##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




FORM 10-Q





Quarterly Report pursuant to Section 13 or 15(d) of


the Securities Exchange Act of 1934





For the Quarterly Period Ended September 30, 2002





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 Incorporation or Organization)

(I.R.S. Employer Identification
No.)





3890 West Northwest Highway, Suite 400, Dallas, Texas 75220


(Address of Registrants Principal Executive Office)





(214) 654-0886


(Registrants Telephone Number, Including Area Code)





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  ̈





The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding as of
November 12, 2002, was 38,962,546 and the number of outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 3,773,585.





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##### Table of Contents

PRENTISS PROPERTIES TRUST





INDEX





Part I:    FINANCIAL INFORMATION

Page NumberItem 1.

Financial StatementsConsolidated Balance Sheets of Prentiss Properties Trust at September 30, 2002 (unaudited) and December 31, 2001

5Consolidated Statements of Income of Prentiss Properties Trust for the three and nine months ended September 30, 2002 and 2001 (unaudited)

6Consolidated Statements of Comprehensive Income of Prentiss Properties Trust for the three and nine months ended September 30, 2002 and 2001 (unaudited)

7Consolidated Statements of Cash Flows of Prentiss Properties Trust for the nine months ended September 30, 2002 and 2001 (unaudited)

8Notes to Consolidated Financial Statements

9-16Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

17-29Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29-30Item 4.

Controls and Procedures

30Part II:    OTHER INFORMATIONItem 1.

Legal Proceedings

31Item 2.

Changes in Securities and Use of Proceeds

31Item 3.

Default Upon Senior Securities

31Item 4.

Submission of Matters to a Vote of Security Holders

31Item 5.

Other Information

31Item 6.

Exhibits and Reports on Form 8-K

31-33SIGNATURE

34CERTIFICATIONS

35-36







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##### Table of Contents

FORWARD LOOKING STATEMENT





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





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




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




| |  |  | Factors that could result in the poor operating performance of our properties including tenant defaults and increased costs such as insurance;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------




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




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




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




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




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




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




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




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




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




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




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




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




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




If one or more of these risks or uncertainties materialize, or if any underlying assumption proves incorrect, actual results may vary materially from those anticipated,
expected or projected. Such forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy
and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. A detailed discussion of risks is included, under the
caption Risk Factors, in our Form 10-K, filed on March 27, 2002. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q or the date of any document incorporated
by reference into this Form 10-Q. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.







3




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##### Table of Contents




PART I


FINANCIAL INFORMATION





Item 1.    Financial Statements





(this page intentionally left blank)







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##### Table of Contents

PRENTISS PROPERTIES TRUST


CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share amounts)





ASSETS

September 30, 2002


December 31, 2001Operating real estate:


(unaudited
)Land

$
293,860


$
296,105Building and improvements


1,602,089



1,510,934Less: accumulated depreciation


(169,265
)


(146,349
)1,726,684



1,660,690Asset held for sale


21,002Construction in progress


37,450



64,410Land held for development


65,244



53,504Deferred charges and other assets, net


151,652



144,329Notes receivable


13,354



13,354Accounts receivable, net


36,936



39,936Cash and cash equivalents


6,753



5,845Escrowed cash


9,326



13,674Investments in securities


3,890



3,398Investments in joint ventures and unconsolidated subsidiaries


20,891



31,453Total assets

$
2,093,182


$
2,030,593LIABILITIES AND SHAREHOLDERS EQUITYMortgages and notes payable

$
975,145


$
907,734Interest rate hedges


17,217



10,490Accounts payable and other liabilities


79,917



76,022Other payables (affiliates)


6,384



4,384Distributions payable


26,936



25,977Total liabilities


1,105,599



1,024,607Minority interest in operating partnership


134,052



184,597Minority interest in real estate partnerships


2,861



1,589Commitments and contingenciesPreferred shares $ .01 par value, 20,000,000 shares authorized, 3,773,585 shares issued and outstanding


100,000



100,000Common shares $ .01 par value, 100,000,000 shares authorized, 43,938,166 and 42,106,896 (includes 4,984,401 and
5,091,009 in treasury) shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively


439



421Additional paid-in capital


882,244



833,314Common shares in treasury at cost, 4,984,401 and 5,091,009 shares at September 30, 2002 and December 31, 2001,
respectively


(118,476
)


(118,228
)Unearned compensation


(1,981
)


(2,556
)Accumulated other comprehensive income


(16,293
)


(9,655
)Retained earnings


4,737



16,504Total shareholders equity


850,670



819,800Total liabilities and shareholders equity

$
2,093,182


$
2,030,593





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




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##### Table of Contents

PRENTISS PROPERTIES TRUST


CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


(in thousands, except per share amounts)





Three Months Ended September
30,


Nine Months Ended September
30,2002


2001


2002


2001Revenues:Rental income

$
88,050


$
83,867


$
260,337


$
251,340Management and other fees, net


963



1,443



3,506



3,95889,013



85,310



263,843



255,298Expenses:Property operating and maintenance


21,778



19,195



63,654



57,223Real estate taxes


9,680



9,750



31,249



29,881General and administrative and personnel costs


2,467



2,737



7,709



8,102Interest expense


17,233



15,898



50,149



49,878Amortization of deferred financing costs


500



402



1,314



1,205Depreciation and amortization


17,923



16,022



52,423



46,84369,581



64,004



206,498



193,132Equity in income of joint ventures and unconsolidated subsidiaries


308



212



2,192



2,204Merger termination fee














17,000Income from continuing operations before gain/(loss) from property dispositions and minority interests


19,740



21,518



59,537



81,370(Loss)/gain on sale of properties






(125
)






14,038Minority interests


(2,770
)


(4,053
)


(8,396
)


(13,436
)Income from continuing operations


16,970



17,340



51,141



81,972Discontinued operations:Income from discontinued operations


554



531



2,000



2,131Gain from disposition of discontinued operations


5,599







5,599



Minority interests related to discontinued operations


(229
)


(23
)


(285
)


(93
)5,924



508



7,314



2,038Income before extraordinary items


22,894



17,848



58,455



84,010Extraordinary items














(367
)Net income

$
22,894


$
17,848


$
58,455


$
83,643Preferred dividends


(2,113
)


(2,019
)


(6,245
)


(5,868
)Net income applicable to common shareholders

$
20,781


$
15,829


$
52,210


$
77,775Basic earnings per common share:Income before discontinued operations and extraordinary items

$
0.38


$
0.42


$
1.18


$
2.08Discontinued operations

$
0.15


$
0.01


$
0.19


$
0.05Extraordinary items

$



$



$



$
(0.01
)Net income per common share  basic

$
0.53


$
0.43


$
1.37


$
2.12Weighted average number of common shares outstanding  basic


38,909



36,864



38,224



36,646Diluted earnings per common share:Income before discontinued operations and extraordinary items

$
0.38


$
0.42


$
1.17


$
2.01Discontinued operations

$
0.15


$
0.01


$
0.19


$
0.05Extraordinary items

$



$



$



$
(0.01
)Net income per common share-diluted

$
0.53


$
0.43


$
1.36


$
2.05Weighted average number of common shares and common share equivalents outstanding-diluted


39,089



37,237



38,506



40,782


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




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##### Table of Contents

PRENTISS PROPERTIES TRUST


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)


(dollars in thousands)





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Net income

$
22,894


$
17,848


$
58,455


$
83,643Unrealized gains and losses on securities:Unrealized (losses)/gains arising during the period


(437
)


(6
)


(178
)


182Unrealized losses on interest rate hedges:Cumulative transition adjustment














(2,513
)Unrealized losses arising during the period


(5,148
)


(7,376
)


(6,895
)


(10,140
)Reclassification adjustment for losses included in earnings


143



143



435



286Other comprehensive income


(5,442
)


(7,239
)


(6,638
)


(12,185
)Comprehensive income

$
17,452


$
10,609


$
51,817


$
71,458





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




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PRENTISS PROPERTIES TRUST


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(dollars in thousands)





Nine Months Ended September
30,2002


2001Cash Flows from Operating Activities:Net income

$
58,455


$
83,643Adjustments to reconcile net income to net cash provided by operating activities:Minority interests


8,681



13,529Extraordinary items






367Gain on sales of real estate


(5,599
)


(14,038
)Provision for doubtful accounts


3,246



(669
)Depreciation and amortization


54,091



48,550Amortization of deferred financing costs


1,314



1,205Non-cash compensation


1,224



1,383Reclassification of accumulated other comprehensive income


435



286Gain on derivative financial instruments


(168
)


Changes in assets and liabilities:Deferred charges and other assets


(5,729
)


1,762Accounts receivable


741



(7,645
)Escrowed cash


4,348



12,253Other payables/receivables (affiliates)


2,000



(2,014
)Accounts payable and other liabilities


(352
)


(16,842
)Net cash provided by operating activities


122,687



121,770Cash Flows from Investing Activities:Development/redevelopment of real estate


(20,145
)


(70,403
)Purchase of real estate


(58,835
)


(130,956
)Purchase of mortgage loan


(47,000
)


Capital expenditures for in-service properties


(18,153
)


(19,006
)Distributions in excess of earnings of joint ventures and unconsolidated subsidiaries


93



1,943Investment in joint ventures and unconsolidated subsidiaries






(1,438
)Investment in securities


(670
)


(2,029
)Proceeds from the sale of real estate


33,284



196,997Net cash used in investing activities


(111,426
)


(24,892
)Cash Flows from Financing Activities:Net proceeds from sale of common shares


52,025



8,244Purchase of treasury shares


(2,472
)


(5,833
)Redemption of preferred units


(50,535
)


Capital contribution from limited partners


1,488



Distributions paid to limited partners


(2,475
)


(2,535
)Distributions paid to common shareholders


(61,960
)


(55,075
)Distributions paid to preferred shareholders


(6,151
)


(5,679
)Distributions paid to preferred unit holders


(7,684
)


(9,644
)Payment for early extinguishment of debt






(50
)Proceeds from mortgages and notes payable


430,100



396,125Repayments of mortgages and notes payable


(362,689
)


(422,454
)Net cash used in financing activities


(10,353
)


(96,901
)Net change in cash and cash equivalents


908



(23
)Cash and cash equivalents, beginning of period


5,845



5,452Cash and cash equivalents, end of period

$
6,753


$
5,429Supplemental Cash Flow Information:Cash paid for interest

$
51,839


$
52,661





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




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.    The Organization





We are a self-administered and self-managed Maryland REIT that acquires, owns, manages, leases, develops and builds primarily
office properties throughout the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, through our own employees. We are self-managed in that we provide all the management and
maintenance services that our properties require through our own employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P.,
and its subsidiaries, and a management company, Prentiss Properties Resources, Inc. and its subsidiaries. Our regional management offices are located in San Diego, Oakland, Dallas, Chicago and Washington, D.C. As of September 30, 2002, we owned
interests in a diversified portfolio of 139 primarily suburban Class A office and suburban industrial properties as follows:





Number of Buildings

Net Rentable Square Feet(in thousands)Office properties

108

15,262Industrial properties

31

2,294Total

139

17,556





Our properties include 2 office properties containing 222,000 net
rentable square feet that were in various stages of development at September 30, 2002. As of September 30, 2002, our properties, exclusive of the development properties, were 93% leased to approximately 1,100 tenants. In addition to managing
properties that we own, we manage approximately 14.8 million net rentable square feet in office, industrial and other properties for third parties.





We have determined that our reportable segments are those that are based on our method of internal reporting, which disaggregates our business by geographic region. In April 2001, we completed an asset
exchange with Brandywine Realty Trust, which included the sale of all of the properties comprising our Northeast Region, and as a result, at September 30, 2002, we no longer had operations in the Northeast Region. In addition, during December 2001,
we divided our West Region into separate Northern and Southern California Regions. As of September 30, 2002, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California; and (5) Southern
California.





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





Reportable Segment

MarketMid-Atlantic

Metropolitan Washington DC, AtlantaMidwest

Chicago, Suburban DetroitSouthwest

Dallas/Fort Worth, Austin, Denver, HoustonNorthern California

Oakland, SacramentoSouthern California

San Diego, Los Angeles





Transactions





During the three months ended September 30, 2002, we disposed of seven industrial properties containing 875,000 net rentable square feet. The sale, which included all of
the industrial properties within our Mid-Atlantic portfolio, resulted in gross proceeds of $33.8 million which were used to repay a portion of the outstanding borrowings under our revolving credit facility. In addition, we committed to a plan to
sell the Academy property, a 194,000 net rentable square foot office property located in the Los Angeles area. We recorded a gain on sale on our industrial properties totaling $8.5 million, which was partially offset by a write-down of $2.9 million,
representing the amount by which the carrying amount of our Academy property exceeded our estimate of the fair value of the property, less cost to sell. The Academy property was subsequently sold on October 17, 2002 for gross proceeds totaling $22.2
million. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for financial statements issued for fiscal years beginning after December 15,
2001, net income and gain/(loss) for real estate properties sold and real estate properties held for sale are to be reflected in the consolidated statements of income as discontinued operations. Below is a summary of our combined results of
operations before gain/(loss) from our Mid-Atlantic industrial properties and our Academy property for the three and nine months ended September 30, 2002 and 2001, respectively.







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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Three Months Ended September 30,

Nine Months Ended September 30,(in thousands)

2002

2001

2002

2001Discontinued Operations:Property revenues:Rental income

$
1,809

$
1,833

$
5,830

$
5,830Property revenues


1,809


1,833


5,830


5,830Property expenses:Property operating and maintenance


570


573


1,630


1,496Real estate taxes


168


145


532


496Depreciation and amortization


517


584


1,668


1,707Property expenses


1,255


1,302


3,830


3,699Property revenues less property expenses

$
554

$
531

$
2,000

$
2,131





In addition to the property related transactions described above,
during the period, we transitioned one office property, located in Austin, Texas and containing 223,000 net rentable square feet from development into operations.





On July 24, 2002, using proceeds from our revolving credit facility, we repurchased 100,000 common shares for an aggregate purchase price of $2.47 million, or $24.72 per
share. At September 30, 2002, under authorization by our board of trustees, we have the ability to repurchase an additional 1.0 million common shares under our share repurchase program.





2.    Basis of Presentation





The accompanying financial statements are unaudited; however, our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information
and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
In our opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the three and nine month periods ended
September 30, 2002 are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with our audited financial statements, and notes thereto, included in our annual
report on Form 10-K for the fiscal year ended December 31, 2001.





3.    Accounts Receivable, Net





Accounts receivable consisted of the following at September 30, 2002 and December 31, 2001:





September 30, 2002


December 31, 2001(in thousands)Rents and services

$
7,157


$
10,218Accruable rental income


34,607



26,940Other


1,504



5,86443,268



43,022Less:  allowance for doubtful accounts


(6,332
)


(3,086
)$
36,936


$
39,936





4.    Investment in Joint Ventures and Unconsolidated Subsidiaries





The following information summarizes the financial position at September 30, 2002 and December 31, 2001 and
the results of operations for the three and nine month periods ended September 30, 2002 and 2001 for the investments in which we held a non-controlling interest during the period presented:







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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Summary of Financial Position:

Total Assets

Total Debt (8)

Total Equity


CompanysInvestment(in thousands)

Sept. 30, 2002

Dec. 31,2001

Sept. 30, 2002

Dec. 31, 2001

Sept. 30, 2002


Dec. 31, 2001


Sept. 30, 2002

Dec. 31, 2001Broadmoor Austin Associates(1)

$
110,125

$
114,101

$
146,175

$
150,423

$
(36,686
)

$
(37,009
)

$
3,852

$
3,882Burnett Plaza Associates(2)





102,484





47,000






51,526






10,347PPS Partners LLC(3)





126












92






79Prentiss Properties Resources, Inc.(4)


11,836


11,710








6,150



5,799



5,993


5,649Tysons International Partners(5)


95,699


99,059


60,799


61,290


33,065



36,158



9,939


10,389Other Investments(6)






















1,107


1,107Total





















$
20,891

$
31,453





For the Three Months Ended September 30, 2002 and 2001





Summary of Operations:

Total Revenue

Net Income


Companys Share of
Net Income/(Loss)(in thousands)

2002

2001

2002


2001


2002


2001Broadmoor Austin Associates(1)

$
4,972

$
4,958

$
1,009


$
958


$
504


$
479Burnett Plaza Associates(2)





5,392






1,213







242PPS Partners LLC(3)





193






124







93Prentiss Properties Resources, Inc.(4)


3,240


3,380


(252
)


(633
)


(247
)


(620
)Tysons International Partners(5)


3,241


3,193


203



70



51



18Total















$
308


$
212For the Nine Months Ended September 30, 2002 and 2001Summary of Operations:

Total Revenue

Net Income


Companys Share of
Net Income/(Loss)(in thousands)

2002

2001

2002


2001


2002


2001Broadmoor Austin Associates(1)

$
14,916

$
14,872

$
3,033


$
2,936


$
1,517


$
1,468Burnett Plaza Associates(2)


4,302


15,906


960



3,754



192



751Lot 21 Associates L.P.(7)





130














PPS Partners LLC(3)


44


550


(13
)


346



(10
)


260Prentiss Properties Limited, Inc.(4)





4,939






558







558Prentiss Properties Resources, Inc.(4)


10,676


7,236


351



(921
)


344



(903
)Project 127 Partners, L.P.(7)





76






(11
)






(6
)Tysons International Partners(5)


9,793


6,669


596



305



149



76Total















$
2,192


$
2,204





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

|(2) |  | At December 31, 2001, we owned a 20% non-controlling interest in Burnett
Plaza Associates, an entity, which owns a 1.0 million net rentable square foot office building in downtown Fort Worth. On March 7, 2002, we acquired the remaining 80% interest in Burnett Plaza Associates. The summary of operations above includes the
results of operations for the periods prior to our acquisition of a controlling interest on March 7, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | PPS Partners LLC was a joint venture between Prentiss Properties Acquisition
Partners, L.P. and a third-party property owner. The third-party property owner contributed property management contracts to PPS Partners LLC. Prentiss Properties Acquisition Partners, L.P. through a sub-management contract managed the properties
and participated in the net income of the joint venture. Effective October 2001, Prentiss Properties Acquisition Partners, L.P. resigned the management duties of the properties.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated under
the General Corporation Law of the State of Delaware to serve as a Taxable REIT Subsidiary and provide services to Prentiss Properties Acquisition Partners, L.P. On March 29, 2001, Prentiss Properties Resources, Inc. acquired our interest in
Prentiss Properties Limited, Inc., valued at $3.9 million, along with certain other assets with a carrying amount of approximately $2.5 million. Prentiss Properties Acquisition Partners, L.P. holds a 98% economic interest and 0% voting interest in
Prentiss Properties Resources, Inc.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | In April 2001, we acquired from Brandywine Realty Trust a 25% non-controlling
interest in Tysons International Partners, an entity, which owns two office properties containing 452,000 net rentable square feet in the Northern Virginia area.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(7) |  | Prior to April 10, 2001, we owned a 60% non-controlling interest in two
entities, each owning a separate office development project in the suburban Philadelphia area. The office projects were sold to Brandywine Realty Trust on April 10, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



11




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





5.    Mortgages and Notes Payable





At September 30, 2002, we had
mortgages and notes payable of $975.1 million, excluding our proportionate share of debt from our investments in joint ventures.





The following table sets forth our mortgages and notes payable as of September 30, 2002 and December 31, 2001:





Description

September 30, 2002

December 31, 2001

Amortization

Interest Rate

Maturity(in thousands)Collateralized term loan

$
71,750

$
72,313

25 yr

LIBOR + 1.625%

September 30, 2004Revolving credit facility


118,500


118,500

None

LIBOR + 1.375%

May 23, 2005Unsecured term loan


75,000


75,000

None

LIBOR + 1.375%

March 16, 2006PPREFI portfolio loan


180,100


180,100

None

7.58%

February 26, 2007Mortgage notes payable


529,795


461,821

(1)

(2)

(2)$
975,145

$
907,734





|(1) |  | Excluding the $72.1 million financing of our Burnett Plaza property, which
requires interest only payments until maturity, our mortgage notes have debt service requirements based on amortization terms ranging from 25 to 30 years.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excluding the Burnett Plaza financing, which has an interest rate equal to
LIBOR plus 215 basis points, the interest rates range from 6.63% to 8.63% with a weighted average interest rate of 7.39% at September 30, 2002. Maturity dates range from December 2003 through June 2013 with a weighted average maturity of 6.6 years
from September 30, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our mortgages and notes payable at September 30, 2002 consisted of
$637.8 million of fixed rate, non-recourse, long-term mortgages and $337.3 million of floating rate debt, $250.0 million of which was hedged at September 30, 2002 with variable to fixed rate hedges.





Future scheduled principal repayments of our outstanding mortgages and notes payable are as follows:





(in thousands)2002

$
1,5352003


9,1792004


99,3782005


229,1202006


89,978Thereafter


545,955$
975,145





6.    Interest Rate Hedges





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





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







12




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





On the date we enter into a derivative contract, we designate the derivative as a hedge of (1) a forecasted transaction or (2) the variability of cash flows that are to be received or paid in
connection with a recognized asset or liability (cash flow hedge). Currently, we have only entered into derivative contracts designated as cash flow hedges. These agreements involve the exchange of amounts based on a variable interest rate for
amounts based on fixed interest rates over the life of the agreement based upon a notional amount. The difference to be paid or received as the interest rates change is recognized as an adjustment to interest expense. The related amount payable to
or receivable from counterparties is included in accounts payable and other liabilities. Changes in the fair value of a derivative, to the extent it is effective and is designated and qualifies as a cash flow hedge, are recorded in other
comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g. until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which
represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of non-hedging instruments are
reported in current-period earnings.





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





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





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





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





Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This
reclassification is consistent with when the hedged items are recognized in earnings. Within the next twelve months, we expect to reclassify to earnings approximately $7.3 million of the current balance held in accumulated other comprehensive
income.




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





The following table summarizes the notional amounts and fair values of our derivative financial instruments as of September 30, 2002. The notional amount provides an indication of the extent of our
involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.





Notional Amount

Swap Rate Paid (Fixed)

Effective FixedRate

Swap Rate Received (Variable) at September 30, 2002

Swap Maturity

Fair Value(in thousands)$ 50 million

2.275%

3.653%

1.81125%

January 2003

$
(73
)$ 50 million

6.253%

7.628%

1.81125%

September 2004


(4,209
)$ 60 million

6.248%

7.623%

1.81125%

September 2004


(5,045
)$ 15 million

4.345%

6.495%

1.81125%

July 2005


(807
)$ 25 million

4.345%

6.495%

1.81125%

July 2005


(1,344
)$ 20 million

5.985%

7.610%

1.81125%

March 2006


(2,238
)$ 30 million

5.990%

7.615%

1.81125%

March 2006


(3,361
)$ 50 million(1)

1.990%

3.365%

1.81125%

August 2003


(140
)Total









$
(17,217
)





|(1) |  | The interest rate swap takes effect upon the expiration of our $50 million
swap expiring in January 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------




Cash payments made under the interest rate swap agreements
exceeded cash receipts from the interest rate swap agreements by $2.0 million and $1.1 million for the three months ended September 30, 2002 and 2001, respectively.





7.    Distribution





On September 17,
2002, we declared a cash distribution for the third quarter of 2002 in the amount of $0.56 per share, payable on October 11, 2002, to common shareholders of record on September 30, 2002. Additionally, we determined that a distribution of $0.56 per
common unit would be made to the partners of the operating partnership and the holders of our Series D Convertible Preferred Shares. The distributions totaled $24.8 million and were paid October 11, 2002. In addition, quarterly distributions
totaling $2.2 million in the aggregate were declared in September 2002, payable to the holders of our Series B Perpetual Preferred Units and our Series E Preferred Units. The distributions, which equate to an annualized 8.3% of the face amount of
the Series B Perpetual Preferred Units and an annualized 7.5% of the face amount of the Series E Preferred Units, were paid on October 3, 2002 and October 15, 2002, respectively.





8.    Supplemental Disclosure of Non-Cash Activities





During the three months ended September 30, 2002, we declared cash distributions totaling $24.8 million payable to holders of common shares, operating partnership units and Series D Convertible Preferred Shares. The distributions
were paid October 11, 2002. In addition, distributions totaling $2.2 million were declared in September 2002, payable to holders of our Series B Perpetual Preferred Units and Series E Preferred Units. The distributions were paid on October 3, 2002
and October 15, 2002 to our holders of our Series B Perpetual Preferred Units and our Series E Preferred Units, respectively.





Pursuant to our long-term incentive plan, during the nine months ended September 30, 2002, we issued 30,600 restricted common shares to various key employees. The shares, which had a market value of approximately $860,000 based upon
the per share price on the date of grant, were classified as unearned compensation and recorded in the shareholders equity section of the consolidated balance sheet. The unearned compensation is amortized quarterly as compensation expense over
the three-year vesting period.





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







14




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





During the nine months ended September 30, 2002, we marked-to-market our investments in securities and our interest rate hedges. During the nine months ended September 30, 2002, we recorded unrealized
losses of $178,000 and $6.9 million on our investments in securities and interest rate hedges, respectively.





During the nine months ended September 30, 2002, common shares in treasury increased by $248,000, representing a decrease of $14.2 million related to the consummation of the private placement of 613,750 common shares with Salomon
Smith Barney Inc., offset by an increase of $14.5 million related to (1) the buy back of 100,000 common shares for gross consideration of $2.5 million and (2) non-cash activities including $11.7 million attributable to 394,365 common shares
surrendered as payment of the exercise price and statutory tax withholdings for certain share options exercised during the period and $304,000, representing 12,777 restricted share grants forfeited as a result of an employee termination during the
period.





As a result of the sale of our Mid-Atlantic industrial properties, during the three months ended
September 30, 2002, we removed accumulated depreciation and accumulated amortization of $7.1 million and $351,000, respectively. In addition, receivables, other assets and liabilities totaling $237,000, $346,000 and $248,000, respectively were
removed.





9.    Segment Information





The tables below present information about segment assets and income from continuing operations used by our chief operating decision maker as of and for the three and nine
month periods ended September 30, 2002 and 2001:





For the Three Months Ended September 30, 2002


(in thousands)


Mid-Atlantic

Midwest

Northeast

Southwest

Northern California

Southern California

Total Segments

CorporateNot Allocable To Segments


Consolidated TotalRevenues

$
23,588

$
15,880

$


$
30,445

$
10,974

$
7,532

$
88,419

$
594


$
89,013Income from continuing operations

$
13,066

$
5,638

$


$
12,752

$
4,587

$
3,822

$
39,865

$
(22,895
)

$
16,970Assets

$
562,768

$
384,277

$


$
641,967

$
266,948

$
202,287

$
2,058,247

$
34,935


$
2,093,182For the Three Months Ended September 30, 2001 (in
thousands)Mid- Atlantic

Midwest

Northeast

Southwest

Northern California

Southern California

Total Segments

CorporateNot Allocable To Segments


Consolidated TotalRevenues

$
23,900

$
18,087

$


$
24,378

$
11,244

$
6,929

$
84,538

$
772


$
85,310Income from continuing operations

$
13,060

$
8,190

$


$
10,122

$
5,212

$
3,653

$
40,237

$
(22,897
)

$
17,340Assets

$
604,938

$
375,663

$


$
546,969

$
267,932

$
194,701

$
1,990,203

$
28,374


$
2,018,577For the Nine Months Ended September 30, 2002 (in
thousands)Mid- Atlantic

Midwest

Northeast

Southwest

Northern California

Southern California

Total Segments

CorporateNot Allocable To Segments


Consolidated TotalRevenues

$
69,428

$
46,983

$


$
89,545

$
33,370

$
22,371

$
261,697

$
2,146


$
263,843Income from continuing operations

$
36,055

$
19,028

$


$
36,249

$
14,238

$
10,967

$
116,537

$
(65,396
)

$
51,141For the Nine Months Ended September 30, 2001 (in
thousands)Mid- Atlantic

Midwest

Northeast

Southwest

Northern California

Southern California

Total Segments

CorporateNot Allocable To Segments


Consolidated TotalRevenues

$
66,755

$
54,056

$
8,422

$
70,567

$
32,974

$
21,072

$
253,846

$
1,452


$
255,298Incoming from continuing operations

$
30,291

$
35,944

$
5,766

$
30,735

$
16,264

$
17,609

$
136,609

$
(54,637
)

$
81,972







15




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##### Table of Contents

PRENTISS PROPERTIES TRUST


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





10.    Earnings per Share





We calculate earnings per share in
accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share which requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Additionally, the statement requires
a reconciliation of the numerator and denominator used in computing basic and diluted earnings per share. The table below presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share for the three
and nine month periods ended September 30, 2002 and 2001:





(in thousands, except per share data)

Three Months EndedSeptember 30,


Nine Months EndedSeptember 30,2002


2001


2002


2001Reconciliation of the numerator used for basic earnings per shareNet income

$
22,894


$
17,848


$
58,455


$
83,643Preferred dividends


(2,113
)


(2,019
)


(6,245
)


(5,868
)Net income available to common shareholders

$
20,781


$
15,829


$
52,210


$
77,775Reconciliation of the denominator used for basic earnings per shareWeighted average common shares outstanding


38,909



36,864



38,224



36,646Basic earnings per share

$
0.53


$
0.43


$
1.37


$
2.12Reconciliation of the numerator used for dilutive earnings per shareNet income

$
22,894


$
17,848


$
58,455


$
83,643Preferred dividends


(2,113
)


(2,019
)


(6,245
)$
20,781


$
15,829


$
52,210


$
83,643Reconciliation of the denominator used for dilutive earnings per shareWeighted average common shares outstanding


38,909



36,864



38,224



36,646Preferred shares(1)














3,774Options


180



373



282



362Weighted average common shares and common share equivalents


39,089



37,237



38,506



40,782Diluted earnings per share

$
0.53


$
0.43


$
1.36


$
2.05





|(1) |  | Preferred shares for the three and nine months ended September 30, 2002 and
the three months ended September 30, 2001 are excluded from the denominator in calculating dilutive earnings per share as such shares were anti-dilutive for the periods; therefore, the numerator used in the calculation of dilutive earnings per share
is income available to common shareholders for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001 as compared to the nine months ended September 30, 2001, for which the numerator is net income.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




11.    Recently Issued Accounting Standards





On June 28, the Financial Accounting Standards Board voted in favor of issuing Statement of Financial Accounting Standards No. 146,
Accounting for Exit or Disposal Activities. The statement addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring
activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of the statement also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The statement will be effective for exit or disposal activities initiated after December 31, 2002. We have not yet
determined the impact of the statement on our results of operations and financial position.





12.    Subsequent
Events





On October 17, 2002, we completed the disposition of our Academy property resulting in gross proceeds
of $22.2 million. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.




16




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##### Table of Contents




|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------




Overview





We are a
real estate company organized as a Maryland REIT. We acquire, own, manage, lease, develop and build primarily office properties throughout the United States. We operate principally through our operating partnership, Prentiss Properties Acquisition
Partners, L.P. and its subsidiaries, and a management company, Prentiss Properties Resources, Inc. and its subsidiaries. As of September 30, 2002, we owned interests in a diversified portfolio of 137 operating properties totaling 17.3 million net
rentable square feet and 2 development projects totaling 222,000 net rentable square feet. The properties consist of 108 office and 31 industrial properties containing in the aggregate 17.6 million net rentable square feet. Our organization consists
of a corporate office located in Dallas, Texas and five regional offices each of which operates under the guidance of a member of our senior management team. The following are the markets in which our properties are located with the first market
being the location of each regional office:





Regions

MarketsMid-Atlantic

Metropolitan Washington DC, AtlantaMidwest

Chicago, Suburban DetroitSouthwest

Dallas/Fort Worth, Austin, Denver, HoustonNorthern California

Oakland, SacramentoSouthern California

San Diego, Los Angeles





Critical Accounting Policies and Application Thereof





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





The estimates used in the preparation of our consolidated financial statements are more fully described in Note (2) to our audited consolidated financial statements for the year ended December 31, 2001, included in our Form 10-K
filed on March 27, 2002. However, certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our consolidated financial
statements.





We consider our critical accounting policies to be those used in the determination of the reported
amounts and disclosure related to the following:





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

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

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

| | (4) |  | Fair value of derivative instruments.
| | --- |  | -------------------------------------




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





Real estate and
leasehold improvements are classified as long-lived assets held for sale or long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we record assets held for sale at the lower of the carrying amount or fair value, less cost to sell. As of September 30, 2002, we classified our Academy property, a 194,000 net rentable square foot office property in Los Angeles,
California, as held for sale. During the period, we recognized an impairment loss of $2.9 million representing the difference between the carrying amount of the property and our estimate of fair value, less cost to sell. With respect to assets
classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered. All of our long-lived assets, with the exception of our Academy property, were classified as held and used at September 30,
2002. Our operating real estate, which comprises the majority of our long-lived assets, had a carrying amount of $1.7 billion at September 30, 2002. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. We recognize an impairment loss to the extent the carrying amount is not recoverable. The impairment loss is the amount by which the carrying amount




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##### Table of Contents

exceeds the fair value. Our determination of expected cash flows generated from our properties requires us to make assumptions related to future
occupancy of our properties, future rental rates, tenant concessions, operating expenditures, property taxes, capital improvements, the ability of our tenants to perform pursuant to their lease obligations and the proceeds generated from the
eventual sale of our properties. If one or more of our assumptions proves incorrect or if our assumptions change, we may need to recognize an impairment loss on our properties in the future. In addition, if by necessity, we are forced to sell one or
more of our properties in a weak economic environment, the proceeds generated from the sale may not be adequate to recover our carrying amount and thus, result in the recognition of a loss on sale. The recognition of a loss on sale would negatively
impact our current earnings. Impairment recognition would negatively impact the recorded value of our assets and reduce current period earnings.





Allowance for doubtful accounts





Accounts receivable are reduced by an allowance for
amounts that may become uncollectible in the future. Our receivable balance is comprised primarily of accrued rental rate increases to be received over the life of in-place leases as well as rents and operating cost recoveries due from tenants. We
regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. At September 30, 2002, we had total
receivables of $43.3 million and an allowance for doubtful accounts of $6.3 million, resulting in a net receivable balance of $36.9 million. Of the $43.3 million in total receivables, $34.6 million represents accrued rental rate increases to be
received over the life of in-place leases. It is our policy to reserve all outstanding receivables that are 90-days past due along with a portion of the remaining receivable balance that we feel is adequate based on our evaluation of our outstanding
receivable balance. In addition, we increase our allowance for doubtful accounts for accrued rental rate increases, if we determine such future rent may become uncollectible. Actual results may differ from these estimates under different assumptions
or conditions. If our assumptions, regarding the collectibility of accounts receivable, prove incorrect, we could experience write-offs in excess of our allowance for doubtful accounts, which would result in a decrease in our earnings.





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





Depreciation on buildings and improvements is provided under the straight-line method over an estimated useful life of 30 to 40 years for office buildings and 25 to 30
years for industrial buildings. Significant betterments made to our real estate assets are capitalized and depreciated over the estimated useful life of the betterment. If our estimate of useful lives proves to be materially incorrect, the
depreciation and amortization expense that we currently recognize would also prove to be materially incorrect. A change in our estimate of useful lives would therefore, result in either an increase or decrease in depreciation and amortization
expense and thus, an increase or decrease in earnings.





Fair value of derivative instruments





In the normal course of business, we are exposed to the effect of interest rate changes. We limit our exposure by following established
risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to hedge against rate movements on our related debt. We are required to recognize all derivatives as either assets
or liabilities in the statement of financial position and to measure those instruments at fair value. Changes in fair value will affect either shareholders equity or net income depending on whether the derivative instrument qualifies as a
hedge for accounting purposes.





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





Results of Operations





As an owner of real estate, the majority of our income and cash flow is derived from rental income received pursuant to tenant leases for space at our properties; and thus,
our earnings would be negatively impacted by a deterioration of our rental income. One or




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##### Table of Contents

more factors could result in a deterioration of rental income including (1) our failure to renew or execute new leases as current leases expire;
(2) our failure to renew or execute new leases with rental terms at or above the terms of in-place leases; and (3) tenant defaults.





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





At September 30, 2002, we had 16.1 million square feet of in-place leases representing 92.8%
of the net rentable square feet of our operating properties. Our leases range in term from 1 month to 17 years with an average term of 5 to 7 years. The 16.1 million square feet of in-place leases expire as follows:





(square feet in thousands)

Square Feet2002

306

1.9%2003

1,713

10.6%2004

2,650

16.5%2005

2,094

13.0%2006

1,862

11.6%Thereafter

7,462

46.4%16,087

100.0%





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





On July 21, 2002, WorldCom, Inc. announced that WorldCom
and substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the United States Bankruptcy Court.





We have eight office lease agreements with WorldCom subsidiaries. These eight leases total 271,402 square feet in five of our office developments. Annualized base rental
revenue from these leases equates to approximately $6.1 million, or less than 2% of our annualized base rental revenue. All rent due as of September 30, 2002 under these office lease agreements, has been collected. Expiration dates for WorldCom
related office leases breakdown as follows: 17,118 square feet expires in March 2003; 35,946 square feet expires in July 2003; 106,576 square feet expires in April 2005; and 111,762 square feet expires at various times in 2006. Base rental rates
under these leases range from $17.50 per square foot to $23.52 per square foot. As of the date of this filing, we are uncertain whether the leases will be accepted or rejected in the bankruptcy proceedings or whether WorldCom or its subsidiaries
will continue to pay in accordance with the lease terms.





In addition to the office lease agreements, we have
eight rooftop antenna lease agreements with WorldCom subsidiaries. These eight leases are spread over seven of our office developments and expire at various dates through June 30, 2008. Annualized rent from these leases equates to $205,000.




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Comparison of the Three Months Ended September 30, 2002 to the Three Months Ended September 30, 2001





The table below presents our statement of operations for the three month periods ended September 30, 2002 and
September 30, 2001:








Three Months Ended September 30,(in thousands)

2002


2001Statement of OperationsRevenues:Rental income

$
88,050


$
83,867Management and other fees, net


963



1,44389,013



85,310Expenses:Property operating and maintenance


21,778



19,195Real estate taxes


9,680



9,750General and administrative and personnel cost


2,467



2,737Interest expense


17,233



15,898Amortization of deferred financing costs


500



402Depreciation and amortization


17,923



16,02269,581



64,004Equity in income of joint ventures and unconsolidated subsidiaries


308



212Income from continuing operations before gain/(loss) from property dispositions and minority interests


19,740



21,518Loss on sale of properties






(125
)Minority interests


(2,770
)


(4,053
)Income from continuing operations

$
16,970


$
17,340Discontinued operations:Income from discontinued operations


554



531Gain from disposition of discontinued operations


5,599



Minority interests related to discontinued operations


(229
)


(23
)5,924



508Net income

$
22,894


$
17,848





Included below is a discussion of the significant events or
transactions that have impacted our results of operations when comparing the three month period ended September 30, 2002 to the three month period ended September 30, 2001.





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





Leasing of Development Projects.Our results of operations for the three months ended September 30, 2002, have been
bolstered by the contribution of several development projects. The projects include approximately 396,000 net rentable square feet in our Southwest Region and 40,000 net rentable square feet in our Southern California Region. At September 30, 2002
these projects were approximately 99% leased.





Redemption of Preferred Units.On January 3, 2002, we
repurchased all of our outstanding 9.45% Series C Cumulative Redeemable Perpetual Preferred Units of our operating partnership for approximately $50.6 million.





Real Estate Dispositions and Real Estate Held for Sale.    During the three months ended September 30, 2002, we disposed of seven industrial properties containing 875,000 net rentable square feet,
which included all of the industrial properties within our Mid-Atlantic Region. The sale resulted in gross proceeds of $33.8 million which were used to repay a portion of the outstanding borrowings under our revolving credit facility. In addition,
we committed to a plan to sell the Academy property, located within our Southern California




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Region. In accordance with Statement of Financial Accounting Standards No. 144, effective for financial statements issued for fiscal years
beginning after December 15, 2001, net income and gain/(loss) for real estate properties sold and real estate properties held for sale are to be reflected in the consolidated statements of income as discontinued operations.





Other Significant Events or Transactions.On November 22, 1999, we acquired 123 North Wacker, a 537,000 net rentable square foot
office property located in our Midwest Region for gross proceeds of approximately $87.3 million. The property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place
lease. Our intention was to convert and market the building for lease as a multi-tenant property. The property, which was vacated as intended, is currently 71% leased.





Included below is a discussion of the material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions
had on one or more line items of our consolidated statements of income when comparing the three month period ended September 30, 2002 to the three month period ended September 30, 2001.





Rental Income.    Rental income increased by $4.2 million, or 5.0%, from $83.9 million to $88.1 million. The acquisition of the Burnett Plaza property in March
2002 and development properties coming on-line resulted in increases of $5.7 million and $1.9 million, respectively. These increases were partially offset by a decrease of $1.1 million related to the 123 North Wacker property and a $2.3 million
decline in rental income from our other properties related primarily to occupancy declines in our portfolio.





Property Operating and
Maintenance.    Property operating and maintenance costs increased by $2.6 million, or 13.5%, from $19.2 million to $21.8 million. The acquisition of the Burnett Plaza property in March 2002 and development properties coming
on-line resulted in increases of $1.4 million and $381,000, respectively. Our 123 North Wacker property accounted for a decrease of $172,000 and our other properties accounted for an increase of $975,000, of which $545,000 was attributable to an
increase in our allowance for doubtful accounts during the period.





Real Estate Taxes.    Real estate taxes
decreased by $70,000, or less than 1.0%, during the period. The acquisition of the Burnett Plaza property in March 2002 and development properties coming on-line resulted in increases of $386,000 and $105,000, respectively. Our 123 North Wacker
property accounted for a decrease of $178,000 and our other properties accounted for a decrease of $384,000, relating primarily to a decrease in actual and estimated property tax assessments for fiscal year 2002.





Interest Expense.    Interest expense increased by $1.3 million, or 8.4%, from $15.9 million to $17.2 million, primarily as a result
of an increase in weighted average borrowings outstanding from the three months ended September 30, 2001 to the three months ended September 30, 2002 and a decrease in capitalized interest from $958,000 to $553,000 for the respective periods. The
increase was partially offset by a decrease in the weighted average interest rate paid on outstanding borrowings from 7.27% to 6.82% for the respective periods.





Depreciation and Amortization.    Depreciation and amortization increased by $1.9 million, or 11.9%, from $16.0 million to $17.9 million. The acquisition of the Burnett Plaza property in March 2002
and development properties coming on-line resulted in increases of $994,000 and $446,000, respectively. Our 123 North Wacker property accounted for an increase of $288,000 and our other properties accounted for an increase of $152,000.





Minority Interests.    Minority interests decreased by $1.3 million, or 31.7%, from $4.1 million to $2.8 million primarily
due to the income allocation related to the Series C Cumulative Redeemable Perpetual Preferred Units that were repurchased in January 2002.





Discontinued Operations.    Discontinued operations increased by $5.4 million from $508,000 to $5.9 million, primarily as a result of the gain from the sale of our industrial properties within our
Mid-Atlantic Region which totaled $8.5 million, partially offset by a write-down of $2.9 million, representing the amount by which the carrying amount of our Academy property exceeded our estimate of the fair value of the property, less cost to
sell.




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##### Table of Contents




Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001





The table below presents our statement of operations for the nine month periods ended September 30, 2002 and
September 30, 2001:





Nine Months Ended September 30,(in thousands)

2002


2001Statement of OperationsRevenues:Rental income

$
260,337


$
251,340Management and other fees, net


3,506



3,958263,843



255,298Expenses:Property operating and maintenance


63,654



57,223Real estate taxes


31,249



29,881General and administrative and personnel cost


7,709



8,102Interest expense


50,149



49,878Amortization of deferred financing costs


1,314



1,205Depreciation and amortization


52,423



46,843206,498



193,132Equity in income of joint ventures and unconsolidated subsidiaries


2,192



2,204Merger termination fee






17,000Income from continuing operations before gain/(loss) from property dispositions and minority interests


59,537



81,370Gain on sale of properties






14,038Minority interests


(8,396
)


(13,436
)Income from continuing operations

$
51,141


$
81,972Discontinued operations:Income from discontinued operations


2,000



2,131Gain from disposition of discontinued operations


5,599



Minority interests related to discontinued operations


(285
)


(93
)7,314



2,038Income before extraordinary items


58,455



84,010Extraordinary items






(367
)Net income

$
58,455


$
83,643





Included below is a discussion of the significant events or
transactions that have impacted our results of operations when comparing the nine month period ended September 30, 2002 to the nine month period ended September 30, 2001.





Acquisition of Real Estate.In addition to the acquisition of the Burnett Plaza property in March 2002, we acquired seven wholly-owned office properties and an interest in
a real estate joint venture, both of which impact our results of operations when comparing the nine months ended September 30, 2002 to the nine months ended September 30, 2001. The seven wholly-owned properties, located in our Mid-Atlantic Region,
contain 1.3 million net rentable square feet and were acquired between April 2001 and July 2001 for an aggregate purchase price of $134.9 million. Our interest in the real estate joint venture, consisting of a 25% non-controlling interest in a joint
venture owning two office properties containing 452,000 net rentable square feet in our Mid-Atlantic Region, was acquired in April 2001 for $10.7 million. We account for our interest in the joint venture using the equity method of accounting.





Leasing of Development Projects.Our results of operations for the nine months ended September 30, 2002,
have been bolstered by the contribution of several development projects. The projects include approximately 396,000 net rentable square feet in our Southwest Region, 59,000 net rentable square feet in our Midwest Region and 40,000 net rentable
square feet in our Southern California Region. At September 30, 2002 these projects were approximately 99% leased.





Redemption and
Issuance of Preferred Units.In addition to the redemption of our 9.45% Series C Cumulative Redeemable Perpetual Preferred Units in January 2002, we issued $10.0 million of 7.50% Series E Preferred Units in April 2001 as
part of the proceeds used in acquiring real estate assets.




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##### Table of Contents




Real Estate Dispositions and Real Estate Held for Sale.    In addition to the
disposition of the industrial properties within our Mid-Atlantic Region, we disposed of 42 properties containing 2.8 million net rentable square feet that impact our results of operations when comparing the nine months ended September 30, 2002 to
the nine months ended September 30, 2001. The 42 properties included 1 property containing 243,000 square feet located in our Mid-Atlantic Region, 5 properties containing 584,000 square feet in our Midwest Region, 5 properties containing 301,000
square feet in our Southern California Region and all of the properties within our Northeast Region which included 31 properties containing 1.7 million square feet.





Termination of Merger.On September 21, 2000, we entered into a termination and release agreement which provided for the termination of the agreement and plan of merger
dated June 27, 2000, between us, our operating partnership, Mack-Cali Realty Corporation, a Maryland corporation and Mack-Cali Realty, L.P., a Delaware limited partnership of which Mack-Cali is the sole general partner. In connection with the
termination and release agreement, and pursuant to an escrow agreement dated September 21, 2000, Mack-Cali deposited a $25.0 million termination fee in escrow for our benefit.





Other Significant Events or Transactions.On November 22, 1999, we acquired 123 North Wacker, a 537,000 net rentable square foot office property located in our Midwest
Region for gross proceeds of approximately $87.3 million. The property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to convert and
market the building for lease as a multi-tenant property. The property, which was vacated as intended, is currently 71% leased.





Included below is a discussion of the material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions had on one or more line items of our consolidated statements
of income when comparing the nine month period ended September 30, 2002 to the nine month period ended September 30, 2001.





Rental
Income.    Rental income increased by $9.0 million, or 3.6%, from $251.3 million to $260.3 million. The real estate acquisitions and development properties coming on-line resulted in increases of $19.5 million and $7.9
million, respectively. These increases were partially offset by a decrease of $10.4 million related to property dispositions during the period January 1, 2001 through December 31, 2001, a decrease of $5.2 million related to our 123 North Wacker
property and a decrease of $2.9 million from our other properties related primarily to occupancy declines in our portfolio.





Property
Operating and Maintenance.    Property operating and maintenance costs increased by $6.4 million, or 11.2%, from $57.2 million to $63.7 million. The real estate acquisitions and development properties coming on-line resulted
in increases of $4.3 million and $1.2 million, respectively. These increases were partially offset by a decrease of $2.4 million related to real estate dispositions during the period January 1, 2001 through December 31, 2001 and a decrease of
$812,000 related to our 123 North Wacker property. Property operating and maintenance expenses related to our other properties increased by $4.2 million, relating primarily to an increase in our allowance for doubtful accounts of $3.2 million during
the period.





Real Estate Taxes.    Real estate taxes increased by $1.4 million, or 4.6% during the period. The
real estate acquisitions and development properties coming on-line resulted in increases of $2.1 million and $1.0 million, respectively. These increases were partially offset by a decrease of $691,000 related to real estate dispositions during the
period January 1, 2001 through December 31, 2001 and a decrease of $1.1 million related to our 123 North Wacker property. Other properties in the aggregate remained virtually unchanged.





Interest Expense.    Interest expense increased by $271,000 or less than 1.0%, from $49.9 million to $50.1 million, primarily as a result of an increase in
weighted average borrowings outstanding from the nine months ended September 30, 2001 to the nine months ended September 30, 2002. This increase was partially offset by an increase in capitalized interest from $2.7 million to $2.9 million for the
respective periods and a decrease in the weighted average interest rate paid on outstanding borrowings from 7.42% to 6.79% for the respective periods.





Depreciation and Amortization.    Depreciation and amortization increased by $5.6 million, or 11.9%, from $46.8 million to $52.4 million. The real estate acquisitions and development properties coming
on-line resulted in increases of $3.4 million and $1.7 million, respectively. These increases were partially offset by a decrease of $1.9 million related to real estate dispositions during the period January 1, 2001 through December 31, 2001.
Additionally, our depreciation and amortization expense related to our 123 North Wacker property and other properties increased by $776,000 and $1.7 million, respectively.





Merger Termination Fee.During the nine months ended September 30, 2001, we received final distributions totaling $17.0 million from the Mack-Cali escrow account.




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Gain on Sales.    Gain on sales decreased by $14.0 million. Prior to the
effective date of Statement of Financial Accounting Standards No. 144, gains and losses on our real estate dispositions were included in continuing operations in the line item gain on sale of properties on our consolidated statement of
income. Included as such, during the nine months ended September 30, 2001, we sold 42 properties totaling 2.8 million net rentable square feet resulting in a gain on sale of $18.8 million. The gain was partially offset by a $4.7 million write-down
on the Crescent Centre property, prior to its disposition in May 2001.





Minority Interests.    Minority
interests decreased by $5.0 million, or 37.5 %, from $13.4 million to $8.4 million, primarily due to the income allocation totaling $3.5 million related to the Series C Cumulative Redeemable Perpetual Preferred Units that were repurchased in January
2002, as well as the minority interest holders proportionate share of the decrease in income from continuing operations before minority interests from $95.4 million for the nine months ended September 30, 2001 to $59.5 million for the nine months
ended September 30, 2002. The decrease was partially offset by the additional income allocation totaling $188,000 related to the Series E Preferred Units issued in April 2001.





Discontinued Operations.    Discontinued operations increased by $5.3 million, from $2.0 million to $7.3 million, primarily as a result of the gain from the sale of our
industrial properties in our Mid-Atlantic Region which totaled $8.5 million, partially offset by a write-down of $2.9 million, representing the amount by which the carrying amount of our Academy property exceeded our estimate of the fair value of
the property, less cost to sell.





On January 1, 2003, we are going to adopt the fair value method of accounting
for stock-based compensation provisions of Statement of Financial Accounting Standards No. 123, which is considered by the Financial Accounting Standards Board to be the preferable accounting method for stock-based employee compensation. Subsequent
to adoption of the fair value method provisions of this statement, we will expense all future employee stock options (and similar awards) over the vesting period based on the fair value of the award on the date of grant. We do not expect our results
of operations to be impacted in the current year from this prospective change in accounting policy based on the current accounting guidance related to this adoption, which is currently under review by the Financial Accounting Standards Board.





The impact of recording compensation expense at fair value in prior periods has been included in the pro forma
disclosures, as required by the statement, provided in our Annual Report on Form 10-K filed on March 27, 2002. Prior period compensation expense is not necessarily indicative of future compensation expense that would be recorded by us upon our
adoption of the fair value method provisions of this statement. Future expense may vary based upon factors such as the number of options we grant and the then-current fair market value of such options.





Liquidity and Capital Resources





Cash and cash equivalents were $6.8 million and $5.8 million at September 30, 2002 and December 31, 2001, respectively. The increase in cash and cash equivalents is a result of cash flows provided by operating activities exceeding
those used in investing and financing activities. Net cash provided by operating activities was $122.7 million for the nine months ended September 30, 2002, compared to $121.8 million for the nine months ended September 30, 2001, due in part to the
increase in rental income from our properties exceeding the increase in property related expenses.





Net cash used
in investing activities totaled $111.4 million for the nine months ended September 30, 2002 compared to $24.9 million for the nine months ended September 30, 2001. This increase in net cash used in investing activities of $86.5 million is due
primarily to a decrease in cash generated from the sale of real estate of $163.7 million, partially offset by a decrease of $25.1 million in cash used in the purchase real estate and mortgage loans and a decrease of $50.3 million in cash used in the
development and redevelopment of real estate.





Net cash used in financing activities totaled $10.4 million for the
nine months ended September 30, 2002 compared to $96.9 million for the nine months ended September 30, 2001. The decrease in net cash used in financing activities of $86.5 million is due primarily to net borrowings of $67.4 million for the nine
months ended September 30, 2002 compared to net repayments of $26.3 million for the nine months ended September 30, 2001, an increase in cash generated from the sale of common shares of $43.8 million, partially offset by an increase in cash used of
$50.5 million for the repurchase of outstanding preferred units in January 2002.





Our principal short-term
liquidity needs are to fund normal recurring expenses, debt service requirements and the minimum distributions required to maintain our REIT qualification under the Internal Revenue Code. We expect to make distributions to our shareholders primarily
based on distributions from the operating partnership. The operating partnerships income is generally derived from operating activities which include rental revenues and operating expense reimbursements from tenants and, to a limited extent,
from fees generated by our office and industrial real estate management service business.




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We anticipate that our short-term liquidity needs will be fully funded from cash
flows provided by operating activities and, when necessary to fund shortfalls resulting from the timing of collections of accounts receivable in the ordinary course of business, from our revolving credit facility. In the event that our cash flow
needs exceed cash flows provided by operating activities, we may be forced to sell real estate properties to fund such cash flow needs.





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





As of September 30, 2002, we had
outstanding total indebtedness, including our pro rata share of joint venture debt of approximately $1.06 billion, or approximately 43.4% of total market capitalization based on a common share price of $28.94 per common share. Our policy is to limit
combined indebtedness plus our pro rata share of joint venture debt and construction loans so that at the time such debt is incurred, it does not exceed 50% of the our total market capitalization. As of September 30, 2002, we had the approximate
capacity to borrow up to an additional $321.8 million under the debt limitation and the various restrictions in our credit agreements. The amount of indebtedness that we may incur, and the policies with respect thereto, are not limited by our
declaration of trust and bylaws, and are solely within the discretion of our board of trustees limited only by various financial covenants in our credit agreements.





We have in place a $300 million unsecured revolving credit facility with a group of 12 banks. The facility, which was renewed in May 2002, matures in May 2005. The facility
has an initial interest rate of LIBOR plus 137.5 basis points. Additionally, we are required to pay an average unused commitment fee of 25 basis points per annum if the unused portion of the credit facility is greater than $200 million. The fee is
reduced to 20 basis points per annum if the unused portion is less than or equal to $200 million, but greater than $100 million. The fee is further reduced to 15 basis points per annum if the unused portion is less than or equal to $100 million.
During the three months ended September 30, 2002, we had net repayments under our credit facility of $38.0 million and an outstanding balance of $118.5 million at September 30, 2002, resulting in an available balance of $181.5 million.





As of September 30, 2002, we have non-controlling partnership interests in two separate real estate joint ventures which have
in the aggregate $207.0 million of non-recourse mortgage debt. The mortgage debt of each venture is collateralized by the real estate property or properties within each venture, the net book value of which totaled $181.1 million at September 30,
2002. Our proportionate share of the non-recourse mortgage debt totaled $88.3 million at September 30, 2002.




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The following table sets forth our
mortgages and notes payable, including our pro rata share of joint venture debt, as of September 30, 2002.





Borrower/Description

Current Balance

Amortization

Interest Rate

Maturity(in thousands)Broadmoor Austin AssociatesBroadmoor Austin(1)

$
73,088


16 yr

7.04%

April 10, 2011Burnett Plaza AssociatesBurnett Plaza


72,100


None

LIBOR + 2.150%

July 9, 2005PL Property Associates, L.P.Park West C2


34,105


30 yr

6.63%

November 10, 2010Prentiss Properties Acquisition Partners, L.P.Bachman West


2,833


25 yr

8.63%

December 1, 2003One Westchase Center


23,651


25 yr

7.84%

February 1, 2004Collateralized Term Loan(2)


71,750


25 yr

LIBOR + 1.625%

September 30, 2004Walnut Glen Tower


34,083


30 yr

6.92%

April 1, 2005Revolving Credit Facility


118,500


None

LIBOR + 1.375%

May 23, 2005Unsecured Term Loan


75,000


None

LIBOR + 1.375%

March 16, 2006Highland Court


4,643


25 yr

7.27%

April 1, 2006Westheimer Central Plaza


5,664


25 yr

8.38%

August 1, 20067101 Wisconsin Avenue


20,722


30 yr

7.25%

April 1, 20092500 Cumberland Parkway


14,250


30 yr

7.46%

July 15, 2009Ordway


48,591


30 yr

7.95%

April 1, 2010World Savings Center


28,842


30 yr

7.91%

November 1, 2010One OHare Centre


40,456


30 yr

6.80%

January 10, 20113130 Fairview Park Drive


22,635


30 yr

7.00%

April 1, 2011Research Office Center


44,581


28 yr

7.64%

October 1, 2011Bannockburn Centre


26,471


30 yr

8.05%

June 1, 2012Del Mar Loan


44,467


30 yr

7.41%

June 1, 2013Prentiss Properties Corporetum, L.P.Corporetum Office Campus


25,066


30 yr

7.02%

February 1, 2009Prentiss Properties Natomas, L.P.Natomas Corporate Center


36,635


30 yr

7.02%

February 1, 2009Prentiss Properties Real Estate Fund I, L.P.PPREFI Portfolio Loan(3)


180,100


None

7.58%

February 26, 2007Tysons International Partners1676 International(4)


11,195


28 yr

7.68%

August 30, 20108260 Greensboro(4)


4,005


28 yr

7.83%

August 30, 2010Total




$
1,063,433





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

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

|(3) |  | The PPREFI Portfolio Loan is collateralized by the following 36 properties: the Los Angeles industrial properties (18 properties), the Chicago industrial
properties (four properties), the Cottonwood Office Center (three properties), Park West E1 and E2 (two properties), One Northwestern Plaza, 3141 Fairview Park Drive, 2455 Horsepen Road, OHare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner
Road, 4401 Fair Lakes Court, the WestPoint Office Building and the PacifiCare Building.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|
|




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





Under our loan agreements, we are required to satisfy various affirmative and negative covenants, including limitations on total indebtedness, total collateralized indebtedness and cash distributions, as well as obligations
to maintain certain minimum tangible net worth and certain minimum interest coverage ratios. Our credit agreements limit total indebtedness to 55% of total assets and require a debt service coverage ratio of at least 2 to 1. Our credit agreements
provide for a 30-day period to cure a default caused by




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##### Table of Contents

our failure to punctually and properly perform, observe and comply with the covenants contained therein. The agreements also provide for an
additional 75-day period if such failure is not capable of being cured within 30-days and we are diligently pursuing the cure thereof. We were in compliance with these covenants at September 30, 2002.





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





We may employ forwards or purchased options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in
net income in the same period that the anticipated transaction occurs, expires or is otherwise terminated. The following table summarizes the notional amounts and fair values of our derivative financial instruments. The notional amount provides an
indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.





Notional Amount

Swap Rate Paid(Fixed)

EffectiveFixedRate

Swap Rate Received(Variable) atSeptember 30, 2002

Swap Maturity

Fair Value(in thousands)$ 50 million

2.275%

3.653%

1.81125%

January 2003

$
(73
)$ 50 million

6.253%

7.628%

1.81125%

September 2004


(4,209
)$ 60 million

6.248%

7.623%

1.81125%

September 2004


(5,045
)$ 15 million

4.345%

6.495%

1.81125%

July 2005


(807
)$ 25 million

4.345%

6.495%

1.81125%

July 2005


(1,344
)$ 20 million

5.985%

7.610%

1.81125%

March 2006


(2,238
)$ 30 million

5.990%

7.615%

1.81125%

March 2006


(3,361
)$ 50 million(1)

1.990%

3.365%

1.81125%

August 2003


(140
)Total









$
(17,217
)





|(1) |  | The interest rate swap takes effect upon the expiration of our $50 million
swap expiring in January 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------




Our properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. The majority of capital required relates to tenant-related capital expenditures and is dependent upon our leasing activity. Our leasing activity is a function of the
percentage of our in-place leases expiring in current and future periods accompanied by our exposure to tenant defaults and our ability to increase the average occupancy of our portfolio. For the nine months ended September 30, 2002, our
non-incremental and incremental revenue-generating capital expenditures totaled approximately $16.2 million and $1.9 million, respectively.





On June 10, 2002, we entered into a securities sales agreement with Brinson Patrick Securities Corporation. Under the sales agreement we may sell, with Brinson Patrick acting as our sales agent, up to
3,000,000 of our common shares of beneficial interest, par value $0.01 per share at the then market price directly to the public. Such sales, which may occur in future periods from time to time pursuant to the agreement, will increase our net cash
provided by financing activities during the period in which they occur, subject to offsetting amounts related to other activities during such period.





During the three months ended September 30, 2002, we repurchased 100,000 common shares in the open market for an aggregate purchase price of $2.47 million, or $24.72 per share, including commissions.
The repurchase of our common shares decreases net cash provided by financing activities.




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##### Table of Contents




We have contractual obligations and commercial commitments including mortgages
and notes payable, ground lease obligations and letters of credit. The table below presents, as of September 30, 2002, our future scheduled principal repayments of mortgages and notes payable and ground lease obligations, including our pro rata
share of debt and ground lease obligations of our of joint venture properties:





(in thousands)

Mortgages and Notes Payable

Ground Lease Obligations

Total Contractual Cash Obligations2002

$
2,311

$
113

$
2,4242003


12,435


452


12,8872004


102,885


457


103,3422005


232,876


517


233,3932006


94,013


536


94,549Thereafter


618,913


28,722


647,635$
1,063,433

$
30,797

$
1,094,230





Our other commercial commitments include letters of credit totaling
$1.4 million which expire as follows:





(in thousands)

Letters of Credit2002

$
632003


1,0632004


632005


632006


126Thereafter


$
1,378





Funds from Operations





Funds from operations, as defined by the National Association of Real Estate Investment Trusts, means net income, computed in accordance with accounting principles
generally accepted in the United States of America excluding extraordinary items (as defined by accounting principles generally accepted in the United States of America) and gains or losses from sales of property, plus depreciation and amortization
on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures and subsidiaries. With the exception of our exclusion, from funds from operations, of the merger termination fee, we calculate funds from operations in
accordance with the NAREIT definition. We believe that funds from operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing and investing activities, it
provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. Our funds from operations is not comparable to funds from operations reported by other REITs that do not
define funds from operations exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, funds from operations should be examined in conjunction with net income as presented in our consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an
alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. Our funds from operations for the respective periods are calculated as follows:





Funds from operations

Three Months Ended September 30,


Nine Months Ended September 30,(in thousands)

2002


2001


2002


2001Net income

$
22,894


$
17,848


$
58,455


$
83,643Add:Real estate depreciation and amortization


18,422



16,589



54,038



48,491Real estate depreciation and amortization of unconsolidated joint ventures


739



966



2,357



2,619Minority interests(1)


2,963



4,034



8,564



13,405Extraordinary items














367Less:Merger termination fee(2)














(17,000
)(Gains)/losses on sales


(5,599
)


125



(5,599
)


(14,038
)Dividend on perpetual preferred units


(2,159
)


(3,340
)


(6,503
)


(9,832
)Funds from operations

$
37,260


$
36,222


$
111,312


$
107,655




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##### Table of Contents




|(1) |  | Represents the minority interests applicable to the common and preferred unit holders of the operating partnership.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(2) |  | Although the fee is not considered an extraordinary item in accordance with accounting principles generally accepted in the United States of America, it is our
opinion that it is appropriate to exclude the fee from funds from operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Funds from
operations increased by $1.0 million from $36.2 million for the three months ended September 30, 2001 to $37.3 million for the three months ended September 30, 2002 and by $3.7 million from $107.7 million for the nine months ended September 30, 2001
to $111.3 million for the nine months ended September 30, 2002 as a result of the factors discussed in the analysis of operating results.





Recently Issued Accounting Standards





On June 28, 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. The statement addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated
with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of the statement also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The statement will be effective for exit or disposal
activities initiated after December 31, 2002. We have not yet determined the impact of the statement on our results of operations and financial position.





Item 3.    Quantitative and Qualitative Disclosures about Market Risk





Our primary market risk is exposure to changes in interest rates as a result of our revolving credit facility and long-term debt. At September 30, 2002, we had outstanding total indebtedness, including our pro rata share of joint
venture debt and construction loans, of approximately $1.06 billion, or approximately 43.4% of total market capitalization. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower
our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable
with such arrangement. In addition, we may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps and floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes. Approximately 68.3% of our outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.45% at September 30, 2002. Of the remaining $337.3 million, or 31.7%, representing our variable rate debt, $250.0 million was effectively locked at an interest rate (before the spread over LIBOR) of 5.10% through our interest rate swap
agreements. We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.




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##### Table of Contents




The following table provides information about our financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations outstanding at September 30, 2002, including our pro rata share of joint venture debt totaling $88.3 million, the table presents
principal cash flows and related weighted average interest rates for the debt outstanding during the periods. For interest rate swaps, the table presents notional amounts and weighted average interest rates for in-place swaps during the period.
Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on 30-day LIBOR as of September 30, 2002. The fair value of our fixed rate debt indicates the estimated
principal amount of debt having similar debt service requirements, which could have been borrowed by us at September 30, 2002. The rate assumed in the fair value calculation of fixed rate debt is equal to 6.0%, representing our estimated borrowing
rate for fixed rate debt instruments similar in term to those outstanding at September 30, 2002. The fair value of our variable to fixed interest rate swaps indicates the estimated amount that would have been paid by us had they been terminated at
September 30, 2002.





(dollars in thousands)

2002


2003


2004


2005


2006


Thereafter


Total

Fair ValueLiabilitiesLong-Term Debt:Fixed Rate

$
2,123


$
11,685


$
32,073


$
42,276


$
19,013


$
618,913


$
726,083

$
779,314Average Interest Rate


7.45
%


7.45
%


7.43
%


7.46
%


7.46
%


7.40
%





Variable Rate

$
188


$
750


$
70,812


$
190,600


$
75,000






$
337,350

$
337,350Average Interest Rate


3.45
%


3.45
%


3.45
%


3.42
%


3.23
%









Interest Rate DerivativesInterest Rate Swaps:Variable to Fixed





$
50,000


$
110,000


$
40,000


$
50,000









$
(17,217
)Average Pay Rate


5.10
%


5.32
%


5.73
%


5.52
%


5.99
%









Average Receive Rate


1.81
%


1.81
%


1.81
%


1.81
%


1.81
%















The table incorporates only those exposures that exist as of
September 30, 2002 and does not consider exposures or positions that could arise after that date. In addition, because firm commitments are not represented in the table above, the information presented therein has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time. There is inherent rollover risk
for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our financing requirements.





Item 4.    Controls and Procedures





Within the 90 days prior to the
filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Securities Exchange Act Rule 15d-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.





There have been no significant changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date we carried out this evaluation.




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##### Table of Contents

PART II


OTHER INFORMATION





Item 1.    Legal Proceedings





We are not presently subject to
any material litigation, other than ordinary routine litigation incidental to the business.





Item 2.    Changes in Securities and Use of Proceeds





None





Item 3.    Defaults Upon Senior Securities





None.





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





None





Item 5.    Other Information





None.





Item 6.    Exhibits and Reports on Form 8-K





(a)    Exhibits:





EXHIBIT NO.

DESCRIPTION3.1

Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to our Registration Statement on Amendment No. 1 of Form S-11, File No.
333-09863, and incorporated by reference herein).3.2

Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to our Form 10-Q, filed on May 15, 2002, File No. 001-14516).3.3

Amendment No. 1 to the Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.3 to our Form 10-Q, filed on May 15, 2002, File No.
001-14516).3.4

Articles Supplementary, dated February 17, 1998, Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Junior Participating
Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, Series B, and Fixing Distribution and Other Preferences and Rights of Such Shares (filed as an Exhibit to our Registration Statement on Form 8-A, filed on February 17, 1998,
File No. 000-23813 and incorporated by reference herein).3.5

Articles Supplementary, dated June 25, 1998, Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Series B Cumulative
Redeemable Perpetual Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Shares (included as Exhibit 3.5 to our Form 10-Q, filed on August 12, 1998, File No. 001-14516).3.6

Articles Supplementary, dated March 20, 2001 (filed as Exhibit 3.6 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by
reference herein).3.7

Articles Supplementary Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Series D Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of such Shares, dated March 20, 2001 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by
reference herein).3.8

Articles Supplementary, dated January 4, 2002 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by
reference herein).4.1

Form of Common Share Certificate (filed as Exhibit 4.1 to our Registration Statement on Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by
reference herein).


|
|






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##### Table of Contents




4.2


Amended and Restated Rights Agreement, dated January 22, 2002, between Prentiss Properties Trust and EquiServe Trust Company, N.A., as Rights Agent (filed as
Exhibit 1 to Amendment No. 2 to our Registration Statement on Form 8-A, filed on February 6, 2002, File No. 000-014516).4.3


First Amendment dated June 26, 2002 to the Amended and Restated Rights Agreement between Prentiss Properties Trust and Equiserve Trust Company, N.A. as
Rights Agent (filed as Exhibit 2 to Amendment No. 3 to our Registration Statement on Form 8-A, filed on June 27, 2002. File No. 001-014516).4.4


Form of Rights Certificate (included as Exhibit A to the Rights Agreement (Exhibit 4.2)).4.5


Form of Series D Preferred Share Certificate (filed as Exhibit 4.4 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by
reference herein).10.1


1996 Share Incentive Plan (filed as Exhibit 10.25 to Amendment No. 1 to our Registration Statement on Form S-11, File No. 333-09863, and incorporated by
reference herein).10.2


First Amendment, effective as of May 6, 1997, to the 1996 Share Incentive Plan (filed as Exhibit 4.6 to our Registration Statement on Form S-8, File No.
333-79623, filed on May 28, 1999, and incorporated by reference herein).10.3


Second Amendment, effective as of May 5, 1998, to the 1996 Share Incentive Plan (filed as Exhibit 4.7 to our Registration Statement on Form S-8, File No.
333-79623, filed on May 28, 1999, and incorporated by reference herein).10.4


Third Amendment, effective as of May 9, 2001, to the 1996 Share Incentive Plan (filed as Exhibit 4.5 to our Registration Statement on Form S-8, File No.
333-68520, filed on August 28, 2001, and incorporated by reference herein).10.5
*

Amendment No. 4, effective as of October 15, 1996, to the 1996 Share Incentive Plan.10.6
*

Amendment No. 5, effective as of October 23, 2002, to the 1996 Share Incentive Plan.10.7


Amended and Restated Trustees Share Incentive Plan, effective as of May 15, 2002 (filed as Exhibit 4.12 to our Registration Statement on Form S-8, File
No. 333-97045, filed on July 24, 2002, and incorporated by reference herein).10.8
*

Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Trustees Share Incentive Plan.10.9


Trustees Share Incentive Plan (filed as Exhibit 4.8 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28, 1999, and incorporated by
reference herein).10.10


First Amendment, effective as of May 5, 1998, to the Trustees Share Incentive Plan (filed as Exhibit 4.9 to our Registration Statement on Form S-8,
File No. 333-79623, filed on May 28, 1999, and incorporated by reference herein).10.11


Second Amendment, effective as of March 1, 1999, to the Trustees Share Incentive Plan (filed as Exhibit 4.10 to our Registration Statement on Form S-8,
File No. 333-79623, filed on May 28, 1999, and incorporated by reference herein).10.12


Third Amendment, effective as of May 10, 2000, to the Trustees Share Incentive Plan (filed as Exhibit 10.8 to our Report on Form 10-K, filed March 27,
2002, File No. 001-14516, and incorporated by reference herein).10.13


Form of Stock Option Agreement (filed as Exhibit 10.9 to our Report on Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference
herein).10.14


Amended and Restated Share Purchase Plan, dated as of July 1, 2000 (filed as Exhibit 10.10 to our Report on Form 10-K, filed March 27, 2002, File No.
001-14516, and incorporated by reference herein).







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##### Table of Contents




10.15*

Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Share Purchase Plan.99.1*

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2*

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





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




On August 14, 2002, we filed with the Securities and Exchange Commission, a Current Report on Form 8-K. The Current Report on Form 8-K was filed pursuant to Item 9. disclosing our filing of
correspondence with the Securities and Exchange Commission. The correspondence accompanied our Quarterly Report on Form 10-Q and included a transmittal letter and certifications of our Chief Executive Officer and Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.




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##### Table of Contents




SIGNATURE





Pursuant to the requirements 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 TRUSTDate: November 14, 2002



By:

/s/    Thomas P. SimonThomas P. Simon Senior Vice President and Chief Accounting Officer (Principal Accounting Officer and Duly Authorized Officer of the Company)




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##### Table of Contents

CERTIFICATIONS





I, Thomas F. August, certify that:





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





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





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





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





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





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





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





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





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





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





6.    The registrants other certifying
officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: November 14, 2002





/s/    Thomas F.
August


Thomas F. August


Chief Executive Officer





I, Michael A. Ernst, certify that:





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





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




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##### Table of Contents




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





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





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





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





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





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





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





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





6.    The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.





Date: November 14, 2002





/s/    Michael A.
Ernst


Michael A. Ernst


Chief Financial Officer




36