a Participant's outstanding award without
the Participant's consent.

INCENTIVE COMPENSATION

  The Company may award incentive compensation to employees of the Company and
its subsidiaries, including incentive awards under the 1996 Plan that may be
earned on the attainment of performance objectives stated with respect to
criteria described above or other performance-related criteria. The Compensation
Committee may, in its discretion, approve bonuses to executive officers and
certain other officers and key employees if the Company achieves Company-wide,
regional and/or business unit performance objectives determined by it each year.
To the extent a bonus exceeds 100% of such an employee's base salary, the
Company may pay such excess in Restricted Shares.

THE TRUSTEES' PLAN

  Prior to the Offering, the Board of Trustees also adopted, and the Company's
sole shareholder approved, the Trustees' Plan to provide incentives to attract
and retain Independent Trustees.

                                       21
<PAGE>
 
  The Trustees' Plan provides for the grant of options and the award of Common
Shares to each eligible Trustee of the Company.  No Trustee who is an employee
of the Company, the Operating Partnership, or designated subsidiaries, including
the Manager, is eligible to participate in the Trustees' Plan.

  The Trustees' Plan provides that each Independent Trustee who is a member of
the Board of Trustees on the effective date of the Offering (a "Founding
Trustee") will be granted an option for 10,000 Common Shares at an exercise
price equal to the Offering Price. Each Independent Trustee who is not a
Founding Trustee will receive an option for 10,000 Common Shares on the date of
the first Board of Trustees meeting following the annual meeting of shareholders
at which the Independent Trustee is first elected to the Board of Trustees;
provided, however, that an Independent Trustee (other than a Founding Trustee)
who is first elected or appointed to the Board of Trustees other than at an
annual meeting of shareholders shall receive an option for 10,000 Common Shares
on the date of such election or appointment. The exercise price of options
granted in accordance with the preceding sentence shall be the fair market value
of a Common Share on the date of grant. The exercise price of options granted
under the Trustees' Plan may be paid in cash, acceptable cash equivalents,
Common Shares or a combination thereof. Options issued under the Trustees' Plan
are exercisable for ten years from the date of grant.

  An option granted under the Trustees' Plan shall become exercisable for 2,500
Common Shares on each of the first through fourth anniversaries of the date of
grant, provided that Trustee is a member of the Board of Trustees on such
anniversary date. To the extent an option has become exercisable under the
Trustees' Plan, it may be exercised whether or not the Trustee is a member of
the Board on the date or dates of exercise. An option may be exercised for any
number of whole shares less than the full number for which the option could be
exercised. A Trustee will have no rights as a shareholder with respect to Common
Shares subject to his or her option until the option is exercised.

  On the effective date of the Offering, options for 50,000 Common Shares were
granted to the Independent Trustees at an exercise price equal to $20.00 per
share.

  Each Independent Trustee will also receive quarterly an award of Common
Shares. Awards will be made on each March 1, June 1, September 1 and December 1
(each date, a "Quarterly Award Date") during the term of the Trustees' Plan.
Each Independent Trustee will receive, on each Quarterly Award Date on which he
or she is a member of the Board of Trustees, the number of Common Shares having
a fair market value on that date that as nearly as possible equals, but does not
exceed, $2,500. A Trustee will be immediately and fully vested in all such
Common Shares awarded to him or her under the Trustees' Plan.

  The terms of outstanding options, the number of Common Shares for which
options will thereafter be awarded, and the number of Common Shares to be
awarded on a Quarterly Award Date shall be subject to adjustment in the event of
a share dividend, share split, combination, reclassification, recapitalization
or other similar event.

  The Trustees' Plan provides that the Board of Trustees may amend or terminate
the Trustees' Plan, but the Trustees' Plan may not be amended more than once
every six months other than to comply with changes in the Internal Revenue Code,
the Employee Retirement Income Security Act of 1974, or the rules thereunder. An
amendment will not become effective without shareholder approval if the
amendment materially changes the eligibility requirements or increases the
benefits that may be provided under the Trustees' Plan. No options for Common
Shares may be granted and no Common Shares may be awarded under the Trustees'
Plan after December 31, 2002.

SAVINGS PLAN

  The Company intends to continue, and the Operating Partnership and designated
subsidiaries, including the Manager (each, a "Participating Employer"), have
adopted, the Employee Savings Plan & Trust (the "401(k) Plan") of PPL which
was originally adopted in 1987. Prior service with PPL will be credited in full
as service with the Company or a Participating Employer for all purposes under
the 401(k) Plan, including eligibility and vesting.
  Each employee of the Company and a Participating Employer may enroll in the
401(k) Plan on March 1, June 1, September 1, and December 1 after completing one
year and 1,000 hours of service and attaining age 21 (an enrolled employee is a
"Plan Participant"). Plan Participants are immediately vested in their pre-tax
and after-tax contributions, matching and discretionary Company contributions,
and earnings thereon.

                                       22
<PAGE>
 
  The 401(k) Plan permits each Plan Participant to elect to defer up to 15% of
base compensation, subject to the annual statutory limitation ($9,500 for 1996)
prescribed by Section 402(g) of the Code, on a pre-tax basis. Plan Participants
may also elect to make an after-tax contribution of up to 8% of their base
compensation. The Company and the Participating Employers will make matching
contributions equal to 25% of amounts deferred up to $500 in deferrals. The
Company and the Participating Employers may also make annual contributions if
the Company achieves certain performance objectives to be determined on an
annual basis by the Compensation Committee. Matching and discretionary
contributions will be made in cash or Common Shares.

SHARE PURCHASE PLAN

  The Company adopted a "Share Purchase Plan." Under the Share Purchase Plan,
employees of the Company, the Operating Partnership, and designated
subsidiaries, including the Manager, will be able to purchase Common Shares
directly from the Company at a 15% discount to the then-current market value at
the date of purchase. Purchases may be made by any employee with more than one
full year of continuous employment on the last business day each of June and
December. An employee's purchases, on an annual basis, under the Share Purchase
Plan will be limited to the lesser of 15% of the employee's base salary or
$25,000. The maximum number of Common Shares that may be purchased under the
Share Purchase Plan is 500,000. Employees who participate in the plan described
in the preceding sentence will recognize income, and the Company will be allowed
a business expense deduction, equal to the discount at the time of a purchase.

COMPENSATION OF TRUSTEES

  The Company intends to pay its Trustees who are not officers of the Company
fees for their services as Trustees. Each such Trustee will receive annual
compensation of $10,000 in Common Shares payable quarterly and a fee of $1,250
plus expenses for attendance in person at each meeting of the Board of Trustees,
$250 for each telephonic meeting of the Board of Trustees and $500 for each
committee meeting attended. In addition, each such Trustee will receive options
under the 1996 Trustees' Share Incentive Plan (the "Trustees' Plan") to
purchase 10,000 Common Shares at an exercise price equal to the Offering Price,
which options will vest in equal installments over a four-year period on the
anniversary of the date of grant. Officers of the Company who are Trustees will
not be paid any trustee fees.

        COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ON
                            COMPENSATION DECISIONS

  During 1996, the Company's Compensation Committee of the Board of Trustees
consisted of Thomas J. Hynes, Jr., Leonard M. Riggs, Jr., and Lawrence A.
Wilson,  constituting all of the Independent Trustees, none of whom was, prior
to or during 1996, an officer or employee of the Company.  None of such persons
had any relationships requiring disclosure under applicable rules and
regulations.  The Company did not have a policy during 1996 prohibiting its
executive officers from participating in deliberation of the Board of Trustees
regarding executive compensation.  Consequently, Messrs. Prentiss and August,
who are also Trustees of the Company, were present during deliberations of the
Board of Trustees regarding executive compensation during 1996.  Messrs.
Prentiss and August, in their capacities as Trustees, participated in such
deliberations.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

  The following table sets forth information, as of March 14, 1997, regarding
each person known to the Company to be the beneficial owner of more than five
percent (5%) of its Common Shares.  Unless otherwise indicated, such Common
Shares are owned directly and the indicated person has sole voting and
investment power with respect thereto.

                                       23
<PAGE>
 
<TABLE>
<CAPTION>
                                           AMOUNT AND
                                           NATURE OF
      NAME AND ADDRESS                     BENEFICIAL     PERCENT OF
      OF BENEFICIAL OWNER                  OWNERSHIP       CLASS/1/
      -------------------                  ----------     ----------
<S>                                        <C>            <C>
Cohen & Steers Capital Management, Inc.     2,551,900       12.58%
757 Third Avenue
New York, New York 10017
</TABLE>

SECURITY OWNERSHIP OF MANAGEMENT

  The following table sets forth the beneficial ownership of Common Shares of
(i) each person who is a shareholder of the Company owning more than 5% of the
beneficial interest in the Company, (ii) each person who is a Trustee, Trustee
nominee or executive officer of the Company and (iii) the Trustees and executive
officers of the Company as a group. Unless otherwise indicated in the footnotes,
all of such interests are owned directly, and the indicated person or entity has
sole voting and investment power. The number of shares represents the number of
Common Shares the person is expected to hold plus the number of shares for which
Units expected to be held by the person are redeemable (if the Company elects to
issue Common Shares rather than pay cash upon such redemption). The extent to
which the persons will hold Common Shares as opposed to Units is set forth in
the notes.


___________________________________________________
/1/  Based upon 20,280,397 shares of outstanding as of March 14, 1997.

                                       24
<PAGE>
 
<TABLE>
<CAPTION>
                                                     NUMBER OF SHARES AND 
                                                      UNITS BENEFICIALLY                                              
                                                         OWNED AFTER       PERCENT OF ALL COMMON    PERCENT OF ALL   
        NAME OF BENEFICIAL OWNER                         THE OFFERING       SHARES AND UNITS(1)    COMMON SHARES(1)  
        ------------------------                     --------------------  ----------------------  ----------------   
<S>                                                  <C>                   <C>                     <C>
Michael V. Prentiss/(2)(3)/ ........................            2,583,698                  10.96%             11.3%

Thomas F. August/(2)(4)/ ...........................              342,423                   1.45%             1.66%

Thomas J. Hynes, Jr./(5)/ ..........................                1,100                      *                 *

Barry J.C. Parker/(5)/ .............................                5,100                      *                 *

Dr. Leonard M. Riggs, Jr./(5)/ .....................                7,600                      *                 *

Ronald G. Steinhart/(5)/ ...........................                5,100                      *                 *

Lawrence A. Wilson/(5)/ ............................                  100                      *                 *

Dennis J. DuBois/(2)(6)/ ...........................              210,582                    .89%             1.03%

Richard J. Bartel/(7)/ .............................                1,100                      *                 *

Richard B. Bradshaw/(2)(10)/ .......................              159,292                    .68%              .78%

Mark R. Doran/(8)/ .................................                  400                      *                 *

Lawrence J. Krueger/(11)/ ..........................                1,000                      *                 *

James B. Meyer/(9)/ ................................                  700                      *                 *

David C. Robertson/(9)/ ............................               10,000                      *                 *

Robert K. Wiberg/(9)/ ..............................                1,000                      *                 *
                                                                ---------                  -----             -----

All Trustees and executive officer (11 persons).....            3,329,195                  14.12%            14.12%
                                                                =========                  =====             =====
</TABLE>                                                       
--------------                                                 
  * Less than 1%.                                              
/(1)/  
       Assumes that all Units held by the person are redeemed for Common Shares.
       The total number of Common Shares outstanding used in calculating the
       percentage of all Common Sharesand Units assumes that all of the Units
       held by other persons are redeemed for Common Shares. The total number of
       Common Shares outstanding used in calculating the percentage of all
       Common Shares assumes that none of the Units held by other persons are
       redeemed for Common Shares.

/(2)/  Includes the principal's allocable share of Units held by PPL and various
       other Prentiss Group entities (including the trust discussed in 3 below)
       which received Units in the Formation Transactions, in exchange for
       interests in Properties or the Prentiss Properties Service Business.
/(3)/  
       Excludes 386,762 Common Shares issuable upon the exercise of options
       granted under the 1996 Plan, which vest in equal installments on each of
       the first three anniversaries of the date of the grant. Includes Units
       redeemable for 336,000 Common Shares whichare held in a trust of which
       Mr. Prentiss is a trustee, and in which Mr. Prentiss disclaims beneficial
       ownership.
/(4)/  
       Excludes 173,944 Common Shares issuable upon the exercise of options
       granted under the 1996 Plan, which vest in equal installments on each of
       the first three anniversaries of the date of the grant.
/(5)/  
       The Independent Trustees will receive a fee of $10,000 per year payable
       quarterly in Common Shares. The table includes the shares that have been
       issued in 1997. Excludes 10,000 Common Shares issuable upon the exercise
       of options granted under the Trustees' Plan, which vest in equal
       installments over a four-year period on the anniversary date of the
       grant.

/(6)/  
       Excludes 39,366 and 25,000 Common Shares issuable upon the exercise of
       options granted under the 1996 Plan, which vest in equal installments on
       each of the first three anniversaries of the date of the grant.

                                       25
<PAGE>
 
/(7)/  
       Excludes 75,000 and 10,000 Common Shares issuable upon the exercise of
       options granted under the 1996 Plan, which vest in equal installments on
       each of the first three anniversaries of the date of the grant.
/(8)/  
       Excludes 50,000 and 25,000 Common Shares issuable upon the exercise of
       options granted under the 1996 Plan, which vest in equal installments on
       each of the first three anniversaries of the date of the grant.
/(9)/  
       Excludes 50,000 Common Shares issuable upon the exercise of options
       granted under the 1996 Plan, which vest in equal installments on each of
       the first three anniversaries of the date of the grant.

/(10)/
       Excludes 64,366 Common Shares issuable upon the exercise of options
       granted under the 1996 Plan, which vest in equal installments on each of
       the first three anniversaries of the date of the grant. Mr. Bradshaw's
       status as an executive officer ceased on March 1, 1997. He will continue
       as an employee beyond March 1, 1997 in a non-decision making capacity.

/(11)/
       Excludes 75,000 and 50,000 Common Shares issuable upon the exercise of
       options granted under the 1996 Plan, which vest in equal installments on
       each of the first three anniversaries of the date of the grant.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

BENEFITS TO RELATED PARTIES

  The Prentiss Group, including the Prentiss Principals, realized certain
benefits as a result of the Offering and the Formation Transactions, including
the following:

  Receipt of Units by the Prentiss Group.   Members of the Prentiss Group
received a total of 3,295,995 Units in consideration for their interests in the
Properties, the Development Parcels, the Options and the Prentiss Properties
Service Business in connection with the Formation Transactions. These Units
(representing approximately 14% of the equity interests in the Company on a
consolidated basis) have a total value of approximately $82.4 million based
on the $25.00 December 31, 1996 closing price per share, compared to a net
tangible book value of the assets contributed to the Operating Partnership by
the Prentiss Group of approximately $4.7 million. The Company believes that the
net tangible book value of the individual assets contributed to the Operating
Partnership by the Prentiss Group (which reflects the historical cost of such
assets less accumulated depreciation), is less than the aggregate current market
value of such assets. Any time after two years following the Closing Date, the
members of the Prentiss Group holding Units may, in accordance with the
Operating Partnership Agreement, exchange all or a portion of such Units for
cash or, at the election of the Company, Common Shares on a one-for-one basis.
The Company currently expects that it will not elect to pay cash for Units in
connection with any such exchange request, but instead will exchange Common
Shares for such Units. The Units may provide the members of the Prentiss Group
with increased liquidity and, until disposition of certain assets contributed to
the Company, with continued deferral of the taxable gain associated with those
assets.

  Increase in Prentiss Group's Net Tangible Investment.   Members of the
Prentiss Group realized an immediate increase of $45.7 million in the net
tangible book value of their original $4.7 million investment in the Company.
The immediate increase is derived from the difference between the net tangible
assets per share before and after the Formation Transactions multiplied by the
3,295,995 Units received as consideration.

  Messrs. Prentiss and August Employment Agreements.   Prior to the IPO, Messrs.
Prentiss and August entered into employment agreements with the Company.  Each
agreement is for an initial term of three years, which will be automatically
renewed for successive one-year periods unless otherwise terminated. The
agreements provide for base annual compensation (as set forth in "--Executive
Compensation" above) and incentive compensation to be determined by the
Compensation Committee (within the terms set forth in "--Incentive Compensation"
above). Each employment agreement provides that the Compensation Committee may
approve increases in the base salaries. Each of the employment agreements
provides for certain severance payments in the event of disability or
termination by the Company without cause or by the employee with cause. No other
employee of the Company is currently employed pursuant to an employment
agreement.

  The terms of Messrs. Prentiss' and August's employment agreements require that
Messrs. Prentiss and August devote substantially all of their business time to
the affairs of the Company. These agreements also, subject to 

                                       26
<PAGE>
 
certain exceptions, prohibit them from engaging, directly or indirectly, during
the term of their employment or the Noncompetition Period, in any activity
anywhere in the U.S. that competes with the Company. These provisions of each
employment agreement survive the termination of such agreement until the
expiration of the Noncompetition Period.

  Mr. DuBois entered into noncompetition agreements with the Company that,
subject to certain limited exceptions, prohibit them from engaging, directly or
indirectly, in Competitive Activities in the Southeastern U.S. and the
Southwestern U.S., during the Noncompetition Period. In the event of an
involuntary termination of Mr. DuBois' employment, the agreement does not
prohibit him from engaging in Competitive Activities, but, during the
Noncompetition Period, does prohibit him from (1) soliciting any employee of the
Company to leave his or her job and (ii) soliciting any client or identified
potential client of the Company during the Noncompetition Period.

  Options Granted.   The Company has granted to the Prentiss Principals, 70
employees of the Company and the Independent Trustees, options to purchase an
aggregate of 1,651,938 Common Shares under the Company's 1996 Share Incentive
Plan at the Offering Price, subject to certain vesting requirements.

  Maintenance of Debt for Benefit of Prentiss Principals. In connection with the
Formation Transactions, the Company agreed to maintain at least $1.3 million of
indebtedness secured by certain of the Properties outstanding for three years
and to permit certain Prentiss Group members to guaranty such debt through
December 31, 1998 in order to defer certain tax consequences associated with the
Formation Transactions.

  Restriction on Certain Transfers of The Plaza on Bachman Creek. The Company
agreed that it shall not dispose of The Plaza on Bachman Creek prior to
December 31, 1999, unless such disposition is structured as a tax-deferred like-
kind exchange under Section 1031 of the Code, in order to defer certain tax
consequences associated with the transfer of the Property to the Company by the
Prentiss Group.

REPAYMENT OF TERMINATION FEE NOTE

  PPL held a note from PCIG which was paid with the proceeds of sales of
properties owned by PCIG. The Company acquired the PGC, 155 Alexandra Way and
Wood Dale 1 & 2 Properties from PCIG and subsequent to the Offering, PPL
received a payment from the seller of approximately $500,000 of the sale
proceeds from those Properties under the note.

SHARING OF OFFICES AND EMPLOYEES

  The Company shares the executive offices and certain employees with the
Manager.  Each company bears its share of costs including allocable portions of
rent, salaries, office expenses, employee benefits and various fixtures and
equipment.  To the extent that services are provided between the companies, such
services are charged at cost plus a mark up of 15%.  The total of these charges
paid by the Company from October 22, 1996 throughout December 31, 1996 totaled
approximately $198 thousand.


                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

     (a)  Financial Statements, Financial Statement Schedule and Exhibits
          (1 & 2)  See Index to Financial Statements and Financial Statement
                   Schedule on page F-1 of this Form 10-K.
          (3)  Exhibits:

               The exhibits listed below are filed as part of this report or
               incorporated by reference("*") to the Company's Registration
               Statement on Form S-11, File 

                                       27
<PAGE>
 
               No. 333-9863 (the "Registration Statement"), Current Event Report
               of December 31, 1996 on Form 8-K and/or Form 8-K/A, or the
               registration of the Share Purchase Plan on Form S-8, File No. 
               333-20329.
<TABLE>
<CAPTION>
                EXHIBIT NO.   DESCRIPTION
                ----------    -----------
                <S>          <C> 
                       3.1*  -- Form of Amended and Restated Declaration of
                                 Trust of the Registrant
                       3.2*  -- Bylaws of the Registrant
                       3.3*  -- Amended and Restated Declaration of Trust of
                                 Prentiss Properties Trust
                       4.1*  -- Form of Common Share Certificate
                       5.1*  -- Opinion of Hunton & Williams
                      10.1*  -- Form of Second Amendment to First Amended and
                                 Restated Agreement of Limited Partnership of
                                 Prentiss Properties Acquisition Partnership,
                                 L.P.
                      10.2   -- Second Amended and Restated Agreement of Limited
                                 Partnership
                      10.3   -- Credit Agreement among Prentiss Properties
                                 Acquisition Partners, L.P. and Bank One, Texas,
                                 N.A., and NationsBank of Texas, N.A.
                      10.4   -- Modification, Amendment, and Increase of Credit
                                 Agreement and Other Loan Documents
                      10.5*  -- Form of Employment Agreement for Michael V.
                                 Prentiss
                      10.6*  -- Form of Employment Agreement for Thomas F.
                                 August
                      10.7*  -- Form of Agreement Not to Compete for Richard B.
                                 Bradshaw
                      10.8*  -- Form of Agreement Not to Compete for Dennis J.
                                 DuBois
                      10.9*  -- Contribution Agreement by and between the
                                 Operating Partnership and PPL
                     10.10*  -- Agreement of Purchase and Sale of Partnership
                                 Interest by and Among Prentiss Properties
                                 Austin, L.P. and PPL
                     10.11*  -- Agreement of Purchase and Sale of Partnership
                                 Interests by and Among Prentiss Properties
                                 Burnett, Inc., Prentiss Properties Burnett II,
                                 Inc. and PPL
                     10.12*  -- Agreement of Purchase and Sale of Partnership
                                 Interest and Option Agreement by and Between
                                 11,000 Burnet Road Corporation and PPL
                     10.13*  -- Agreement of Purchase and Sale of Partnership
                                 Interests by and Among Fairview Eleven, Inc.,
                                 the Prentiss Principals and PPL
                     10.14*  -- Agreement of Purchase and Sale of Partnership
                                 Interest by and Between Prentiss Properties
                                 Itasca, L.P. and PPL
                     10.15*  -- Agreement of Purchase and Sale of Partnership
                                 Interests by and Between Prentiss O'Hare
                                 Illinois, Inc., Prentiss O'Hare Illinois II,
                                 Inc. and PPL
                     10.16*  -- Agreement of Purchase and Sale of Partnership
                                 Interests by and Between Prentiss Properties C-
                                 2 Investors, L.P. and PPL
                     10.17*  -- Agreement of Sale of Partnership Interest by and
                                 Among New York Life Insurance Company, Prentiss
                                 Properties Austin, L.P. and PPL
                     10.18*  -- Purchase Agreement By and Between the Operating
                                 Partnership and PPL
                     10.19*  -- Agreement of Purchase and Sale and Joint Escrow
                                 Instructions By and Between LAPCO Industrial
                                 Parks and PPL
                     10.20*  -- First Amendment to Agreement of Purchase and
                                 Sale and Joint Escrow Instructions By and
                                 Between LAPCO Industrial Parks and PPL
                     10.21*  -- Agreement of Purchase and Sale of Partnership
                                 Interests By and Among LW-RTC, Inc., LW-LP,
                                 Inc., NP Investment VI Co. and PPL
                     10.22*  -- Agreement of Sale (Real Property) By and Between
                                 Property Asset Management Inc. and PPL
                                 (Annapolis, Maryland)
                     10.23*  -- Agreement of Sale (Real Property) By and Between
                                 Property Asset Management Inc. and PPL (Irving,
                                 Texas)

</TABLE> 

                                       28
<PAGE>
 
<TABLE> 
<CAPTION> 
                <S>          <C> 
                     10.24*  -- Agreement of Sale (Real Property) By and Between
                                 Property Asset Management Inc. and PPL
                                 (Houston, Texas)
                     10.25*  -- Letter Agreement dated as of August 5, 1996 from
                                 PPL to LW-LP, Inc., LW-RTC, Inc. and NP
                                 Investment VI Co.
                     10.26*  -- Real Estate Purchase and Sale Agreement By and
                                 Between Principal Mutual Life Insurance Company
                                 and Prentiss Properties Investors, Inc.
                     10.27*  -- 1996 Share Incentive Plan
                     10.28*  -- Agreement of Purchase and Sale By and Between
                                 Dulles Corner Properties II Limited Partnership
                                 ("Seller") and Prentiss Properties Acquisition
                                 Partners, L.P. ("Purchaser") dated December 27,
                                 1996
                     10.29   -- Loan Agreement Between Prentiss Properties Real
                                 Estate Fund I, L.P. as Borrower and Lehman
                                 Brother Realty Corporation as Lender
                      23.1   -- Consent of Independent Accountants

                      27     -- Financial Data Schedule
</TABLE>
  (b)  Reports on Form 8-K and/or Form 8-K/A

       A current report on Form 8-K and Form 8-K/A, dated December 31, 1996, was
       filed by the Company with respect to the acquisition by the Operating
       Partnership, of which the Company is the sole general partner through a
       wholly-owned subsidiary, of two Class "A" suburban office buildings in
       Herndon, VA (the "Dulles Properties").  The buildings total approximately
       281,000 square feet and are part of the three million square foot Dulles
       Corner Office Park, located at the intersection of Route 28 and the
       Dulles Toll Road, adjacent to Dulles International Airport.

                                       29
<PAGE>
 
                                   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 TRUST



                                     By:           /s/ Thomas P. Simon
                                         ---------------------------------------
               Date                                  Thomas P. Simon
               ----                                  Vice President
           March 21, 1997                 

     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 21, 1997                      /s/ Michael V. Prentiss
                                       ---------------------------------------- 
                                                  Michael V. Prentiss
                                                Chief Executive Officer
                                            Chairman of the Board of Trustees

           March 21, 1997                       /s/ Thomas F. August
                                       ---------------------------------------- 
                                                    Thomas F. August
                                          President and Chief Operating Officer
                                                       Trustee

           March 21, 1997                         /s/ Mark R. Doran
                                       ---------------------------------------- 
                                                    Mark R. Doran
                                              Executive Vice President,
                                               Chief Financial Officer
                                                    and Treasurer

           March 21, 1997                        /s/ Thomas P. Simon
                                       ---------------------------------------- 
                                                     Thomas P. Simon
                                                     Vice President

           March 21, 1997                       /s/ Thomas J. Hynes, Jr.
                                       ---------------------------------------- 
                                                    Thomas J. Hynes, Jr.
                                                        Trustee

           March 21, 1997                       /s/ Barry J.C. Parker
                                       ---------------------------------------- 
                                                    Barry J.C. Parker
                                                        Trustee

           March 21, 1997                    /s/ Dr. Leonard M. Riggs, Jr.
                                       ---------------------------------------- 
                                                 Dr. Leonard M. Riggs, Jr.
                                                         Trustee

           March 21, 1997                       /s/ Ronald G. Steinhart
                                       ---------------------------------------- 
                                                    Ronald G. Steinhart
                                                         Trustee

           March 21, 1997                       /s/ Lawrence A. Wilson
                                       ---------------------------------------- 
                                                    Lawrence A. Wilson
                                                         Trustee
 

                                       30
<PAGE>
 
                           PRENTISS PROPERTIES TRUST

                         INDEX TO FINANCIAL STATEMENTS
 
FINANCIAL STATEMENTS                                                        PAGE
--------------------                                                        ----
 
   Report of Independent Accountants......................................  F-2
 
   Consolidated Balance Sheet of Prentiss Properties Trust (the
    "Company") as of December 31, 1996 and Combined Balance Sheet 
    of the Predecessor Company as of December 31, 1995....................  F-3
  
   Consolidated Statement of Income of the Company for the Period 
    October 22, 1996 (inception of operations) to December 31, 1996 
    and Combined Statements of Income for the Predecessor Company 
    for the Period January 1, 1996 to October 21, 1996, and the 
    Years Ended December 31, 1995 and 1994................................  F-4
 
   Consolidated Statement of Changes in Shareholders' Equity of the 
    Company for the Period October 22, 1996 (inception to operations) 
    to December 31, 1996 and Combined Statements of Changes in Equity 
    of the Predecessor Company for the Period January 1, 1996 to 
    October 21, 1996 and the Years Ended December 31, 1995 and 1994.......  F-5
 
   Consolidated Statement of Cash Flows of the Company for the Period
    October 22, 1996 (inception of operations) to December 31, 1996 
    and Combined Statements of Cash Flows of the Predecessor Company
    for the Period January 1, 1996 to October 21, 1996, and the Years
    Ended December 31, 1995 and 1994......................................  F-6
 
   Notes to Consolidated and Combined Financial Statements................  F-7
 
FINANCIAL STATEMENT SCHEDULE
 
   Schedule III:  Real Estate and Accumulated Depreciation................  F-20

                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders
of Prentiss Properties Trust

  We have audited the accompanying consolidated and combined financial
statements and the financial statement schedule of Prentiss Properties Trust
(the "Company") and the Predecessor Company as listed on page F-1 of this Form
10-K.  These consolidated and combined financial statements and the financial
statement schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the consolidated and combined
financial position of Prentiss Properties Trust as of December 31, 1996 and the
Predecessor Company as of December 31, 1995, and the consolidated and combined
results of operations  and cash flows for the periods October 22, 1996 through
December 31, 1996 and January 1, 1996 through October 21, 1996, and the years
ended December 31, 1995 and 1994, respectively, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be set forth therein.

Coopers & Lybrand L.L.P.


Dallas, Texas
February 12, 1997, except as to Note 18
for which the date is February 20, 1997.

                                      F-2
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                   CONSOLIDATED AND COMBINED BALANCE SHEETS

                   (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                                 PREDECESSOR
                                             THE COMPANY           COMPANY
                                          ------------------  ------------------
                                          DECEMBER 31, 1996   DECEMBER 31, 1995
                                          ------------------  ------------------
<S>                                       <C>                 <C>
                                     ASSETS
Assets:
 
Real estate.............................           $501,035            $153,148
  Less: accumulated depreciation........            (18,507)            (11,780)
                                                   --------            --------
                                                    482,528             141,368
 
Deferred charges and other assets, net..             11,747               7,135
Receivables, net........................              5,356               2,755
Cash and cash equivalents...............              7,226               1,033
Escrowed cash...........................                867               1,294
Other receivables (affiliates)..........              1,346
Investments in joint venture and            
 unconsolidated subsidiaries............             21,956               1,050
 Total assets...........................           --------            --------
                                                   $531,026            $154,635
                                                   ========            ========
 
                     LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
 Debt on real estate....................           $128,800            $ 46,442
 Accounts payable and other liabilities.             15,868               3,622
 Distributions payable..................              7,309
 Other liabilities (affiliates).........                                    705
                                                   --------            --------
   Total liabilities....................            151,977              50,769
                                                   --------            --------
 
Minority interest in Operating                       52,857
 Partnership............................           --------            --------
Minority interest in partnerships.......                971                    
                                                   --------            -------- 
Commitments and contingencies   

Shareholders' equity:
  Common shares $.01 par value,
  100,000,000 shares                            
  authorized, 20,279,897 shares                 
  issued and outstanding................                203                    
 Additional paid-in capital.............            326,309                   
 Predecessor company equity.............                                103,866
 Distributions in excess of accumulated            
  earnings..............................             (1,291)                   
                                                   --------            --------
  Total shareholders equity.............            325,221             103,866
                                                   --------            --------
  Total liabilities and shareholders'              
   equity...............................           $531,026            $154,635
                                                   ========            ======== 
</TABLE>

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

                                      F-3
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

           (dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
                                           THE COMPANY            PREDECESSOR COMPANY
                                          --------------  -----------------------------------
                                          OCT. 22, 1996   JAN. 1, 1996   YEARS ENDED DEC. 31,
                                             THROUGH         THROUGH     --------------------
                                          DEC. 31, 1996   OCT. 21, 1996      1995      1994
                                          --------------  -------------  --------------------    
<S>                                       <C>             <C>            <C>        <C>
Revenues:
  Rental income.........................        $13,485         $27,086    $29,423    $25,256
  Management fees.......................            192           7,903      9,979      9,810
  Development, leasing, sale and other
   fees.................................            110           9,607     15,762     16,892
                                                -------         -------    -------    -------
   Total revenues.......................         13,787          44,596     55,164     51,958
                                                -------         -------    -------    -------
 
Expenses:
 Property operating and maintenance.....          3,618           7,550      7,696      7,040
 Real estate taxes......................          1,162           3,085      3,030      2,691
 General and administrative.............            547           5,304      6,293      5,323
 Personnel costs, net...................            505          11,991     17,138     20,815
 Interest expense.......................            759           4,549      3,783      3,120
 Amortization of deferred financing             
  costs.................................             87           1,402         99         71 
 Depreciation and amortization..........          2,696           5,993      7,166      5,557
                                                -------         -------    -------    -------
   Total expenses.......................          9,374          39,874     45,205     44,617
                                                -------         -------    -------    -------
 
  Equity in joint venture and
   unconsolidated subsidiaries..........          1,427              18         11         13
                                                -------         -------    -------    -------
 
Income before minority interest and
 gain on sale of property...............          5,840           4,740      9,970      7,354
Minority interest.......................           (844)
                                                -------         -------    -------    -------
 
Income before gain on sale of property..          4,996           4,740      9,970      7,354
Gain on sale of property................                            378                 1,718
                                                -------         -------    -------    -------
Net income..............................        $ 4,996         $ 5,118    $ 9,970    $ 9,072
                                                =======         =======    =======    =======
 
Net income per common share.............        $   .25
                                                =======
 
Weighted average number of common
 shares outstanding.....................         20,002
                                                =======
</TABLE>

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

                                      F-4
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
              CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN 
                             SHAREHOLDERS' EQUITY

                   (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                     PREDECESSOR
                                                       COMPANY        THE COMPANY - SHAREHOLDERS' EQUITY
                                                     ------------  ----------------------------------------
                                                         NET       COMMON  ADD'L. PAID-IN  DIST. IN EXCESS
                                            TOTAL       EQUITY     SHARES     CAPITAL      ACCUM. EARNINGS
                                          ---------  ------------  ------  --------------  ----------------
<S>                                       <C>        <C>           <C>     <C>             <C>
Balance at December 31, 1993............  $ 94,046      $ 94,046
  Net income............................     9,072         9,072
  Contributions.........................    12,139        12,139
  Distributions of PPL income...........    (2,663)       (2,663)
                                          --------      --------     ----        --------          -------
 
Balance at December 31, 1994............   112,594       112,594
  Net income............................     9,970         9,970
  Distributions.........................   (15,250)      (15,250)
  Distributions of PPL income...........    (4,498)       (4,498)
  Equity on purchase of Park West C2....     1,050         1,050
                                          --------      --------     ----        --------          -------
 
Balance at December 31, 1995............   103,866       103,866
 Net income.............................     5,118         5,118
 Distributions..........................    (6,375)       (6,375)
 Distributions of PPL income............    (2,395)       (2,395)
 Equity on purchase of Plaza on Bachman
  Creek.................................     3,314         3,314    
                                          --------      --------     ----        --------          -------
 
Balance at October 21, 1996.............   103,528       103,528
 Acquisition of Predecessor Company's
  interest..............................   (98,316)      (98,316)
 Contribution of Predecessor Company's
  interest..............................                  (5,212)                $  5,212
 Net proceeds from issuance of common
  shares (20,279,897 common shares).....   321,300                   $203         321,097
 Distributions declared ($.31 per share)    (6,287)                                                $(6,287)
 Net income.............................     4,996                                                   4,996
                                          --------      --------     ----        --------          -------
Balance at December 31, 1996............  $325,221      $            $203        $326,309          $(1,291)
                                          ========      ========     ====        ========          =======
</TABLE>

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

                                      F-5
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
              CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

                            (dollars in thousands)
<TABLE>
<CAPTION>
                                                           PREDECESSOR
                                           THE COMPANY       COMPANY
                                          --------------  --------------
                                          OCT. 22, 1996    JAN. 1, 1996    YEARS ENDED DEC. 31, 
                                             THROUGH         THROUGH      ----------------------
                                          DEC. 31, 1996   OCT. 21, 1996       1995      1994    
                                          --------------  --------------  ---------------------- 
                                                                          
 
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                       <C>             <C>             <C>         <C>
 Net income.............................      $   4,996        $  5,118    $  9,970    $  9,072
 
 Adjustments to reconcile net income to
  net cash provided by operating
  activities:                                       
  Minority interest.....................            844
  Gain on sale of property..............                           (378)                 (1,718)
  Depreciation and amortization.........          2,696           5,993       7,166       5,557
  Amortization of deferred financing....             87           1,402          99          71
  Equity income in joint venture and         
   unconsolidated subsidiaries..........         (1,427)            (18)        (11)        (13)
  Changes in assets and liabilities:         
  Provision for doubtful accounts.......            201            (120)       (150)        310
  Receivables...........................         (2,377)           (497)       (265)       (654)
  Other assets..........................           (712)           (199)        176        (549)
  Escrowed cash.........................          1,325            (898)        (93)       (698)
  Accounts payable and other                                                                             
    liabilities.........................          6,166           2,392        (756)      1,557
  Amounts due to/from affiliates........         (1,524)           (527)        102         124
                                              ---------        --------    --------    --------
  Net cash provided by operating 
  activities............................         10,275          12,268      16,238      13,059
                                              ---------        --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of and additions to                 
   investment in real estate............       (335,689)        (33,544)     (4,669)    (71,856)
  Proceeds from sale of real estate.....                            559                   7,894 
  Investment in joint venture and              
   unconsolidated subsidiaries...........       (20,902)                                         
  Distribution received from joint             
   venture...............................           373                                          
  Cash from contributed assets...........         2,409                         368      23,053  
                                                               --------    --------    --------  
  Decrease in escrowed cash..............     ---------  
  Net cash used in investing activities..      (353,809)        (32,985)     (4,301)    (40,909)  
                                              ---------        --------    --------    --------  
CASH FLOWS FROM FINANCING ACTIVITIES:                                                             
  Net proceeds from sale of common shares       337,604
  Partner's Contributions................                         3,314                  12,139
  Contributions from minority interest        
    holders...............................          950                                         
  Distributions..........................                        (6,375)    (15,250)   
  Proceeds from debt on real estate......       112,800          29,000                  27,100  
  Repayments of debt on real estate......       (99,462)           (261)       (289)       (841) 
  Deferred financing costs...............        (1,133)         (2,000)                   (357)
  Distribution of PPL income.............                        (2,395)     (4,498)     (2,663)
                                              ---------        --------    --------    -------- 
  Net cash provided by financing
    activities............................      350,759          21,283     (20,037)     35,378 
                                              ---------        --------    --------    -------- 
  Net increase in cash and cash            
    equivalents...........................        7,225             566      (8,100)      7,528
  Cash and cash equivalents, beginning                                                           
    of periods............................            1           1,033       9,133       1,605 
  Cash and cash equivalents, end of           ---------        --------    --------    -------- 
    periods...............................      $ 7,226        $  1,599    $  1,033    $  9,133 
                                              =========        ========    ========    ========  
SUPPLEMENTAL CASH FLOW INFORMATION:        
  Cash paid for interest.................                                                        
                                              $     983        $  4,720    $  3,786    $  2,946 
                                              =========        ========    ========    ========  
</TABLE>
  The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS

(1)   ORGANIZATION AND BASIS OF PRESENTATION

     Prentiss Properties Trust (the "Company") was formed under the laws of the
state of Maryland on July 12, 1996, to be a self-administered and self-managed
real estate investment trust ("REIT").  The Company acquired a sole general
partnership interest in Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") through the Company's wholly-owned subsidiary Prentiss
Properties I, Inc., a Delaware corporation and owns an approximate 86.0% limited
partnership interest in the Operating Partnership.

     The Company has been formed to succeed to substantially all of the
interests of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in (i)
a portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates (the "Prentiss Group").  The acquisition,
property management, leasing, development and construction businesses will be
carried out by the Operating Partnership and the Company's majority-owned
affiliates, Prentiss Properties Limited, Inc. and Prentiss Properties Limited
II, Inc. (collectively, the "Manager").

     On October 22, 1996, the Company commenced operations after completing an
initial public offering of 16,000,000 common shares.  The Company issued an
additional 2,400,000 common shares on November 1, 1996 pursuant to the exercise
of the underwriters' over-allotment option.  The combined 18,400,000 common
shares were issued at a price per share of $20.00 (the "Offering").  The Company
used approximately $87.4 million of the net proceeds of the Offering and issued
1,879,897 common shares of the Company for a total consideration of
approximately $125.0 million to purchase certain limited partners' interests in
the Operating Partnership.  The Company contributed the remaining net proceeds
of the Offering to the Operating Partnership.  Subsequent to these transactions,
the Company held an approximate 86.0% interest in the Operating Partnership.

     The Prentiss Group members, who, prior to the Offering, collectively served
as the general partner of the Operating Partnership, contributed to the
Operating Partnership all of its interests in the Properties (as defined below)
and certain management contracts of PPL (the "Contracts") in exchange for
3,295,995 limited partnership units in the Operating Partnership ("Units").

     Upon completion of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company owned 87 properties,
28 office and 59 industrial containing 8.9 million net rentable square feet
including 57 properties totaling approximately 6.6 million square feet acquired
from the Predecessor Company (defined below).  Subsequent to the Offering,
through December 31, 1996, the Company acquired eight additional properties,
(collectively, the "Acquired Properties").  The Acquired Properties consist of
five Class "A" suburban office properties totaling approximately 850,000 square
feet and three suburban industrial properties totaling approximately 226,000
square feet.  The office properties are located in the Chicago, Illinois;
Denver, Colorado; and Northern Virginia markets.  The industrial properties are
located in the Chicago, Illinois market.  The purchase price of the Acquired
Properties totaled approximately $116.6 million, which was funded principally
with borrowings under the Line of Credit totaling $72.8 million, other
indebtedness incurred or assumed directly by the Company totaling $35.0 million
and approximately $8.8 million of cash reserves.  As of December 31, 1996, the
Company owned 95 properties, 33 office and 62 industrial (the "Properties")
representing 9.9 million square feet in 12 major markets throughout the U.S.

     The accompanying combined financial statements of the Predecessor Company
include the accounts of Prentiss Properties Acquisition Partners, L.P.; the
operations of Prentiss Properties Limited, Inc.; a 50% equity investment in
Austex Associates L.P. (''Austex''), the accounts of Fairview Eleven Investors
L.P. (''3141 Fairview Park Drive'') from February 23, 1996 through October 21,
1996, the accounts of the Plaza on Bachman Creek from August 19, 1996 through
October 21, 1996; and a 15% equity investment in Park West C2 Associates (''Park
West C2'') from September 5, 1995 through October 21, 1996. The accounts are
presented on a combined basis, as the above properties were under the control of
the Prentiss Group, have common management and were part of the formation of the
Company.  The Predecessor Company's 50% investment in Austex, which held a 50%
investment 

                                      F-7
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS

in Broadmoor Austin, and its investment in Park West C2 were
accounted for using the equity method of accounting.

     All significant intercompany transactions have been eliminated in the
combined financial statements.

     The following summarizes the Company's interests in the Properties at
December 31, 1996:
<TABLE> 
<CAPTION> 
                                  NUMBER OF     COMPANY                           COMPANY
OFFICE PROPERTIES                 PROPERTIES  OWNERSHIP %     LOCATION            NOTES
-----------------                 ----------  -----------  ---------------        --------
<S>                               <C>         <C>          <C>                    <C> 
FHP Denver.....................       1          100%       Denver, CO            (C)
Cumberland Office Park.........       9          100%       Atlanta, GA           (A)
1717 Deerfield Road............       1          100%       Chicago, IL           (C)
O'Hare Plaza II................       1          100%       Chicago, IL           (C)
One Northwestern Plaza.........       1          100%       Southfield, MI        (B)
Broadmoor Austin...............       7           50%       Austin, TX            (A), (D)
Park West C2...................       1          100%       Dallas, TX            (A)
Park West E1...................       1          100%       Dallas, TX            (B)
Park West E2...................       1          100%       Dallas, TX            (B)
5307 East Mockingbird..........       1          100%       Dallas, TX            (A)
Walnut Glen Tower..............       1          100%       Dallas, TX            (A)
Cottonwood Office Center.......       3          100%       Dallas, TX            (B)
Plaza on Bachman Creek.........       1          100%       Dallas, TX            (A)
3141 Fairview Park Drive.......       1          100%       Northern VA           (A)
8521 Leesburg Pike.............       1          100%       Northern VA           (A)
2411 Dulles Corner Park........       1          100%       Northern VA           (C)
2455 Horsepen Road.............       1          100%       Northern VA           (C)
                                     --                    
  Total Office Properties......      33                    
                                     --                    
                                                           
INDUSTRIAL PROPERTIES                                
---------------------
Pacific Gateway Center.........      18          100%       Los Angeles, CA       (B)
155 Alexandra Way..............       1          100%       Chicago, IL           (C)
Wood Dale 1 & 2................       2          100%       Chicago, IL           (C)
8869 Greenwood.................       1          100%       Baltimore, MD         (A)
1329 Western Avenue............       1           99%       Baltimore, MD         (A), (E)
Deep Run 1 & 2.................       2           99%       Baltimore, MD         (A), (E)
4611 Mercedes Drive............       1           98%       Baltimore, MD         (A), (E)
9050 Junction Drive............       1          100%       Baltimore, MD         (B)
Northland Park.................       4          100%       Kansas City, MO       (A)
North Topping Street...........       1          100%       Kansas City, MO       (A)
Airworld Drive.................       1          100%       Kansas City, MO       (A)
107th Terrace..................       1          100%       Kansas City, MO       (A)
Nicholson III..................       3          100%       Dallas, TX            (A)
13425 Branchview...............       1          100%       Dallas, TX            (A)
1002 Avenue T..................       1          100%       Dallas, TX            (A)
1625 Vantage Drive.............       1          100%       Dallas, TX            (A)
West Loop Business Park........       5          100%       Houston, TX           (B)
Airport Properties.............      12          100%       Milwaukee, WI         (A)
Oak Creek Properties...........       2          100%       Milwaukee, WI         (A)
North West Properties..........       3          100%       Milwaukee, WI         (A)
                                     --                      
  Total Industrial Properties..      62                      
                                     --                       
Total Properties...............      95                       
                                     ==                       
</TABLE>

                                      F-8
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS

   (A) As discussed above, the Predecessor Company had an interest in 57 of the
       Company's properties prior to the formation of the Company.
   (B) In connection with the Formation Transactions, the Company purchased 30
       properties.
   (C) Subsequent to the formation of the Company, through December 31, 1996,
       the Company purchased eight properties.
   (D) The Company holds a non-controlling 49.9% interest in the Broadmoor
       Austin Associates Joint Venture.  The Broadmoor Austin Associates Joint
       Venture owns and operates an office complex in Austin, Texas, consisting
       of seven properties.  The Company accounts for its interest using the
       equity method of accounting.
   (E) Four of the Baltimore industrial properties are owned by three
       partnerships.  The Company holds the majority general partnership
       interest of each of the Partnerships and consolidates the accounts and
       operations of the partnerships.

     With the exception of the Broadmoor Austin properties, all Properties are
majority-owned by the Company and the accounts and operations are consolidated.
The Company owns a 49.9% interest in Broadmoor Austin and accounts for its
interest using the equity method of accounting.  The Company also owns a 95%
non-voting economic interest in the Manager.  The Manager conducts the majority
of the Company's third-party management operations and, due to the non-voting
nature of the Company's ownership interest in the Manager, the Company accounts
for its interest using the equity method of accounting.


(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Real Estate

     Real estate and leasehold improvements are stated at the lower of
depreciated cost or net realizable value. In accordance with Statement of
Financial Accounting Standards No. 121, ''Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of,'' the Operating
Partnership will record impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the estimated undiscounted cash flows to be generated by those
assets are less than the carrying amounts of those assets.  The Company
periodically reviews its properties to determine if its carrying costs will be
recovered from future operating cash flows.  In cases where the Company does not
expect to recover its carrying costs, the Company recognizes an impairment loss.
No such impairment losses have been recognized to date.

     Depreciation on buildings and improvements is provided under the straight-
line method over an estimated useful life of 30 to 50 years for office buildings
and 25 to 30 years for industrial buildings.

     Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. When assets are sold or retired, their
costs and related accumulated depreciation are removed from the accounts with
the resulting gains or losses reflected in net income (loss).

 Deferred Charges

     Deferred financing costs are recorded at cost and are being amortized over
the life of the related debt. Leasing commissions and leasehold improvements are
deferred and amortized over the terms of the related leases. 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 when purchased.

 Escrowed Cash

     Escrowed funds as of December 31, 1996 and 1995 are comprised of funds held
for the payment of real estate taxes.

                                      F-9
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 

Income Taxes

  The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its short taxable year ended December 31, 1996.  If the
Company qualifies for taxation as a REIT, the Company generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders.  A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income.  The Predecessor
Company's statements combine the operations and balances of partnerships and an
S-corporation neither of which is directly subject to income tax. The tax effect
of its activities accrues to the individual partners and/or principals of the
respective entity.  The Manager consists of legal entities subject to federal
income tax on their taxable income at regular corporate rates.

Leases

  The Company and Predecessor Company, each as lessor, has retained
substantially all of the risks and benefits of ownership and accounts for its
leases as operating leases.

Revenue Recognition

  Rental income is recognized over the terms of the leases as it is earned.

  Management company income, principally management fees and recoveries of the
Manager, is recognized as earned. Other income consists of (i) development fees,
which are recognized ratably over each project's development period, as defined;
(ii) leasing fees, which 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; (iii)
sale fees, which are recognized upon completion of the asset sale; and (iv)
termination fees, which are recognized when earned.

Net Income Per Common Share

  Net income per common share has been computed by dividing net income
applicable to common shareholders by the weighted average number of common
shares outstanding.  For the period from October 22, 1996 through December 31,
1996, the outstanding common share options had an immaterial dilutive effect.

Distributions

   The Company pays regular quarterly distributions which are dependent on
receipt of distributions from the Operating Partnership.

  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.  Distributions declared in 1996
represent an approximate 57% return of capital for federal income tax purposes.

Minority Interest

   Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership.
Income is allocated to minority interest based on the weighted average
percentage ownership through the year.  Minority interest in partnerships
represents the limited partners' proportionate share of the equity in
partnerships, of which the Operating Partnership has a majority ownership
interest and the accounts of which are consolidated into the Operating
Partnership.

                                      F-10
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


Concentration of Credit Risk

  The Company places cash deposits at major banks.  Management believes that
through its cash investment policy the credit risk related to these deposits is
minimal.

Distributions of PPL Income

  PPL has retained certain assets and liabilities which were not transferred to
the Operating Partnership pursuant to the formation of the Company. These assets
and liabilities are inconsistent with the Company's investment objectives or are
not continuing businesses. All revenues and expenses related to the management
contracts that were contributed to the Operating Partnership upon formation are
reflected in the accompanying financial statements. The Combined Statements of
Changes in Shareholders' Equity and the Combined Statements of Cash Flows for
the Predecessor Company reflect the distributions of the PPL income, as the
benefit of each period's net income from these contracts has been distributed to
the principals of PPL.

Use of Estimates in the Preparation of Financial Statements

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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.
Actual results could differ from those estimates.

Fair Value of Financial Instruments

     Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," effective for years ending after December
15, 1992, requires disclosures about the fair value of financial instruments
whether or not such instruments are recognizable in the balance sheet.  The
Company's financial instruments include short-term investments, tenant accounts
receivable, accounts payable, other accrued expenses and mortgage loans payable.
The fair values of these financial instruments were not materially different
from their carrying or contract values.


(3)   REAL ESTATE

Real estate consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
 
 
                                                1996        1995
                                             ----------  ----------
 
        <S>                                  <C>         <C>
        Land...............................   $ 86,711    $ 32,061
        Buildings and improvements.........    409,060     121,087
        Construction in progress...........      5,264
                                              --------    --------
          Total............................    501,035     153,148
        Less: Accumulated depreciation.....    (18,507)    (11,780)
                                              --------    --------
                                              $482,528    $141,368
                                              ========    ========
 
</TABLE>

                                      F-11
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


(4)   DEFERRED CHARGES AND OTHER ASSETS, NET

  Deferred charges and other assets consisted of the following at December 31,
  1996 and 1995:
<TABLE>
<CAPTION>
 
 
                                                 1996       1995
                                               ---------  ---------
 
        <S>                                    <C>        <C>
        Deferred leasing and tenant charges..  $ 18,919    $12,183
        Deferred financing costs.............     1,219        693
        Organization costs...................                  525
        Prepaid and other assets.............     1,704        854
          Less:  Accumulated amortization....   (10,095)    (7,120)
                                               --------    -------
                                               $ 11,747    $ 7,135
                                               ========    =======
</TABLE>

(5)   RECEIVABLES, NET

  Receivables consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
 
                                                    1996      1995
                                                  --------  --------
 
        <S>                                       <C>       <C>
        Rents and services......................   $2,858    $1,697
        Accruable rental income.................    1,749     1,327
        Other...................................    1,195        95
                                                   ------    ------
          Total.................................    5,802     3,119
        Less: Allowance for doubtful accounts...     (446)     (364)
                                                   ------    ------
                                                   $5,356    $2,755
                                                   ======    ======
</TABLE>
  Accruable rental income represents rental income earned in excess of rent
payments received pursuant to the terms of the individual lease agreements.

(6)   INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES

  Included in Investments in joint venture and unconsolidated subsidiaries are
the Company's investment in the Broadmoor Austin Associates Joint Venture
("Broadmoor Austin") and the Company's investment in the Manager.  The Company
accounts for its 49.9% investment in Broadmoor Austin and its 95% investment in
the Manager using the equity method of accounting, and thus reports its share of
income and losses based on its ownership interest in the respective entities.
At December 31, 1996, the carrying value of the Company's interest in Broadmoor
Austin and the Manager is $16.6 million and $5.3 million, respectively.  The
difference between the carrying value of the Company's interest in Broadmoor
Austin and the book value of the underlying equity is being amortized over 40
years.

   The following is summarized financial information for 100% of Broadmoor
   Austin at December 31, 1996 and 1995 and for the years then ended:
<TABLE>
<CAPTION>
 
        BALANCE SHEET:                               1996        1995
        --------------                            ----------  ----------
        <S>                                       <C>         <C>
        Real estate and deferred charges, net...   $115,856    $120,189
        Total assets............................   $129,513    $132,471
        Mortgage note payable/(A)/..............   $140,000    $140,000
        Venturers' deficit......................   $(14,097)   $(11,059)
</TABLE>
       /(A)/ The Company, along with the other venture partner in Broadmoor
       Austin, has guaranteed the borrowings under the mortgage note payable.

                                      F-12
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 

<TABLE>
<CAPTION>
 
 
        INCOME STATEMENT:                 1996     1995
        -----------------                -------  -------
        <S>                              <C>      <C>
        Rental income..................  $19,776  $19,776
        Interest expense...............  $13,527  $13,529
        Depreciation and amortization..  $ 4,333  $ 4,333
        Net income.....................  $   927  $   928
</TABLE>
   The following is summarized financial information for 100% of  the Manager at
   December 31, 1996 and for the period from October 22, 1996 through December
   31, 1996:
<TABLE>
<CAPTION>
 
        BALANCE SHEET:                        1996
        --------------                       -------
        <S>                                  <C>
        Total assets.......................  $10,826
        Total liabilities..................  $ 5,270
        Owners' equity.....................  $ 5,556
 
        INCOME STATEMENT:                     1996
        -----------------                    -------
        Fee income.........................  $ 5,418
        Personnel costs, net...............  $ 2,579
        General office and administrative..  $ 1,059
        Net income.........................  $ 1,401
</TABLE>

(7)   DEBT ON REAL ESTATE

  Debt on real estate consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
 
                                                    1996      1995
                                                  --------  --------
 
        <S>                                       <C>       <C>
        Office properties' debt.................  $ 16,000   $19,719
        Industrial properties' debt.............              26,723
        Line of Credit..........................    72,800
        Mortgage debt payable to an affiliate
         of Lehman Brothers Inc.................    40,000 
                                                  --------  -------- 
                                                  $128,800   $46,442
                                                  ========   =======
</TABLE>

  Upon the closing of the Offering, the Operating Partnership closed a three-
year revolving credit facility (the "Line of Credit") with two financial
institutions, initially in the amount of $100 million and subsequently increased
to $150 million.  Borrowings under the Line of Credit bear interest at 30-day,
60-day or 90-day LIBOR, at the option of the Company, plus 2.00% initially per
annum, which has subsequently been reduced to 1.75% (7.25% at December 31,
1996).  Borrowings outstanding at December 31, 1996 under the Line of Credit
totaled $72.8 million.  The Line of Credit is secured by 33 of the Company's
properties, including 16 office properties.  Interest is payable monthly through
October 1999, at which time all unpaid principal and interest are due.  The Line
of Credit agreement requires the Company to maintain certain debt and interest
coverage ratios (1.75 to 1.00) and (2.25 to 1.00), respectively, with which the
Company was in compliance at December 31, 1996.

  Mortgage debt which is payable to an affiliate of Lehman Brothers Inc. and is
collateralized by 24 of the industrial properties owned by the Company and bears
interest at 30-day, 60-day or 90-day LIBOR, at the option of the Company, plus
1.65% (7.15% at December 31, 1996).  Interest is payable monthly through
November 1999, at which time all unpaid principal and interest are due.

                                      F-13
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


  The remaining debt at December 31, 1996 is collateralized by two office
buildings, bears interest ranging from 7.3% to 7.5% per annum, and matures in
November 2000 and January 2001.

  Debt on real estate outstanding at December 31, 1995, aggregated approximately
$46.4 million and was collateralized by two office buildings and various
industrial properties.  The debt had interest ranging from 8.125% to 8.5%.  All
but $10.0 million of the debt was repaid with the proceeds from the Offering.

  Principal repayments of debt on real estate at December 31, 1996, are due
  approximately as follows:
<TABLE>
<CAPTION>
 
                  Years ending December 31:
                  <S>                         <C>
                  1999......................  $112,800
                  2000......................     6,000
                  Thereafter................    10,000
                                              --------
                                              $128,800
                                              ========
 
</TABLE>
(8)   ACCOUNTS PAYABLE AND OTHER LIABILITIES

  Accounts payable and other liabilities consisted of the following at December
  31, 1996 and 1995.
<TABLE>
<CAPTION>
 
 
                                                    1996     1995
                                                  --------  -------
 
        <S>                                       <C>       <C>
         Accounts payable and other liabilities.   $ 7,517   $  824
         Advance rent and deposits..............     2,528    1,141
         Accrued real estate taxes..............     5,823    1,657
                                                   -------   ------
                                                   $15,868   $3,622
                                                   =======   ======
 
</TABLE>
(9)   DISTRIBUTIONS PAYABLE

  On December 17, 1996, the Company declared a distribution equal to $.31 per
common share and limited partnership unit outstanding at December 31, 1996.  The
common shares and limited partnership unit outstanding at December 31, 1996,
totaled 20,279,897 and 3,295,995, respectively.


(10)   LEASING ACTIVITIES

  The future minimum lease payments to be received by the Company as of December
31, 1996, under non-cancelable operating leases, which expire on various dates
through 2013, are as follows:
<TABLE>
<CAPTION>
 
                  Years ending December 31:
                  <S>                        <C>
                  1997.....................  $ 71,396
                  1998.....................    66,831
                  1999.....................    57,195
                  2000.....................    40,159
                  2001.....................    30,101
                  Thereafter...............    83,557
                                             --------
                                             $349,239
                                             ========
</TABLE>

                                      F-14
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


  The geographic concentration of the future minimum lease payments to be
  received is detailed as follows:
<TABLE>
<CAPTION>
 
                     LOCATION            AMOUNT
                     --------           --------
 
                  <S>                   <C>
                  Milwaukee, WI.......  $ 15,675
                  Dallas, TX..........   112,845
                  Kansas City, MO.....    11,178
                  Atlanta, GA.........    42,286
                  Northern VA.........    40,803
                  Baltimore, MD.......    11,770
                  Los Angeles, CA.....    20,835
                  Southfield, MI......    22,745
                  Chicago, IL.........    47,481
                  Houston, TX.........     2,264
                  Denver, CO..........    21,357
                                        --------
                                        $349,239
                                        ========
</TABLE>
  One major tenant represented 10.0% of the Company's total rental income for
the period from October 22, 1996 through December 31, 1996.


(11)   SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

  In connection with the Formation Transactions, Units valued at $65.9 million
were issued in exchange for the Prentiss Group's interest in the Predecessor
Company's properties and Contracts of PPL.  The net assets assumed in the
exchange totaled approximately $5.2 million.  In addition, 1,879,897 common
shares valued at $20.00 per share were issued in exchange for certain limited
partners' interests in the Operating Partnership.  Additional paid-in capital
was reduced by $.9 million of unamortized financing costs related to debt repaid
with proceeds from the Offering.  In 1996, $52 million of the net proceeds of
the Company's Offering was allocated to minority interest.  The remainder of the
net proceeds increased common shares and additional paid-in capital.

  In addition to the above transactions, the Company also acquired the remaining
85% interest in the Park West C2 property.  The fair value of the assets
acquired totaled $43 million and liabilities assumed totaled approximately $35
million and the resulting cash paid totaled, approximately $8 million.  On
December 17, 1996, the Company declared a distribution totaling $7.3 million
which was paid on January 17, 1997.

  During the period from October 22, 1996 through December 31, 1996, the Company
acquired eight properties (described in Note 1) and assumed certain assets and
liabilities in the transactions.  The acquisitions were recorded under the
purchase method of accounting.  The fair values of the acquired assets and
liabilities recorded at the date of acquisition are as follows:
<TABLE>
<CAPTION>
 
                                              Amount
                                             ---------
                <S>                          <C>
                Assets acquired              $121,834
                Mortgage debt assumed          (6,000)
                Other liabilities assumed      (2,599)
                Other acquisition credits        (511)
                                             --------
                  Net cash paid              $112,724
                                             ========
 </TABLE>

                                      F-15
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


(12)   RELATED PARTY TRANSACTIONS

  The Company owns a 95% economic interest in the Manager which is not
consolidated in these financial statements.  The Manager incurs certain
personnel and other overhead-related expenses on behalf of the Company which is
subsequently reimbursed to the Manager.  Such expenses totaled $1,418 for the
period October 22, 1996 through December 31, 1996.  In addition, the Company
funded certain costs of the Manager totaling approximately $2,566 during the
period.  The net unreimbursed cost has been included in Other receivables
(affiliates) on the balance sheet and is detailed below:
<TABLE>
<CAPTION>
 
                                                           AMOUNT
                                                          --------
                <S>                                        <C>
                Capital funding to affiliates...........   $2,566
                Acquisition fees due to affiliates......     (761)
                Payroll and staff benefits due to
                 affiliates.............................     (257)
                Other amounts due to affiliates.........     (202)
                                                           ------
                                                           $1,346
                                                           ======
 
</TABLE>

(13)   EMPLOYEE BENEFIT PLAN (IN WHOLE DOLLARS)

  Effective October 16, 1987, the Predecessor Company adopted a 401(k) Savings
Plan (the ''Plan'') for its 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.  Upon formation, the Company
adopted the Plan and the terms of the Plan.

  Wages eligible for contribution to the Plan include bonuses, overtime pay and
commissions. Participants who have authorized a pre-tax contribution of 2% or
more may also elect to make an after-tax contribution of up to 8% of their
wages.

  The Plan provides that matching employer contributions are to be determined at
the discretion of the Company.  The Company matches 25% of the first $500
contributed by its employees.  There was no cost to the Company for this
matching for the period October 22, 1996 through December 31, 1996.  The cost to
the Predecessor Company totaled $35,000 for the period January 1, 1996 through
October 21, 1996 and $36,000 and $41,000 for the years ended December 31, 1995
and 1994, respectively.  In addition, the Predecessor Company elected to match
employee contributions with a discretionary match for the year ended December
31, 1994, which totaled $76,000.

  Participants are immediately vested in their pre-tax and after-tax
contributions, the Predecessor Company's matching contributions and earnings
thereon.

  On January 24, 1997, the Company filed a Form S-8 registering 500,000 common
shares in connection with the Company's Share Purchase Plan.  The share purchase
plan enables eligible employees to purchase shares, subject certain
restrictions, of the Company at a 15% discount to fair market value.  No shares
were issued pursuant to the plan during the period October 22, 1996 through
December 31, 1996.

(14)   SHARE INCENTIVE PLAN

  Under the Company's 1996 Share Incentive Plan, the Company granted options in
October 1996 to purchase 1,219,438 common shares at an exercise price of $20.00
per share (the IPO price), in November 1996 to purchase an additional 37,500
shares at an exercise price of $20.625 per share (the then current market price)
and in December 1996 to purchase an additional 395,000 shares at an exercise
price of $23.375 per share (the then current market price).  The options vest
and are exercisable ratably over three and four years.

                                      F-16
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


Share-Based Compensation Plans

  The Company sponsors the Prentiss Properties Trust Trustees' Share
Incentive Plan and the Prentiss Properties Trust 1996 Share Incentive Plan (the
"Plans"), which are share-based incentive compensation plans as described below.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the Plans.  In 1995, the FASB issued Statement of Financial Accounting Standards
Statement No. 123 "Accounting for Stock-Based Compensation ("SFAS 123") which,
if fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of its Plans.  Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to elect these
provisions of SFAS 123.  However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1996 are required by SFAS
123 and are presented below.

  Under the Plans, the Company is authorized to issue common shares pursuant
to "Awards" granted in the form of incentive share options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended) and non-
qualified share options.  Awards may be granted to selected employees and
trustees of the Company or any subsidiary.  In 1996, the Company granted both
incentive share options and non-qualified stock options under the Plans.

Share Options

  Under the 1996 Share Incentive Plan, the Company is authorized to issue up
to 2,030,000 common shares pursuant to "Awards" granted to officers, key
employees and directors in the form of incentive share options qualified under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
non-qualified share options not qualified under Section 422 of the Code.  These
share options vest ratably over a three or four year period on a graded basis.

  A summary of the status of the Company's share options as of December 31,
1996, and the changes during the period ended on December 31, 1996 is presented
below:
<TABLE>
<CAPTION>
 
                                                          1996
                                                # SHARES OF     WEIGHTED
                                                UNDERLYING       AVERAGE
                                                  OPTIONS    EXERCISE PRICES
                                                -----------  ---------------
        <S>                                     <C>          <C>
        Outstanding at beginning of the year..
        Granted...............................    1,651,938       $20.82
        Exercised.............................
        Forfeited.............................
        Expired...............................
                                                 ----------
        Outstanding at end of year............    1,651,938       $20.82
                                                 ==========
        Exercisable at end of year............
                                                 ==========
          Weighted-average fair value                       $1.62
                                                            =====
</TABLE>

  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 for grants in 1996:  dividend yield of 8.00%; different
risk-free interest rates for each grant ranging from 6.05% to 6.26%; options
with expected lives of five years; and volatility of 20% for all grants.

  As of December 31, 1996, there were 1,651,938 options outstanding with a
weighted-average remaining contractual life of 9.83 years and a weighted-average
exercise price of $20.82.  None of these options were exercisable at that time.

                                      F-17
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS 


  Had the compensation cost for the Company's share-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
 

                               AS REPORTED  PRO FORMA
                                 12/31/96    12/31/96
<S>                            <C>          <C>
SFAS 123 charge...............              $     145
APB25 charge..................
Net income....................   $   4,996  $   4,851
                                 =========  =========
Net income per common share...   $     .25  $     .24
                                 =========  =========
</TABLE>

  The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.  SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its share-based
compensation plans.


(15)  CAPITAL SHARES

  The Board of Trustees is authorized to provide for the issuance of 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, 1996 no preferred shares were issued.

  The outstanding Units are redeemable at the option of the holder for a like
number of common shares, or at the option of the Company, the cash equivalent
thereof.  Total Units outstanding at December 31, 1996, were 3,295,995.  The
total market value of these Units at December 31, 1996, based on the last
reported sale price of the common shares on the New York Stock Exchange of
$25.00, was approximately $82.4 million.


(16)   COMMITMENTS AND CONTINGENCIES

Legal Matters

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

Environmental Matters

  The Company obtained Phase I environmental site assessments ("ESAs") for all
properties involved in the Offering.  The ESAs for the industrial properties
located in Milwaukee, Wisconsin, revealed lead contamination near the property
lines of two of the buildings and the development parcel adjacent to the site.
The ESA states that the contamination is probably the result of unauthorized
dumping of contaminated soil by the owner of a vacant lot located between the
two buildings and the development parcel.  The dumping occurred prior to the
acquisition of the Milwaukee industrials by the Predecessor Company.  Upon
discovery of the unauthorized dumping, the Predecessor Company brought suit
against the owner of the vacant lot, the generators of the contaminated soil and
the prior owner of the properties.  The contaminated soil consists of foundry
sand which was found to contain lead in excess of acceptable trace levels.
According to the ESA, the contamination does not affect the groundwater and is
not likely to migrate or leech into adjoining land.  During 1996, a settlement
to the lawsuit was finalized and was approved by the court.  In accordance with
the Settlement, (i) the Operating Partnership transferred the affected areas ( a
total of approximately 1.2 acres) to the owner of the vacant lot in exchange for
$100,000 and (ii) the owner of the vacant lot and the generators of the
contaminated soil agreed to assume all responsibility for the 

                                      F-18
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS


remediation of the contaminated soil. The court has entered a finding that the
Operating Partnership was not in the chain of title of the contaminated area. It
is management's opinion that any future outcome of this environmental matter
will not have a material impact on the financial statements.


(17)   PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

  Due to the impact of the Offering, related formation transactions, and the
eight properties acquired subsequent to the Offering, the historical results of
operations are not indicative of future results of operations.  The following
Pro Forma Condensed Statements of Income for the years ended December 31, 1996
and 1995 are presented as if the Offering and related formation transactions and
property acquisitions had occurred at January 1, 1995, and therefore include pro
forma information.  The pro forma information is based upon historical
information and does not purport to present what actual results would have been
had such transactions, in fact, occurred at January 1, 1995, or to project
results for any future period.

                              PRO FORMA CONDENSED STATEMENTS OF INCOME
                                          (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                            YEARS ENDED DECEMBER 31,
                                                  -------------------------------------------
                                                          1996                   1995
                                                  ---------------------  --------------------
        <S>                                       <C>                    <C>
                                                   (in thousands, except for per share data)
        Total revenues.............................      $84,413               $80,569
        Property operating and maintenance.........       21,438                20,809
        Real estate taxes..........................        7,986                 7,984
        General and administrative.................        2,461                 2,012
        Personnel costs, net.......................        2,069                 1,782
        Interest expense...........................        9,326                 9,326
        Amortization of deferred financing costs...          470                   470
        Depreciation and amortization..............       16,392                15,806
        Equity in joint venture and                        
         unconsolidated subsidiaries...............        4,736                 7,307
                                                          ------               -------
        Income before minority interest............       29,007                29,687
        Minority interest..........................       (4,055)               (4,150)
                                                         -------               -------
        Net income.................................      $24,952               $25,537
                                                         =======               =======
                                                           
        Net income per share.......................      $  1.23               $  1.26
                                                         =======               =======
 
</TABLE>

(18)   SUBSEQUENT EVENTS

  On January 14, 1997, the Company purchased a four-story, Class "A" suburban
office building located in Fairfax County, Virginia, totaling approximately
59,000 square feet. The purchase price of this property totaled approximately
$6.1 million.

  On February 20, 1997, the Company purchased an industrial building in
Milwaukee, Wisconsin, totaling approximately 360,000 square feet. The purchase
price of this property totaled approximately $9.8 million.

                                      F-19
<PAGE>
                                                                    
                                                                   Schedule III


                           PRENTISS PROPERTIES TRUST
                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 1996
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                                  Initial cost                    Costs         
                                                               --------------------------       capitalized     
                                                                            Buildings and        subsequent     
Property Name               Location          Encumbrances      Land        Improvements        to acquisition  
-------------               --------          ------------     ------       -------------       --------------- 
<S>                         <S>                <C>             <C>          <C>                 <C>             
Office Properties:                                                                                              
Cumberland Office Park      Atlanta, GA         $    -          $10,987       $ 13,226              $4,019      
5307 East Mockingbird       Dallas, TX               -              870          1,976               1,069
Walnut Glen Tower           Dallas, TX             10,000         5,400         32,669               3,471      
Park West C-2               Dallas, TX               -            8,360         29,640               6,238      
Plaza on Bachman Creek      Dallas, TX               -            1,305          8,773                  -       
Cottonwood Office Center    Dallas, TX               -            1,735          9,865                  -       
Park West E-1               Dallas, TX               -            2,857         16,499                  -       
Park West E-2               Dallas, TX               -            2,079         11,863                  -       
FHP Denver                  Denver, CO              6,000         3,043         17,448                  -       
8521 Leesburg Pike          Northern VA              -            2,130          5,955               4,425      
3141 Fairview Park Drive    Northern VA              -            4,000         15,980                 373      
2411 Dulles Corner Park     Northern VA              -            3,971         22,501                  -       
2455 Horsepen Road          Northern VA              -            2,098         11,888                  -       
One Northwestern Plaza      Southfield, MI           -            4,113         23,335                   1      
1717 Deerfield Road         Chicago, IL              -            3,237         18,556                  -       
O'Hare Plaza II             Chicago, IL              -            3,861         22,131                  -       
                                                                                                                
Industrial Properties:                                                                                          
Federal Express             Atlanta, GA              -            5,015             -                  249      
8869 Greenwood              Baltimore, MD            -              425          1,701                 433      
1329 Western Avenue         Baltimore, MD            -              800          4,854                 216      
Deep Run 1&2                Baltimore, MD            -            1,400          3,947                 727      
4611 Mercedes Drive         Baltimore, MD            -              865          4,600                 652      
9050 Junction Drive         Baltimore, MD            -              690          3,908                  -       
Northland Park              Kansas City, MO          -            2,710         12,677               2,514      
North Topping Street        Kansas City, MO          -              425          1,505                 429      
Airworld Drive              Kansas City, MO          -              722          2,736                 172      
107th Terrace               Kansas City, MO          -              276          1,728                 392      
Nicholson III               Dallas, TX               -              700          1,758               1,124      
1002 Avenue T               Dallas, TX               -              300          1,831                 482      
13425 Branchview            Dallas, TX               -              310          1,795                 411      
1625 Vantage                Dallas, TX               -              145          1,067                 362      
Westloop Business Park      Houston, TX              -              496          2,813                  -       
Airport Properties          Milwaukee, WI            -            1,649         11,783               5,676      
Oakcreek Properties         Milwaukee, WI            -              494          3,795               2,175      
Northwest Properties        Milwaukee, WI            -            1,030          8,357               2,135      
155 Alexandra               Chicago, IL              -              585          3,357                  -       
Wood Dale 1&2               Chicago, IL              -              716          4,109                  -       
Pacific Gateway Center      Los Angeles, CA          -            6,429         36,431                   5      
                                              --------          -------       --------            --------      
                                              $ 16,000          $86,228       $377,057            $ 37,750      
                                              ========          =======       ========            ========      

<CAPTION>  

                                      Gross amount                    
                                 carried at close of period           
                          ---------------------------------------                                                     Depreciable
                           Land and     Building and                 Accumulated         Date of          Date           lives  
Property Name             Improvements  Improvements      Total      depreciation     construction      acquired        (years)  
-------------             ------------  ------------    ---------    ------------     ------------      --------      -----------
<S>                       <C>           <C>            <C>           <C>              <C>               <C>           <C>      
Office Properties:                                                                                                     
Cumberland Office Park      $11,020       $ 17,212       $ 28,232       $2,795           1972-1980        1/16/91        (1)    
5307 East Mockingbird           875          3,040          3,915          299                1979        1/28/93        (1)    
Walnut Glen Tower             6,710         34,830         41,540        3,336                1985         1/1/94        (1)    
Park West C-2                 9,696         34,542         44,238          975                1989         9/5/95        (1)    
Plaza on Bachman Creek        1,305          8,773         10,078           62                1986        8/20/96        (1)    
Cottonwood Office Center      1,735          9,865         11,600           62                1986       10/24/96        (1)    
Park West E-1                 2,857         16,499         19,356           76                1982       10/23/96        (1)    
Park West E-2                 2,079         11,863         13,942           56                1985       10/23/96        (1)    
FHP Denver                    3,043         17,448         20,491           13                1983       12/20/96        (1)    
8521 Leesburg Pike            2,259         10,251         12,510          510                1984        8/17/94        (1)    
3141 Fairview Park Drive      4,000         16,353         20,353          318                1988        2/22/96        (1)    
2411 Dulles Corner Park       3,971         22,501         26,472           -                 1990       12/31/96        (1)    
2455 Horsepen Road            2,098         11,888         13,986           -                 1989       12/31/96        (1)    
One Northwestern Plaza        4,113         23,336         27,449          110                1989       10/23/96        (1)    
1717 Deerfield Road           3,237         18,556         21,793           -                 1985       12/11/96        (1)    
O'Hare Plaza II               3,861         22,131         25,992           -                 1986       12/13/96        (1)    
                                                                                                                                
Industrial Properties:                                               
Federal Express               5,015            249          5,264           -                 1997       10/31/96        (1)    
8869 Greenwood                  425          2,134          2,559          237           1986-1987       12/27/93        (1)    
1329 Western Avenue             836          5,034          5,870          452                1988        9/19/94        (1)    
Deep Run 1&2                  1,400          4,674          6,074          389                1988         9/1/94        (1)    
4611 Mercedes Drive             898          5,219          6,117          379                1990       12/27/94        (1)    
9050 Junction Drive             690          3,908          4,598           25                1989       10/22/96        (1)    
Northland Park                2,979         14,922         17,901        2,552           1975-1980        1/23/92        (1)    
North Topping Street            425          1,934          2,359          238           1975-1980         2/1/93        (1)    
Airworld Drive                  830          2,800          3,630          288           1975-1980        5/16/94        (1)    
107th Terrace                   336          2,060          2,396          184           1975-1980        5/16/94        (1)    
Nicholson III                   700          2,882          3,582          324                1981        9/16/92        (1)    
1002 Avenue T                   349          2,264          2,613          292                1981         5/5/93        (1)    
13425 Branchview                353          2,163          2,516          252                1970        7/23/93        (1)    
1625 Vantage                    208          1,366          1,574          150                1984        7/26/93        (1)    
Westloop Business Park          496          2,813          3,309           18                1986       10/22/96        (1)    
Airport Properties            2,918         16,190         19,108        1,910           1970-1980        2/11/93        (1)    
Oakcreek Properties             835          5,629          6,464          614           1970-1979        2/11/93        (1)    
Northwest Properties          1,444         10,078         11,522        1,336           1973-1987        2/11/93        (1)    
155 Alexandra Way               585          3,357          3,942            9                1988       11/25/96        (1)    
Wood Dale 1&2                   716          4,109          4,825           11                1988       11/25/96        (1)    
Pacific Gateway Center        6,429         36,436         42,865          235           1972-1984       10/22/96        (1)     
                            -------       --------       --------     --------
                            $91,726       $409,309       $501,035     $ 18,507                                       
                            =======       ========       ========     ========                                       
</TABLE>
__________
(1)  Buildings & improvements - 25 to 40 years
(2)  The aggregate cost for federal income tax purposes was approximately 
     $458,010.

                                     F-20
<PAGE>
 
                          PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                      NOTES TO CONSOLIDATED AND COMBINED
                             FINANCIAL STATEMENTS


                   REAL ESTATE AND ACCUMULATED DEPRECIATION

                            (DOLLARS IN THOUSANDS)

  A summary of activity for real estate and accumulated depreciation is as
  follows:
<TABLE>
<CAPTION>
 
                                                    1996      1995      1994
                                                  --------  --------  --------
        <S>                                       <C>       <C>       <C>
        Real estate:
         Balance at beginning of year...........  $153,148  $151,673  $ 89,116
           Additions to and Improvement of Real    347,887     1,475    68,650
            estate..............................
           Disposition of Real estate...........                        (6,093)
                                                  --------  --------  --------
           Balance at end of year...............  $501,035  $153,148  $151,673
                                                  ========  ========  ========
        Accumulated depreciation:
           Balance at beginning of year.........    11,780     7,307     3,567
           Depreciation expense.................     6,727     4,473     4,008
           Accumulated depreciation on Real                               (268)
            estate sold.........................  --------  --------  --------
             Balance at end of year.............  $ 18,507  $ 11,780  $  7,307
                                                  ========  ========  ========
 
</TABLE>

                                     F - 21