##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended June 30, 2003



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



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 Principal Executive Offices)



(214) 654-0886

(Registrants Telephone Number, Including Area Code)



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



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



The number of Common Shares of Beneficial Interest, $0.01 par value,
outstanding as of August 13, 2003, was 39,235,629 and the number of outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 3,773,585.

---



---

##### Table of Contents

PRENTISS PROPERITES TRUST



INDEX



|Part I:   |  | FINANCIAL INFORMATION |  | Page Number                                                                                                                                       
|--------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                       | 
|          |  | Item 1.               |  | Financial Statements                                                                                                                              
|          |  |                       | 
|          |  |                       |  | Consolidated Balance Sheets of Prentiss Properties Trust at June 30, 2003 (unaudited) and December 31, 2002                                       
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Income of Prentiss Properties Trust for the three and six months ended June 30, 2003 and 2002 (unaudited)              
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Comprehensive Income of Prentiss Properties Trust for the three and six months ended June 30, 2003 and 2002 (unaudited)
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Cash Flows of Prentiss Properties Trust for the six months ended June 30, 2003 and 2002 (unaudited)                    
|          |  |                       | 
|          |  |                       |  | Notes to Consolidated Financial Statements                                                                                                        
|          |  |                       | 
|          |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                             
|          |  |                       | 
|          |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                        
|          |  |                       | 
|          |  | Item 4.               |  | Controls and Procedures                                                                                                                           
|          |  |                      
|Part II:  |  | OTHER INFORMATION     |  |                                                                                                                                                   
|          |  |                       | 
|          |  | Item 1.               |  | Legal Proceedings                                                                                                                                 
|          |  |                       | 
|          |  | Item 2.               |  | Changes in Securities and Use of Proceeds                                                                                                         
|          |  |                       | 
|          |  | Item 3.               |  | Default Upon Senior Securities                                                                                                                    
|          |  |                       | 
|          |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                                               
|          |  |                       | 
|          |  | Item 5.               |  | Other Information                                                                                                                                 
|          |  |                       | 
|          |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                                                  
|          | 
|SIGNATURE |  | 47                   





2



---

##### Table of Contents

FORWARD-LOOKING STATEMENTS



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 taxes, insurance and utilities; | 
|                                                                                                                                                                           | 
|      Competition in markets where we have properties;                                                                                                                    | 
|                                                                                                                                                                           | 
|      Environmental and Americans with Disabilities Act compliance issues related to our
properties;                                                                      | 
|                                                                                                                                                                           | 
|      Some of our properties may be subject to uninsured losses;                                                                                                          | 
|                                                                                                                                                                           | 
|      Our properties are illiquid assets;                                                                                                                                 | 
|                                                                                                                                                                           | 
|      Our incurrence of debt and use of variable rate debt and derivative financial
instruments;                                                                          | 



If one or more of
these risks or uncertainties materialize, or if any underlying assumption proves incorrect, actual results may vary materially from those anticipated, expected or projected. Such forward-looking statements reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or
individuals acting on our behalf are expressly qualified in their entirety by this paragraph. A detailed discussion of risks is included, under the caption Risk Factors, in our Form 10-K, filed on March 28, 2003. 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



---

##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1.
Financial Statements



(this page intentionally left
blank)





4



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|ASSETS                                                                                                                                                                                                     |  | June 30, 2003 |            |   | December 31,2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | -
|Operating real estate:                                                                                                                                                                                     |  |               | (unaudited | ) |                  |  
|Land                                                                                                                                                                                                       |  | $             | 313,621    |   |                  | $
|Buildings and improvements                                                                                                                                                                                 |  |               | 1,684,609  |   |                  |  
|Less: accumulated depreciation                                                                                                                                                                             |  |               | (198,194   | ) |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|                                                                                                                                                                                                           |  |               | 1,800,036  |   |                  |  
|                                                                                                                                                                                                           |  |              
|Construction in progress                                                                                                                                                                                   |  |               |           |   |                  |  
|Land held for development                                                                                                                                                                                  |  |               | 64,185     |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Deferred charges and other assets, net                                                                                                                                                                     |  |               | 180,210    |   |                  |  
|Notes receivable                                                                                                                                                                                           |  |               | 13,354     |   |                  |  
|Accounts receivable, net                                                                                                                                                                                   |  |               | 41,097     |   |                  |  
|Cash and cash equivalents                                                                                                                                                                                  |  |               | 7,395      |   |                  |  
|Escrowed cash                                                                                                                                                                                              |  |               | 12,551     |   |                  |  
|Investments in securities                                                                                                                                                                                  |  |               | 2,301      |   |                  |  
|Investments in joint ventures and unconsolidated subsidiaries                                                                                                                                              |  |               | 14,535     |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Total assets                                                                                                                                                                                               |  | $             | 2,135,664  |   |                  | $
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                       |  |               |            |   |                  |  
|Mortgages and notes payable                                                                                                                                                                                |  | $             | 1,060,786  |   |                  | $
|Interest rate hedges                                                                                                                                                                                       |  |               | 14,855     |   |                  |  
|Accounts payable and other liabilities                                                                                                                                                                     |  |               | 75,896     |   |                  |  
|Other payables (affiliates)                                                                                                                                                                                |  |               |           |   |                  |  
|Distributions payable                                                                                                                                                                                      |  |               | 27,043     |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Total liabilities                                                                                                                                                                                          |  |               | 1,178,580  |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|                                                                                                                                                                                                           |  |              
|Minority interest in operating partnership                                                                                                                                                                 |  |               | 132,622    |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Minority interest in real estate partnerships                                                                                                                                                              |  |               | 1,512      |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|                                                                                                                                                                                                           |  |              
|Commitments and contingencies                                                                                                                                                                              |  |               |            |   |                  |  
|                                                                                                                                                                                                           |  |              
|Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585 shares issued and outstanding                                                                                                     |  |               | 100,000    |   |                  |  
|Common shares $.01 par value, 100,000,000 shares authorized, 44,145,837 and 43,965,756 (includes 5,067,401 and 4,984,901 in
treasury) shares issued and outstanding at June 30, 2003 and December 31, 2002 |  |               | 441        |   |                  |  
|Additional paid-in capital                                                                                                                                                                                 |  |               | 887,300    |   |                  |  
|Common shares in treasury at cost, 5,067,401and 4,984,901 shares at June 30, 2003 and December 31, 2002                                                                                                    |  |               | (120,545   | ) |                  |  
|Unearned compensation                                                                                                                                                                                      |  |               | (2,963     | ) |                  |  
|Accumulated other comprehensive income                                                                                                                                                                     |  |               | (13,879    | ) |                  |  
|Distributions in excess of earnings                                                                                                                                                                        |  |               | (27,404    | ) |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Total shareholders equity                                                                                                                                                                                 |  |               | 822,950    |   |                  |  
|                                                                                                                                                                                                           |  |               |            |   |                  |  
|Total liabilities and shareholders equity                                                                                                                                                                 |  | $             | 2,135,664  |   |                  | $
|                                                                                                                                                                                                           |  |               |            |   |                  |  



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



5



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)



|                                                                                                                                   |  | Three Months EndedJune 30, |        |   | Six Months Ended June 30, |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | -
|                                                                                                                                   |  | 2003                       |        |   | 2002                      |  
|Revenues:                                                                                                                          |  |                            |        |   |                           |  
|Rental income                                                                                                                      |  | $                          | 84,203 |   |                           | $
|Service business and other income                                                                                                  |  |                            | 4,247  |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|                                                                                                                                   |  |                            | 88,450 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Expenses:                                                                                                                          |  |                            |        |   |                           |  
|Property operating and maintenance                                                                                                 |  |                            | 21,163 |   |                           |  
|Real estate taxes                                                                                                                  |  |                            | 9,733  |   |                           |  
|General and administrative and personnel costs                                                                                     |  |                            | 3,232  |   |                           |  
|Operating expenses of service business                                                                                             |  |                            | 2,902  |   |                           |  
|Interest expense                                                                                                                   |  |                            | 17,712 |   |                           |  
|Amortization of deferred financing costs                                                                                           |  |                            | 536    |   |                           |  
|Depreciation and amortization                                                                                                      |  |                            | 18,508 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|                                                                                                                                   |  |                            | 73,786 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                            | 14,664 |   |                           |  
|Minority interests                                                                                                                 |  |                            | (2,576 | ) |                           |  
|Equity in income of joint venture and unconsolidated subsidiaries                                                                  |  |                            | 712    |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Income from continuing operations                                                                                                  |  |                            | 12,800 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Discontinued operations                                                                                                            |  |                            |        |   |                           |  
|Income/(loss) from discontinued operations                                                                                         |  |                            | (717   | ) |                           |  
|Loss on sale of properties                                                                                                         |  |                            | (4,542 | ) |                           |  
|Minority interests related to discontinued operations                                                                              |  |                            | 193    |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|                                                                                                                                   |  |                            | (5,066 | ) |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Income before gain on sale of properties                                                                                           |  |                            | 7,734  |   |                           |  
|                                                                                                                                   |  |                            |        |  
|Gain on sale of properties                                                                                                         |  |                            | 778    |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Net income                                                                                                                         |  |                            | 8,512  |   |                           |  
|Preferred dividends                                                                                                                |  |                            | (2,113 | ) |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Net income applicable to common shareholders                                                                                       |  |                            | 6,399  |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Basic earnings per common share:                                                                                                   |  |                            |        |   |                           |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                          | 0.29   |   |                           | $
|Discontinued operations                                                                                                            |  |                            | (0.13  | ) |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Net income applicable to common shareholders  basic                                                                               |  | $                          | 0.16   |   |                           | $
|                                                                                                                                   |  |                            |        |   |                           |  
|Weighted average number of common shares outstanding  basic                                                                       |  |                            | 38,996 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Diluted earnings per common share:                                                                                                 |  |                            |        |   |                           |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                          | 0.29   |   |                           | $
|Discontinued operations                                                                                                            |  |                            | (0.13  | ) |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  
|Net income applicable to common shareholders  diluted                                                                             |  | $                          | 0.16   |   |                           | $
|                                                                                                                                   |  |                            |        |   |                           |  
|Weighted average number of common shares and common share equivalents outstanding  diluted                                        |  |                            | 39,204 |   |                           |  
|                                                                                                                                   |  |                            |        |   |                           |  



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





6



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)



|                                                            |  | Three Months Ended June 30, |       |      | Six Months EndedJune 30, |       
|----------------------------------------------------------- |  | --------------------------- | ----- | ---- | ------------------------ | ------
|                                                            |  | 2003                        |       | 2002 |                          |       
|Net income                                                  |  | $                           | 8,512 |      | $                        | 17,341
|                                                            |  |                             |       |      |                          |       
|Unrealized gains and losses on securities:                  |  |                             |       |      |                          |       
|Unrealized (losses)/gains arising during the period         |  |                             | 151   |      |                          | 20    
|Unrealized gains on interest rate hedges:                   |  |                             |       |      |                          |       
|Unrealized (losses)/gains arising during the period         |  |                             | 972   |      |                          | (4,183
|Reclassification adjustment for losses included in earnings |  |                             | 120   |      |                          | 146   
|                                                            |  |                             |       |      |                          |       
|Other comprehensive income                                  |  |                             | 1,243 |      |                          | (4,017
|                                                            |  |                             |       |     
|Comprehensive income                                        |  | $                           | 9,755 |      | $                        | 13,324
|                                                            |  |                             |       |      |                          |       



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



7



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)



|                                                                                        |  | Six Months Ended June 30, |         
|--------------------------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                                        |  | 2003                      |         
|Cash Flows from Operating Activities:                                                   |  |                           |         
|Net income                                                                              |  | $                         | 24,022  
|                                                                                        |  |                          
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                           |         
|Minority interests                                                                      |  |                           | 5,054   
|Loss on sale of real estate, net of gains                                               |  |                           | 2,632   
|Loss on impairment of discontinued operations                                           |  |                           | 1,792   
|Provision for doubtful accounts                                                         |  |                           | 1,171   
|Depreciation and amortization                                                           |  |                           | 39,160  
|Amortization of deferred financing costs                                                |  |                           | 1,045   
|Earnings in excess of distributions from joint ventures and unconsolidated subsidiaries |  |                           |        
|Non-cash compensation                                                                   |  |                           | 1,736   
|Reclassification of accumulated other comprehensive income                              |  |                           | 263     
|Gain on derivative financial instrument                                                 |  |                           | (149    
|Changes in assets and liabilities:                                                      |  |                           |         
|Deferred charges and other assets                                                       |  |                           | (1,328  
|Accounts receivable                                                                     |  |                           | (1,483  
|Escrowed cash                                                                           |  |                           | (2,068  
|Other payables/receivables (affiliates)                                                 |  |                           |        
|Accounts payable and other liabilities                                                  |  |                           | (12,075 
|                                                                                        |  |                           |         
|Net cash provided by operating activities                                               |  |                           | 59,772  
|                                                                                        |  |                           |         
|Cash Flows from Investing Activities:                                                   |  |                           |         
|Development/redevelopment of real estate                                                |  |                           | (4,374  
|Purchase of real estate                                                                 |  |                           | (57,580 
|Purchase of mortgage loan                                                               |  |                           |        
|Capital expenditures for in-service properties                                          |  |                           | (12,270 
|Distributions in excess of earnings of joint ventures and unconsolidated subsidiaries   |  |                           | 124     
|Purchase of interest in Prentiss Properties Resources                                   |  |                           | (67     
|Cash from consolidation of Prentiss Properties Resources                                |  |                           | 461     
|Investment in securities                                                                |  |                           | (327    
|Proceeds from the sale of real estate                                                   |  |                           | 18,869  
|                                                                                        |  |                           |         
|Net cash used in investing activities                                                   |  |                           | (55,164 
|                                                                                        |  |                           |         
|Cash Flows from Financing Activities:                                                   |  |                           |         
|Net proceeds from sale of common shares                                                 |  |                           | 1,774   
|Redemption of preferred units                                                           |  |                           |        
|Capital contribution from consolidated joint ventures                                   |  |                           | 115     
|Distributions paid to limited partners                                                  |  |                           | (1,677  
|Distributions paid to common shareholders                                               |  |                           | (43,720 
|Distributions paid to preferred shareholders                                            |  |                           | (4,226  
|Distributions paid to preferred unitholders                                             |  |                           | (4,318  
|Proceeds from mortgages and notes payable                                               |  |                           | 296,685 
|Repayments of mortgages and notes payable                                               |  |                           | (246,926
|                                                                                        |  |                           |         
|Net cash (used in)/provided by financing activities                                     |  |                           | (2,293  
|                                                                                        |  |                           |         
|Net change in cash and cash equivalents                                                 |  |                           | 2,315   
|Cash and cash equivalents, beginning of period                                          |  |                           | 5,080   
|                                                                                        |  |                           |         
|Cash and cash equivalents, end of period                                                |  | $                         | 7,395   
|                                                                                        |  |                           |         
|Supplemental Cash Flow Information:                                                     |  |                           |         
|Cash paid for interest                                                                  |  | $                         | 34,658  
|                                                                                        |  |                           |         



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



8



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



1. The Organization



Organization



We are a self-administered and self-managed Maryland REIT that acquires, owns, manages, leases, develops and builds primarily office properties throughout
the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, through our own employees. We are self-managed in that we provide all the management and maintenance services that our
properties require through our own employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P., and its subsidiaries, and a
management company, Prentiss Properties Resources and its subsidiaries. The ownership of the operating partnership was as follows at June 30, 2003:



|(units in thousands)      |  | CommonUnits |  | %      |   |  | Series DConvertiblePreferredUnits |  | %      |   |  | Series BPreferredUnits |  | %      |   |  | Series EPreferredUnits |  | %      |  
|------------------------- |  | ----------- |  | ------ | - |  | --------------------------------- |  | ------ | - |  | ---------------------- |  | ------ | - |  | ---------------------- |  | ------ | -
|Prentiss Properties Trust |  | 39,161      |  | 96.33  | % |  | 3,774                             |  | 100.00 | % |  |                       |  | 0.00   | % |  |                       |  | 0.00   | %
|Third parties             |  | 1,491       |  | 3.67   | % |  |                                  |  | 0.00   | % |  | 1,900                  |  | 100.00 | % |  | 200                    |  | 100.00 | %
|                          |  |             |  |        |   |  |                                   |  |        |   |  |                        |  |        |   |  |                        |  |        |  
|Total                     |  | 40,652      |  | 100.00 | % |  | 3,774                             |  | 100.00 | % |  | 1,900                  |  | 100.00 | % |  | 200                    |  | 100.00 | %
|                          |  |             |  |        |   |  |                                   |  |        |   |  |                        |  |        |   |  |                        |  |        |  



As of June 30, 2003,
we owned interests in a diversified portfolio of 138 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  | Number ofBuildings |  | Net RentableSquare Feet
|--------------------- |  | ------------------ |  | -----------------------
|                      |  |                    |  | (in thousands)         
|Office properties     |  | 107                |  | 15,517                 
|Industrial properties |  | 31                 |  | 2,294                  
|                      |  |                    |  |                        
|Total                 |  | 138                |  | 17,811                 
|                      |  |                    |  |                        



As of June 30, 2003,
our properties were 91% leased to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 11.8 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. As of June 30, 2003, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California; and (5) Southern
California.



At June 30, 2003, our properties were located in
12 markets, which were included in our reportable segments as follows:



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



Subsequent to June 30,
2003, we disposed of all of our properties in Atlanta, Georgia consisting of nine properties containing 644,000 net rentable square feet and as a result, exited the Atlanta market.



9



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Transactions



On May 8, 2003, we acquired from an unrelated third party the 410 Warrenville Road building, a 60,434 net rentable square foot office property located in
the Chicago, Illinois area for gross proceeds of approximately $8.7 million. The acquisition was funded with proceeds from our revolving credit facility.



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



On June 18, 2003, we acquired from an unrelated third party the Corporate
Lakes III building, a 124,327 net rentable square foot office property located in the Chicago, Illinois area for gross proceeds of approximately $22.2 million. The acquisition was funded with proceeds from our revolving credit facility.



On June 26, 2003, we completed the sale of two office properties
containing 339,000 net rentable square feet to an unrelated third party. The sale, which included two of the remaining three properties we own in the Houston, Texas area, resulted in gross proceeds of $16.0 million and a loss on sale of $4.5
million. The proceeds from the sale were used to repay a portion of the outstanding borrowings under our revolving credit facility. Also during the period, we committed to a plan to sell nine office properties, totaling 644,000 net rentable square
feet, representing all of our properties located in the Atlanta, Georgia area. As a result, we recorded a loss on impairment of real estate of $1.8 million, representing the amount by which the carrying amount of the properties exceeds our estimate
of the fair value of the properties, less cost to sell. The nine properties were subsequently sold on July 24, 2003 for gross proceeds totaling $40.1 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, income and gain/(loss) for real estate properties sold and real estate properties held for sale
are to be reflected in the consolidated statements of income as discontinued operations. Below is a summary of our combined results of operations from the properties disposed of during the period and those properties held for sale at June 30, 2003.
The summary includes the results of operations before gain/(loss) for the three and six months ended June 30, 2003 and 2002, respectively.



|Discontinued Operations:                   |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|------------------------------------------ |  | -------------------------- | ------ | ------------------------
|(in thousands)                             |  | 2003                       |        |                         
|Property revenues:                         |  |                            |        |                         
|Rental income                              |  | $                          | 3,720  |                         
|                                           |  |                            |        |                         
|Property revenues                          |  |                            | 3,720  |                         
|                                           |  |                            |        |                         
|Property expenses:                         |  |                            |        |                         
|Property operating and maintenance         |  |                            | 1,450  |                         
|Real estate taxes                          |  |                            | 169    |                         
|Depreciation and amortization              |  |                            | 1,026  |                         
|                                           |  |                            |        |                         
|Property expenses                          |  |                            | 2,645  |                         
|                                           |  |                            |        |                         
|Loss on impairment of real estate          |  |                            | (1,792 | )                       
|                                           |  |                            |        |                         
|Income/(loss) from discontinued operations |  | $                          | (717   | )                       
|                                           |  |                            |        |                         



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



On June 19, 2003, we completed two four-year interest rate swaps in the
notional amounts of $50.0 million and $25.0 million. The interest rate swaps effectively lock in our cost of funds at 2.27% and 2.277% (before the spread over LIBOR) on $50.0 million



10



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



and $25.0 million of our variable rate borrowings, respectively. Had the swaps been in effect on June 30, 2003, the
effective interest rate would have been 3.645% and 3.652%, respectively, as of June 30, 2003. The interest rate swaps effectively convert in the aggregate, $75.0 million of our variable rate borrowings to fixed rate borrowings. The interest rate
swap agreements have an effective date of August 1, 2003 and mature August 1, 2007.



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 six month periods ended June 30, 2003 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, 2002.



3. Statement of Financial Accounting Standards No.
141



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



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



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



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



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



During the three months ended June 30, 2003, we acquired two office
properties in our Midwest Region. Based on our estimate of the fair value of each component of the real estate properties acquired during the three months ended June 30, 2003, we allocated purchase price as follows:



11



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|(in thousands)                 |  |   |       
|------------------------------ |  | - | ------
|Below-market lease value       |  | $ | (800  
|In-place lease value at market |  | $ | 8,829 
|Land                           |  | $ | 4,611 
|Buildings and improvements     |  | $ | 18,721



4. Deferred Charges and Other
Assets, Net



Deferred charges consisted of the following
at June 30, 2003 and December 31, 2002:



|                                                                      |  | (in thousands) |        
|--------------------------------------------------------------------- |  | -------------- | -------
|                                                                      |  | June 30,2003   |        
|Deferred leasing costs, tenant improvements and in-place lease values |  | $              | 251,117
|Deferred financing costs                                              |  |                | 15,326 
|Prepaids and other assets                                             |  |                | 8,121  
|                                                                      |  |                |        
|                                                                      |  |                | 274,564
|Less: accumulated amortization                                        |  |                | (94,354
|                                                                      |  |                |        
|                                                                      |  | $              | 180,210
|                                                                      |  |                |        



5. Accounts Receivable, Net



Accounts receivable consisted of the following at June
30, 2003 and December 31, 2002:



|                                      |  | (in thousands) |       
|------------------------------------- |  | -------------- | ------
|                                      |  | June 30,2003   |       
|Rents and services                    |  | $              | 8,715 
|Accruable rental income               |  |                | 40,171
|Other                                 |  |                | 1,094 
|                                      |  |                |       
|                                      |  |                | 49,980
|Less: allowance for doubtful accounts |  |                | (8,883
|                                      |  |                |       
|                                      |  | $              | 41,097
|                                      |  |                |       



6. Investments in Joint Ventures
and Unconsolidated Subsidiaries



The following information
summarizes the financial position at June 30, 2003 and December 31, 2002 and the results of operations for the three and six month periods ended June 30, 2003 and 2002 for the investments in which we held a non-controlling interest during the period
presented:



|Summary of Financial Position:   |  | Total Assets |         | Total Debt (5) |   | Total Equity |  |              | Companys Investment
|-------------------------------- |  | ------------ | ------- | -------------- | - | ------------ |  | ------------ | --------------------
|(in thousands)                   |  | June 30,2003 |         | Dec. 31,2002   |   | June 30,2003 |  | Dec. 31,2002 |                     
|Broadmoor Austin Associates(1)   |  | $            | 106,077 |                | $ | 108,929      |  | $            | 141,666             
|Prentiss Properties Resources(2) |  |              |        |                |   | 12,406       |  |              |                    
|Tysons International Partners(3) |  |              | 96,235  |                |   | 94,873       |  |              | 60,278              
|Other Investments(4)             |  |              |        |                |   |             |  |              |                    
|                                 |  |              |         |                |   |              |  |              |                     
|                                 |  |              |         |                |   |              |  |              |                     
|                                 |  |              |         |                |   |              |  |              |                     



12



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



For the Three Months Ended June 30, 2003 and 2002



|Summary of Operations:                          |  | Total Revenue |        | Net Income |   |       | Companys Share of Net Income/(Loss) |     
|----------------------------------------------- |  | ------------- | ------ | ---------- | - | ----- | ------------------------------------ | ----
|(in thousands)                                  |  | 2003          |        | 2002       |   | 2003  |                                      | 2002
|Broadmoor Austin Associates                     |  | $             | 5,055  |            | $ | 4,972 |                                      | $   
|PPS Partners LLC(6)                             |  |               |       |            |   | 9     |                                      |     
|Prentiss Properties Resources, Inc.             |  |               |       |            |   | 3,591 |                                      |     
|Tysons International Partners                   |  |               | 3,329  |            |   | 3,300 |                                      |     
|                                                |  |               |        |            |   |       |                                      |     
|Total                                           |  |               |        |            |   |       |                                      |     
|                                                |  |               |        |            |   |       |                                      |     
|                                                |  |               |        |            |   |      
|For the Six Months Ended June 30, 2003 and 2002 |  |               |        |            |   |       |                                      |     
|                                                |  |               |       
|Summary of Operations:                          |  | Total Revenue |        | Net Income |   |       | Companys Share of Net Income/(Loss) |     
|(in thousands)                                  |  | 2003          |        | 2002       |   | 2003  |                                      | 2002
|Broadmoor Austin Associates                     |  | $             | 10,111 |            | $ | 9,944 |                                      | $   
|Burnett Plaza Associates(7)                     |  |               |       |            |   | 4,302 |                                      |     
|PPS Partners LLC(6)                             |  |               |       |            |   | 44    |                                      |     
|Prentiss Properties Resources, Inc.             |  |               |       |            |   | 7,436 |                                      |     
|Tysons International Partners                   |  |               | 6,574  |            |   | 6,552 |                                      |     
|                                                |  |               |        |            |   |       |                                      |     
|Total                                           |  |               |        |            |   |       |                                      |     
|                                                |  |               |        |            |   |       |                                      |     



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

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

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

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

|(5) |  | The mortgage debt, all of which is non-recourse, is collateralized by the individual real estate property or properties within each venture.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | PPS Partners LLC was a joint venture between our operating partnership and a third-party property owner. The third-party property owner contributed property
management contracts to PPS Partners LLC. Our operating partnership through a sub-management contract managed the properties and participated in the net income of the joint venture. Effective October 2001, our operating partnership resigned the
management duties of the properties.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



13



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



7. Mortgages and Notes Payable



At June 30, 2003, we had mortgages and notes payable of $1.06 billion, excluding our proportionate share of debt from our
investments in joint ventures.



The following table sets forth
our mortgages and notes payable as of June 30, 2003 and December 31, 2002:



|                             |  | (in thousands) |           |                  |   |              |  |                 
|---------------------------- |  | -------------- | --------- | ---------------- | - | ------------ |  | ----------------
|Description                  |  | June 30,2003   |           | December 31,2002 |   | Amortization |  | Interest Rate(3)
|Collateralized term loan     |  | $              | 71,187    |                  | $ | 71,563       |  | 25 yr           
|Revolving credit facility    |  |                | 107,500   |                  |   | 156,000      |  | None            
|Unsecured term loan Commerz  |  |                | 75,000    |                  |   | 75,000       |  | None            
|Unsecured term loan Eurohypo |  |                | 100,000   |                  |   |             |  | None            
|PPREFI portfolio loan        |  |                | 180,100   |                  |   | 180,100      |  | None            
|Mortgage notes payable       |  |                | 526,999   |                  |   | 528,364      |  | (1)             
|                             |  |                |           |                  |   |              |  |                 
|                             |  | $              | 1,060,786 |                  | $ | 1,011,027    |  |                 
|                             |  |                |           |                  |   |              |  |                 



|(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 18 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 June 30, 2003. Maturity dates range from December 2003 through June 2013 with a weighted average maturity of 5.89 years from June 30, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 30-day LIBOR was 1.12% at June 30, 2003.
|--- |  | ----------------------------------------



Our mortgages and notes payable at June 30, 2003 consisted of $635.0 million of fixed rate, non-recourse, long-term mortgages and $425.8 million of
floating rate debt, $250.0 million of which was hedged at June 30, 2003 with variable to fixed rate hedges.



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



|           |  | (in thousands)
|---------- |  | --------------
|2003       |  | $             
|2004       |  |               
|2005       |  |               
|2006       |  |               
|2007       |  |               
|Thereafter |  |               
|           |  |               
|           |  | $             
|           |  |               



8. Interest Rate Hedges



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



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



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



14



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



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



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



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



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



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



Over time, the
unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with when the hedged items are recognized in earnings. Within the next twelve months, we expect to
reclassify to earnings approximately $8.9 million of the current balance held in accumulated other comprehensive income.



The following table summarizes the notional values and fair values of our derivative financial instruments at June 30, 2003. The notional value provides
an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.



15



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



|Notional Amount |  | Swap Rate Paid(Fixed) |   |  | EffectiveFixed Rate |   |  | Swap Rate Received(Variable) at June 30, 2003 |   |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | --------------------- | - |  | ------------------- | - |  | --------------------------------------------- | - |  | -------------- |  | -------------- | -------
|                |  |                       |   |  |                     |   |  |                                               |   |  |                |  | (in thousands) |        
|$ 50 million    |  | 1.990                 | % |  | 3.490               | % |  | 1.12                                          | % |  | August 2003    |  | $              | (42    
|$ 50 million    |  | 6.253                 | % |  | 7.753               | % |  | 1.12                                          | % |  | September 2004 |  |                | (3,202 
|$ 60 million    |  | 6.248                 | % |  | 7.748               | % |  | 1.12                                          | % |  | September 2004 |  |                | (3,839 
|$ 15 million    |  | 4.345                 | % |  | 6.495               | % |  | 1.12                                          | % |  | July 2005      |  |                | (1,461 
|$ 25 million    |  | 4.345                 | % |  | 6.495               | % |  | 1.12                                          | % |  | July 2005      |  |                | (877   
|$ 20 million    |  | 5.985                 | % |  | 7.610               | % |  | 1.12                                          | % |  | March 2006     |  |                | (2,254 
|$ 30 million    |  | 5.990                 | % |  | 7.615               | % |  | 1.12                                          | % |  | March 2006     |  |                | (3,385 
|$ 50 million    |  | 2.270                 | % |  | 3.645               | % |  | 1.12                                          | % |  | August 2007    |  |                | 141    
|$ 25 million    |  | 2.277                 | % |  | 3.652               | % |  | 1.12                                          | % |  | August 2007    |  |                | 64     
|                |  |                       |   |  |                     |   |  |                                               |   |  |                |  |                |        
|Total           |  |                       |   |  |                     |   |  |                                               |   |  |                |  | $              | (14,855
|                |  |                       |   |  |                     |   |  |                                               |   |  |                |  |                |        



Cash payments made
under our interest rate hedges exceeded cash receipts from our interest rate hedges by $2.4 million and $2.0 million for the three months ended June 30, 2003 and 2002, respectively.



9. Accounts Payable and Other Liabilities



Accounts payable and other liabilities consisted of the following at June 30, 2003 and December 31, 2002:



|                              |  | (in thousands)
|----------------------------- |  | --------------
|                              |  | June 30,2003  
|Accrued interest expense      |  | $             
|Accrued real estate taxes     |  |               
|Advance rents and deposits    |  |               
|Deferred compensation payable |  |               
|Other liabilities             |  |               
|                              |  |               
|                              |  | $             
|                              |  |               



10. Distributions



On June 11, 2003, we declared a cash distribution for the second quarter
of 2003 in the amount of $0.56 per share, payable on July 11, 2003 to common shareholders of record on June 30, 2003. 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 $24.9 million and were paid July 11, 2003. In addition, quarterly distributions totaling $2.2 million in the aggregate were declared in June 2003, 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 July 3, 2003 and July 11, 2003, respectively.



11. Supplemental Disclosure of Non-Cash Activities



During the three months ended June 30, 2003, we declared cash distributions totaling $24.9 million payable to holders of common shares, operating partnership units and Series D Convertible Preferred Shares. The distributions were paid July
11, 2003. In addition, distributions totaling $2.2 million were declared in June 2003, payable to holders of our Series B Perpetual Preferred Units and Series E Preferred Units. The distributions were paid on July 3, 2003 and July 11, 2003 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 six months ended June 30, 2003, we issued 93,250 restricted common shares to various key employees.
The shares, which had a market value of approximately $2.4 million based upon the per share price on the date of grant, were classified as unearned compensation and recorded in the shareholders equity section of the consolidated balance sheet.
The unearned compensation is amortized quarterly as compensation expense over the three-year vesting period.



16



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



During the six months ended June 30, 2003, 9,693 common shares were issued pursuant to the conversion
of 9,693 common units of our operating partnership. The common shares had a market value of approximately $277,000 on the conversion date.



During the six months ended June 30, 2003, we reclassified $2.2 million of our investment in securities, representing 82,500 of our common shares to
common shares held in treasury. The shares are owned pursuant to a key employee deferred compensation plan. In addition, we reclassified unrealized gains on the common shares of $153,000 from accumulated other comprehensive income to common shares
held in treasury, with no impact on earnings.



We
marked-to-market our investments in securities and our interest rate hedges. During the six months ended June 30, 2003, we recorded an unrealized loss of $146,000 and a unrealized gain of $1.8 million on our investments in securities and interest
rate hedges, respectively. The unrealized loss of $146,000 on our investment in securities includes the impact of the reclassification of $153,000 of previously recognized unrealized gains described above.



On January 1, 2003, in connection with the acquisition of the remaining
interest in Prentiss Properties Resources, the following assets and liabilities were consolidated into the accounts of the operating partnership.



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



In connection with the
acquisitions during the six months ended June 30, 2003, we assumed liabilities of approximately $1.7 million. We removed approximately $272,000 and $13,000 of receivables and other assets as a result of property sales during the period.



17



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



12. Segment Information



The tables below present information about segment assets, our investments in equity method investees, expenditures
for additions to long-lived assets and revenues and income from continuing operations used by our chief operating decision maker as of and for the three and six month periods ended June 30, 2003 and 2002:



For the Three Months Ended June 30, 2003

(in thousands)



|                                               |  | Mid- Atlantic |         | Midwest |   | Southwest |  | NorthernCalifornia |         | SouthernCalifornia |   |         | TotalSegments |   | CorporateNotAllocable ToSegments |   |  | ConsolidatedTotal
|---------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | ------------------ | ------- | ------------------ | - | ------- | ------------- | - | -------------------------------- | - |  | -----------------
|Revenues                                       |  | $             | 22,537  |         | $ | 15,281    |  | $                  | 30,190  |                    | $ | 11,348  |               | $ | 7,912                            |   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Income from continuing operations              |  | $             | 11,591  |         | $ | 5,025     |  | $                  | 11,495  |                    | $ | 4,533   |               | $ | 3,728                            |   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Additions to long-lived assets:                |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Development/redevelopment                      |  | $             | 208     |         | $ | 1,552     |  | $                  | 241     |                    | $ | 2       |               | $ | (190                             | ) |  | $                
|Purchase of real estate                        |  |               |        |         |   | 31,361    |  |                    | 13      |                    |   |        |               |   |                                 |   |  |                  
|Capital expenditures for in-service properties |  |               | 2,256   |         |   | 862       |  |                    | 2,223   |                    |   | 1,686   |               |   | 943                              |   |  |                  
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Total additions                                |  | $             | 2,464   |         | $ | 33,775    |  | $                  | 2,477   |                    | $ | 1,688   |               | $ | 753                              |   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Investments in equity method investees         |  | $             | 9,534   |         | $ |          |  | $                  | 3,894   |                    | $ |        |               | $ |                                 |   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  
|Assets                                         |  | $             | 610,388 |         | $ | 411,860   |  | $                  | 639,129 |                    | $ | 265,672 |               | $ | 178,678                          |   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |         |               |   |                                  |   |  |                  



For the Three Months Ended June 30,
2002

(in thousands)



|                                                |  | Mid- Atlantic |         | Midwest |   | Southwest |  | NorthernCalifornia |         | SouthernCalifornia |   | TotalSegments |  | CorporateNotAllocable ToSegments |         |  | ConsolidatedTotal
|----------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | ------------------ | ------- | ------------------ | - | ------------- |  | -------------------------------- | ------- |  | -----------------
|Revenues                                        |  | $             | 20,130  |         | $ | 15,806    |  | $                  | 30,810  |                    | $ | 10,017        |  | $                                | 8,517   |  | $                
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Income from continuing operations               |  | $             | 10,698  |         | $ | 6,678     |  | $                  | 11,830  |                    | $ | 4,292         |  | $                                | 4,000   |  | $                
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Additions to long-lived assets:                 |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Development/redevelopment                       |  | $             | 1,475   |         | $ | 1,708     |  | $                  | 716     |                    | $ | 17            |  | $                                | 593     |  | $                
|Purchase of real estate                         |  |               |        |         |   |          |  |                    |        |                    |   |              |  |                                  |        |  |                  
|Capital expenditures for in- service properties |  |               | 1,006   |         |   | 487       |  |                    | 3,236   |                    |   | 315           |  |                                  | 1,002   |  |                  
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Total additions                                 |  | $             | 2,481   |         | $ | 2,195     |  | $                  | 3,952   |                    | $ | 332           |  | $                                | 1,595   |  | $                
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Investment in equity method investees           |  | $             | 10,088  |         | $ |          |  | $                  | 3,922   |                    | $ |              |  | $                                |        |  | $                
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Assets                                          |  | $             | 588,683 |         | $ | 384,065   |  | $                  | 645,360 |                    | $ | 267,264       |  | $                                | 205,632 |  | $                
|                                                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  



18



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



For the Six Months Ended June 30, 2003

(in thousands)



|                                               |  | Mid- Atlantic |        | Midwest |   | Southwest |  | NorthernCalifornia |        | SouthernCalifornia |   |        | TotalSegments |   | CorporateNotAllocable ToSegments |   |  | ConsolidatedTotal
|---------------------------------------------- |  | ------------- | ------ | ------- | - | --------- |  | ------------------ | ------ | ------------------ | - | ------ | ------------- | - | -------------------------------- | - |  | -----------------
|Revenues                                       |  | $             | 44,405 |         | $ | 29,882    |  | $                  | 59,122 |                    | $ | 23,670 |               | $ | 15,854                           |   |  | $                
|                                               |  |               |        |         |   |           |  |                    |        |                    |   |        |               |   |                                  |   |  |                  
|Income from continuing operations              |  | $             | 22,308 |         | $ | 9,203     |  | $                  | 21,030 |                    | $ | 10,111 |               | $ | 7,161                            |   |  | $                
|                                               |  |               |        |         |   |           |  |                    |        |                    |   |        |               |   |                                  |   |  |                  
|Additions to long-lived assets:                |  |               |        |         |   |           |  |                    |        |                    |   |        |               |   |                                  |   |  |                  
|Development/redevelopment                      |  | $             | 1,231  |         | $ | 2,827     |  | $                  | 331    |                    | $ | 7      |               | $ | (22                              | ) |  | $                
|Purchase of real estate                        |  |               |       |         |   | 31,361    |  |                    | 28,051 |                    |   |       |               |   |                                 |   |  |                  
|Capital expenditures for in-service properties |  |               | 3,043  |         |   | 1,174     |  |                    | 4,290  |                    |   | 2,393  |               |   | 1,370                            |   |  |                  
|                                               |  |               |        |         |   |           |  |                    |        |                    |   |        |               |   |                                  |   |  |                  
|Total additions                                |  | $             | 4,274  |         | $ | 35,362    |  | $                  | 32,672 |                    | $ | 2,400  |               | $ | 1,348                            |   |  | $                
|                                               |  |               |        |         |   |           |  |                    |        |                    |   |        |               |   |                                  |   |  |                  



For the Six Months Ended June 30,
2002

(in thousands)



|                                               |  | Mid- Atlantic |         | Midwest |   | Southwest |  | NorthernCalifornia |        | SouthernCalifornia |   | TotalSegments |  | CorporateNotAllocable ToSegments |        |  | ConsolidatedTotal
|---------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | ------------------ | ------ | ------------------ | - | ------------- |  | -------------------------------- | ------ |  | -----------------
|Revenues                                       |  | $             | 40,053  |         | $ | 31,103    |  | $                  | 56,638 |                    | $ | 20,515        |  | $                                | 16,720 |  | $                
|                                               |  |               |         |         |   |           |  |                    |        |                    |   |               |  |                                  |        |  |                  
|Income from continuing operations              |  | $             | 20,952  |         | $ | 13,390    |  | $                  | 22,827 |                    | $ | 9,372         |  | $                                | 7,423  |  | $                
|                                               |  |               |         |         |   |           |  |                    |        |                    |   |               |  |                                  |        |  |                  
|Additions to long-lived assets:                |  |               |         |         |   |           |  |                    |        |                    |   |               |  |                                  |        |  |                  
|Development/redevelopment                      |  | $             | 4,242   |         | $ | 5,606     |  | $                  | 3,096  |                    | $ | 66            |  | $                                | 1,159  |  | $                
|Purchase of real estate                        |  |               | 107,475 |         |   |          |  |                    |       |                    |   |              |  |                                  | 10,597 |  |                  
|Capital expenditures for in-service properties |  |               | 1,646   |         |   | 639       |  |                    | 5,754  |                    |   | 813           |  |                                  | 1,643  |  |                  
|                                               |  |               |         |         |   |           |  |                    |        |                    |   |               |  |                                  |        |  |                  
|Total additions                                |  | $             | 113,363 |         | $ | 6,245     |  | $                  | 8,850  |                    | $ | 879           |  | $                                | 13,399 |  | $                
|                                               |  |               |         |         |   |           |  |                    |        |                    |   |               |  |                                  |        |  |                  



19



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



13. 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 six months ended June 30, 2003 and 2002:



|(in thousands, except per share data)                                   |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|----------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | -
|Reconciliation of the numerator used for basic earnings per share       |  | 2003                       |        |   | 2002                     |  
|Income from continuing operations                                       |  | $                          | 12,800 |   |                          | $
|Preferred dividends                                                     |  |                            | (2,113 | ) |                          |  
|Gain on sale of properties                                              |  |                            | 778    |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Income from continuing operations applicable to common shareholders     |  | $                          | 11,465 |   |                          | $
|                                                                        |  |                            |        |  
|Discontinued operations                                                 |  |                            | (5,066 | ) |                          |  
|                                                                        |  |                            |        |   |                          |  
|Net income applicable to common shareholders                            |  | $                          | 6,399  |   |                          | $
|                                                                        |  |                            |        |   |                          |  
|                                                                        |  |                            |        |  
|Reconciliation of the denominator used for basic earnings per share     |  |                            |        |   |                          |  
|Weighted average common shares outstanding                              |  |                            | 38,996 |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Basic earnings per share                                                |  | $                          | 0.16   |   |                          | $
|                                                                        |  |                            |        |   |                          |  
|                                                                        |  |                            |        |  
|Reconciliation of the numerator used for dilutive earnings per share    |  |                            |        |   |                          |  
|Income from continuing operations                                       |  | $                          | 12,800 |   |                          | $
|Preferred dividends                                                     |  |                            | (2,113 | ) |                          |  
|Gain on sale of properties                                              |  |                            | 778    |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Income from continuing operations applicable to common shareholders     |  | $                          | 11,465 |   |                          | $
|                                                                        |  |                            |        |  
|Discontinued operations                                                 |  |                            | (5,066 | ) |                          |  
|                                                                        |  |                            |        |   |                          |  
|                                                                        |  | $                          | 6,399  |   |                          | $
|                                                                        |  |                            |        |   |                          |  
|                                                                        |  |                            |        |  
|Reconciliation of the denominator used for dilutive earnings per share  |  |                            |        |   |                          |  
|Weighted average common shares outstanding                              |  |                            | 38,996 |   |                          |  
|Preferred shares(1)                                                     |  |                            |       |   |                          |  
|Options                                                                 |  |                            | 208    |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Weighted average common shares and common share equivalents Outstanding |  |                            | 39,204 |   |                          |  
|                                                                        |  |                            |        |   |                          |  
|Diluted earnings per share                                              |  | $                          | 0.16   |   |                          | $
|                                                                        |  |                            |        |   |                          |  



|(1) |  | Preferred shares for the three and six months ended June 30, 2003 and 2002 are excluded from
the denominator in calculating dilutive earnings per share as such shares were anti-dilutive for the periods; therefore, the numerator used in the calculation of dilutive earnings per share is income applicable to common shareholders for the three
and six months ended June 30, 2003 and 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



14. Share-Based Compensation



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



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



Historically, we applied the intrinsic value based method of accounting as prescribed by APB Opinion 25 and related Interpretations in accounting for our
share-based awards. Had we fully adopted Statements of Financial Accounting Standards No. 123, for awards issued prior to January 1, 2003, it would have changed our method for recognizing the cost of our plans. Had the compensation cost for our
share-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, our net income and net income per common share for the three and six months ended June 30, 2003 and 2002 would approximate the pro
forma amounts below:



|                                             |  | (amounts in thousands, except per share data)
|-------------------------------------------- |  | ---------------------------------------------
|Three Months Ended June 30,                  |  | As reported2003                              
|SFAS No. 123 charge                          |  | $                                            
|APB 25 charge                                |  | $                                            
|Net income applicable to common shareholders |  | $                                            
|Net income per common share-basic            |  | $                                            
|Net income per common share-diluted          |  | $                                            
|                                             | 
|                                             |  | (amounts in thousands, except per share data)
|Six Months Ended June 30,                    |  | As reported2003                              
|SFAS No. 123 charge                          |  | $                                            
|APB 25 charge                                |  | $                                            
|Net income applicable to common shareholders |  | $                                            
|Net income per common share-basic            |  | $                                            
|Net income per common share-diluted          |  | $                                            



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



15. Recently Issued Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This
interpretation requires consolidation of an entity by an enterprise if that enterprise will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or
both. An entity subject to this interpretation is called a variable interest entity. The disclosure provisions of this interpretation are effective for financial statements issued after January 31, 2003. A public entity with a variable interest
entity created before February 1, 2003, shall apply the consolidation provisions of this interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. All enterprises with
variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this interpretation immediately.



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



21



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



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



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



We are currently evaluating whether our equity investments in
Broadmoor Austin Associates and Tysons International Partners qualify as variable interest entities and if so, determining whether we are the primary beneficiary, thus requiring consolidation. Regardless, we do not anticipate that the provisions of
FASB Interpretation No. 46 will have a material impact on our financial condition and results of operations.



In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of
Financial Accounting Standards No. 133. The amendments set forth in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The statement is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The impact from the implementation of this statement, which we believe
will not have a material impact on our financial statements, will be dependent upon whether we enter into derivative transactions, subsequent to June 30, 2003, included in the scope of this statement or whether we modify, subsequent to June 30,
2003, derivative instruments existing at June 30, 2003.



In May
2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. We believe that the impact from
the implementation of this statement will not have a material impact on our financial statements.



16. Subsequent Events



On July 24, 2003 we completed the sale of nine office properties containing 644,000 net rentable square feet to an unrelated third party. The sale, which included all of our properties in the Atlanta, Georgia area, represented an exit from
the Atlanta market. Gross proceeds from the sale totaled approximately $40.1 million which were used to repay a portion of our outstanding borrowings under our revolving credit facility. In accordance with Statement of Financial Accounting Standards
No. 144, during the three months ended June 30, 2003, we recorded a loss on impairment of $1.8 million representing the amount by which the carrying amount of the property exceeded our estimate of fair value less cost to sell. The loss on impairment
is included in the line item income from discontinued operations in our consolidated statement of income for the three and six months ended June 30, 2003.



On August 13, 2003, we agreed to sell 2.3 million common shares, which included 300,000 common shares to cover the
underwriters over-allotment option, at $28.90 per share, net of underwriting discounts. The closing is expected to occur on August 18, 2003. The offering is pursuant to our universal shelf Registration Statement on Form S-3, File No.
333-49433, as amended, which was declared



22



---

##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



effective by the SEC on July 29, 2002. After deducting underwriting discounts and commissions of $1.2 million and
estimated offering expenses, we will receive net offering proceeds of approximately $57.5 million.



We will contribute the net proceeds of the sale of the common shares to the operating partnership in exchange for additional common units of limited
partnership interest in the operating partnership. In July 2003, we entered into a contract to purchase one office property in Virginia containing approximately 228,000 net rentable square feet for approximately $51.0 million. We expect the closing
of the transaction, which is subject to satisfactory completion of due diligence, to occur during the third quarter of 2003. Our operating partnership intends to use a portion of the net proceeds to purchase this property. The operating partnership
will use the remaining net proceeds, or if this acquisition does not close, all the net proceeds, to acquire additional office properties as suitable opportunities arise or to redeem, in part, its outstanding 8.30% Series B cumulative redeemable
perpetual preferred units at a redemption price of $50.00 per Series B preferred unit plus accumulated and unpaid dividends. Although we monitor and evaluate acquisition opportunities on an ongoing basis, we have no other present agreements,
commitments or understandings with respect to the acquisition of any office properties at this time.



23



---

##### Table of Contents

Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes thereto presented in this Form 10-Q. Historical results set forth in our consolidated financial statements should not be taken as an indication of our future operations.



Overview



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



As of June 30, 2003, we owned interests in a diversified portfolio of 138 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  | Number of Buildings |  | Net Rentable Square Feet
|--------------------- |  | ------------------- |  | ------------------------
|                      |  |                     |  | (in millions)           
|Office properties     |  | 107                 |  | 15.5                    
|Industrial properties |  | 31                  |  | 2.3                     
|                      |  |                     |  |                         
|Total                 |  | 138                 |  | 17.8                    
|                      |  |                     |  |                         



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



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



Our organization consists of a corporate office located in Dallas, Texas and five regional offices each of which operates
under the guidance of a member of our senior management team. The following table presents second quarter 2003 regional revenues and the 12 markets in which our properties were located as of June 30, 2003, with the first market being the location of
each regional office:



|Region              |  | Revenues |        | Market
|------------------- |  | -------- | ------ | ------
|Mid-Atlantic        |  | $        | 22,537 |       
|Midwest             |  |          | 15,281 |       
|Southwest           |  |          | 30,190 |       
|Northern California |  |          | 11,348 |       
|Southern California |  |          | 7,912  |       
|                    |  |          |        |       
|Total               |  | $        | 87,268 |       
|                    |  |          |        |       



In addition to the
$87.3 million of regional revenues, during the three months ended June 30, 2003, we recognized $1.2 million of revenue which was not allocated to our regions.



Subsequent to June 30, 2003, we disposed of all of our properties in Atlanta, Georgia consisting of nine properties containing 644,000 net rentable
square feet and as a result, exited the Atlanta market.



At
June 30, 2003, we had 16.2 million square feet of in-place leases representing 91% of the net rentable square feet of our properties. Our leases range in term from 1 month to 20 years with an average term of 5 to 7 years. The 16.2 million square
feet of in-place leases expire as follows:



24



---

##### Table of Contents

|(square feet in thousands) |  | Square Feet |  |       |  
|-------------------------- |  | ----------- |  | ----- | -
|2003                       |  | 719         |  | 4.4   | %
|2004                       |  | 2,474       |  | 15.3  | %
|2005                       |  | 1,872       |  | 11.6  | %
|2006                       |  | 2,049       |  | 12.7  | %
|2007                       |  | 2,116       |  | 13.1  | %
|Thereafter                 |  | 6,922       |  | 42.9  | %
|                           |  |             |  |       |  
|Total                      |  | 16,152      |  | 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. At the time of the announcement, WorldCom subsidiaries had operating leases totaling approximately 272,000 net rentable square feet in six of our properties. To
date, we have received formal notice of rejection of approximately 96,000 net rentable square feet of WorldCom related leases and are negotiating the terms whereby Worldcom will reject an additional 106,576 net rentable square feet effective August
15, 2003.



Subsequent to August 15, 2003, we will have three
remaining office lease agreements with WorldCom subsidiaries representing approximately 51,377 net rentable square feet in three of our office properties. Annualized base rental revenue from the three remaining leases equates to approximately $1.2
million, or less than 0.4% of our annualized base rental revenue. All rent due as of June 30, 2003 under the office lease agreements, with the exception of approximately $32,000, has been collected. Accruable rental income related to all WorldCom
related office leases totaled approximately $339,000 at June 30, 2003, all of which was reserved at June 30, 2003. 18,039 of the net rentable square feet of the WorldCom related office leases were recently renewed. The remaining WorldCom leases,
totaling 51,377 net rentable square feet, expire as follows: 4,840 square feet expire in April 2006; 28,498 square feet expire in December 2006; and 18,039 expire in July 2008. Base rental rates under these leases range from $21.00 per square foot
to $27.86 per square foot. In addition to the office lease agreements, we have rooftop antenna lease agreements with WorldCom subsidiaries. These leases expire at various dates through June 30, 2008. Annualized rent from these leases equates to
approximately $235,000.



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



Second Quarter 2003 Transactions



On May 8, 2003, we acquired from an unrelated third party the 410
Warrenville Road building, a 60,434 net rentable square foot office property located in the Chicago, Illinois area for gross proceeds of approximately $8.7 million. The acquisition was funded with proceeds from our revolving credit facility.



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



On June 18, 2003, we acquired from an unrelated third party the Corporate Lakes III building, a 124,327 net rentable square foot office property located in the Chicago, Illinois area for gross proceeds of
approximately $22.2 million. The acquisition was funded with proceeds from our revolving credit facility.



On June 26, 2003, we completed the sale of two office properties containing 339,000 net rentable square feet to an unrelated third party. The sale, which
included two of the remaining three properties we own in the Houston, Texas area, resulted in gross proceeds of $16.0 million and a loss on sale of $4.5 million. The proceeds from the sale were used to repay a portion of the outstanding borrowings
under our revolving credit facility. Also during the period, we committed to a plan to sell nine office properties, totaling 644,000 net rentable square feet, representing all of our properties located in the Atlanta, Georgia area. As a result, we
recorded a loss on impairment of real estate of $1.8 million, representing the amount by which the carrying amount of the properties exceeds our estimate of the fair value of the properties, less cost to sell. The nine properties were subsequently
sold on July



25



---

##### Table of Contents

24, 2003 for gross proceeds totaling $40.1 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, income and gain/(loss) for real estate properties sold and real estate
properties held for sale are to be reflected in the consolidated statements of income as discontinued operations. Below is a summary of our combined results of operations from the properties disposed of during the period and those properties held
for sale at June 30, 2003. The summary includes the results of operations before gain/(loss) for the three and six months ended June 30, 2003 and 2002, respectively.



|Discontinued Operations:                   |  | Three MonthsEnded June 30, |        | Six Months EndedJune 30,
|------------------------------------------ |  | -------------------------- | ------ | ------------------------
|(in thousands)                             |  | 2003                       |        |                         
|Property revenues:                         |  |                            |        |                         
|Rental income                              |  | $                          | 3,720  |                         
|                                           |  |                            |        |                         
|Property revenues                          |  |                            | 3,720  |                         
|                                           |  |                            |        |                         
|Property expenses:                         |  |                            |        |                         
|Property operating and maintenance         |  |                            | 1,450  |                         
|Real estate taxes                          |  |                            | 169    |                         
|Depreciation and amortization              |  |                            | 1,026  |                         
|                                           |  |                            |        |                         
|Property expenses                          |  |                            | 2,645  |                         
|                                           |  |                            |        |                         
|Loss on impairment of real estate          |  |                            | (1,792 | )                       
|                                           |  |                            |        |                         
|Income/(loss) from discontinued operations |  | $                          | (717   | )                       
|                                           |  |                            |        |                         



On May 22, 2003, we
completed a $100.0 million, 5-year unsecured term loan with a group of lenders headed by Eurohypo AG, as administrative agent. The loan requires interest only payments until maturity. Currently, interest is computed using a rate equal to 30-day
LIBOR plus 137.5 basis points. The spread over 30-day LIBOR can fluctuate between 112.5 basis point and 162.5 basis points depending upon a quarterly computation of our ratio of total indebtedness to total assets.



On June 19, 2003, we completed two four-year interest rate swaps in the
notional amounts of $50.0 million and $25.0 million. The interest rate swaps effectively lock in our cost of funds at 2.27% and 2.277% (before the spread over LIBOR) on $50.0 million and $25.0 million of our variable rate borrowings, respectively.
Had the swaps been in effect on June 30, 2003, the effective interest rate would have been 3.645% and 3.652%, respectively, as of June 30, 2003. The interest rate swaps effectively convert in the aggregate, $75.0 million of our variable rate
borrowings to fixed rate borrowings. The interest rate swap agreements have an effective date of August 1, 2003 and mature August 1, 2007.



Critical Accounting Policies and Estimates



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



The significant accounting policies used in the preparation of our consolidated financial statements are fully described in Note (2) to our audited
consolidated financial statements for the year ended December 31, 2002, included in our Form 10-K filed on March 28, 2003. However, certain of our significant accounting estimates are considered critical accounting estimates because the estimate
requires our management to make assumptions about matters that are highly uncertain at the time the estimate is made and different estimates that reasonably could have been used in the current period, or changes in the estimates that are reasonably
likely to occur from period to period, would have a material impact on our financial condition, changes in financial condition or results of operations. We consider our critical accounting policies and estimates to be those used in the determination
of the reported amounts and disclosure related to the following:



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

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

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

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



26



---

##### Table of Contents

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



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



Real estate, leasehold improvements and land holdings are classified as long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying amount or fair value, less cost to sell. As
of June 30, 2003, we classified nine properties containing 644,000 net rentable square feet in the Atlanta area as held for sale. During the period, we recognized an impairment loss of $1.8 million representing the difference between the carrying
amount of the properties 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 the nine Atlanta properties, were classified as held and used at June 30, 2003. Our operating real estate, which comprises the majority of our long-lived assets, had a carrying amount of $1.8 billion at June 30, 2003. A
long-lived asset is considered impaired if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Upon impairment, we would recognize an impairment loss to reduce the
carrying value of the long-lived asset to our estimate of its fair value. Our estimate of fair value and cash flows to be generated from our properties requires us to make assumptions related to future occupancy of our properties, future rental
rates, tenant concessions, operating expenditures, property taxes, capital improvements, the ability of our tenants to perform pursuant to their lease obligations, the holding period of our properties and the proceeds to be generated from the
eventual sale of our properties. If one or more of our assumptions proves incorrect or if our assumptions change, the recognition of an impairment loss on one or more properties may be necessary in the future. With respect to assets classified as
held and used, we did not recognize any impairment during the three months ended June 30, 2003.



Allowance for doubtful accounts



Accounts receivable are reduced by an allowance for amounts that we estimate to be uncollectible. Our receivable balance is comprised primarily of accrued rental rate increases to be received over the life of in-place leases as well as
rents and operating cost recoveries due from tenants. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic
conditions. At June 30, 2003, we had total receivables of $50.0 million and an allowance for doubtful accounts of $8.9 million, resulting in a net receivable balance of $41.1 million. Of the $50.0 million in total receivables, $40.2 million
represents accrued rental rate increases to be received over the life of in-place leases. It is our policy to reserve all outstanding receivables that are 90-days past due along with a portion of the remaining receivable balance that we feel is
uncollectible based on our evaluation of the outstanding receivable balance. In addition, we increase our allowance for doubtful accounts for accrued rental rate increases, if we determine such future rent is uncollectible. Actual results may differ
from these estimates under different assumptions or conditions. If our assumptions, regarding the collectibility of accounts receivable, prove incorrect, we may experience write-offs in excess of our allowance for doubtful accounts. The table below
presents bad debt expense recognized during the three months ended June 30, 2003 and 2002, which includes increases or decreases to our allowance for doubtful accounts. The table also presents our allowance for doubtful accounts at June 30, 2003 and
2002.



|                                                       |  | Three MonthsEnded June 30,
|------------------------------------------------------ |  | --------------------------
|(in thousands)                                         |  | 2003                      
|Bad debt expense                                       |  | $                         
|Less: Bad debts realized during the period             |  |                           
|                                                       |  |                           
|Increase/(decrease) in allowance for doubtful accounts |  | $                         
|                                                       |  |                           
|Allowance for doubtful accounts at period end          |  | $                         
|                                                       |  |                           



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 decrease or increase in earnings. The table below presents real
estate related depreciation and amortization expense, including real estate depreciation and amortization included in discontinued operations, for the three months ended June 30, 2003 and 2002:



27



---

##### Table of Contents

|                                          |  | Three Months EndedJune 30,
|----------------------------------------- |  | --------------------------
|(in thousands)                            |  | 2003                      
|Real estate depreciation and amortization |  | $                         



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



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



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



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



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



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



During the three months ended June 30, 2003,
we acquired two office properties in our Midwest Region. Based on our estimate of the fair value of each component of the real estate properties acquired during the three months ended June 30, 2003, we allocated purchase price as follows:



|(in thousands)                 |  |   |        |  
|------------------------------ |  | - | ------ | -
|Below-market lease value       |  | $ | (800   | )
|In-place lease value at market |  | $ | 8,829  |  
|Land                           |  | $ | 4,611  |  
|Buildings and improvements     |  | $ | 18,721 |  



28



---

##### Table of Contents

Fair value of derivative instruments



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



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



Our objective in using derivatives is to add stability to interest expense
and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements without the exchange of the underlying principal amount. During the three months ended June 30, 2003, such derivatives were used to hedge the variable cash flows associated
with a portion of our variable-rate debt.



As of June 30, 2003,
we did not have any derivatives designated as fair value hedges. Additionally, we do not use derivatives for trading or speculative purposes and currently, we do not have any derivatives that are not designated as hedges.



To determine the fair value of our derivative instruments, we use a variety
of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, standard market conventions and techniques such as discounted cash
flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Future cash
inflows or outflows from our derivative instruments depend upon future borrowing rates. If assumptions about future borrowing rates prove to be materially incorrect, the recorded value of these agreements could also prove to be materially incorrect.
Because we use the derivative instruments to hedge our exposure to variable interest rates, thus effectively fixing a portion of our variable interest rates, the impact of changes in future borrowing rates could result in our interest expense being
either higher or lower than might otherwise have been incurred on our variable-rate borrowings had the rates not been fixed. The table below presents the amount by which cash payments made under our interest rate swap agreements exceeded cash
receipts from our agreements during the three months ended June 30, 2003 and 2002. The table also presents the estimated fair value of our in-place swap agreements as of June 30, 2003 and 2002.

|
|



|(in thousands)                                        |  | Three Months Ended June 30, |        
|----------------------------------------------------- |  | --------------------------- | -------
|Net cash paid under our interest rate swap agreements |  | $                           | 2,354  
|Fair value of interest rate swaps at June 30, 2003    |  | $                           | (14,855
|                                                      |  |                             |        

|
|

|
|

|
|



29



---

##### Table of Contents

Results of Operations



Comparison of the three months ended June 30, 2003 to the three months ended June 30, 2002



The table below presents our consolidated statements of income for the three months ended June 30, 2003 and 2002:



|Consolidated Statements of Income                                                                                                  |  | Three Months EndedJune 30, |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------
|(in thousands)                                                                                                                     |  | 2003                       |       
|Revenues:                                                                                                                          |  |                            |       
|Rental income                                                                                                                      |  | $                          | 84,203
|Service business and other income                                                                                                  |  |                            | 4,247 
|                                                                                                                                   |  |                            |       
|                                                                                                                                   |  |                            | 88,450
|                                                                                                                                   |  |                            |       
|Expenses:                                                                                                                          |  |                            |       
|Property operating and maintenance                                                                                                 |  |                            | 21,163
|Real estate taxes                                                                                                                  |  |                            | 9,733 
|General and administrative and personnel cost                                                                                      |  |                            | 3,232 
|Operating expenses of service business                                                                                             |  |                            | 2,902 
|Interest expense                                                                                                                   |  |                            | 17,712
|Amortization of deferred financing costs                                                                                           |  |                            | 536   
|Depreciation and amortization                                                                                                      |  |                            | 18,508
|                                                                                                                                   |  |                            |       
|                                                                                                                                   |  |                            | 73,786
|                                                                                                                                   |  |                            |       
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                            | 14,664
|                                                                                                                                   |  |                           
|Minority interests                                                                                                                 |  |                            | (2,576
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                            | 712   
|                                                                                                                                   |  |                            |       
|Income from continuing operations                                                                                                  |  |                            | 12,800
|                                                                                                                                   |  |                            |       
|Discontinued operations:                                                                                                           |  |                            |       
|Income from discontinued operations                                                                                                |  |                            | (717  
|Loss on sale of properties                                                                                                         |  |                            | (4,542
|Minority interests related to discontinued operations                                                                              |  |                            | 193   
|                                                                                                                                   |  |                            |       
|                                                                                                                                   |  |                            | (5,066
|                                                                                                                                   |  |                            |       
|Income before gain on sale of properties                                                                                           |  |                            | 7,734 
|                                                                                                                                   |  |                           
|Gain on sale of properties                                                                                                         |  |                            | 778   
|                                                                                                                                   |  |                            |       
|Net income                                                                                                                         |  | $                          | 8,512 
|Preferred dividends                                                                                                                |  |                            | (2,113
|                                                                                                                                   |  |                            |       
|Net income applicable to common shareholders                                                                                       |  | $                          | 6,399 
|                                                                                                                                   |  |                            |       



Included below is a
discussion of the significant events or transactions that have impacted our results of operations when comparing the three months ended June 30, 2003 to the three months ended June 30, 2002.



Acquisition of Real Estate. During the period April 1, 2002 through June 30, 2003, we
acquired four office properties containing in the aggregate approximately 787,000 net rentable square feet. The properties include the 12601 Fair Lakes Circle building in our Mid-Atlantic Region, the Park West C-3 building in our Southwest Region
and the 410 Warrenville Road and Corporate Lakes III buildings in our Midwest Region. The 12601 Fair Lakes Circle building was acquired November 18, 2002 for gross proceeds of approximately $55.0 million and contains approximately 264,000 net
rentable square feet. The Park West C-3 building was acquired on February 4, 2003 for gross proceeds of approximately $28.0 million and contains approximately 339,000 net rentable square feet. The 410 Warrenville Road building was acquired on May 8,
2003 for gross proceeds of approximately $8.7 million and contains approximately 60,000 net rentable square feet. The Corporate Lakes III building was acquired on June 18, 2003 for gross proceeds of approximately $22.2 million and contains
approximately 124,000 net rentable square feet.



30



---

##### Table of Contents

Leasing of Development Projects.Our results of operations, for the three months ended June 30, 2003, have been
bolstered by the contribution of several development projects. The projects include approximately 182,000 net rentable square feet in our Mid-Atlantic Region, 223,000 net rentable square feet in our Southwest Region and 40,000 net rentable square
feet in our Southern California Region. The projects were approximately 61% leased and rent paying for the three month period ended June 30, 2003 compared to approximately 48% for the three month period ended June 30, 2002.



Real Estate Dispositions. During the period April 1, 2002 through June 30, 2003, we
disposed of seven industrial properties containing 875,000 net rentable square feet and five office properties containing 533,000 net rentable square feet. The industrial properties were sold on September 10, 2002 and included all of the industrial
properties within our Mid-Atlantic Region. Three office properties containing 194,000 net rentable square feet were sold on October 17, 2002 and represented our only office holdings within the Los Angeles area, a market within our Southern
California Region. The remaining 339,000 net rentable square feet included the disposition on June 26, 2003 of two office properties within our Southwest Region. The sales resulted in aggregate gross proceeds of approximately $72.0 million which
were used to repay a portion of the outstanding borrowings under our revolving credit facility.



Other Significant Real Estate Transactions.On November 22, 1999, we acquired 123 North Wacker, a 537,000 net rentable square foot office property located in our Midwest Region for a purchase price of
approximately $87.3 million. The property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to convert and market the building for lease
as a multi-tenant property. The property, which was vacated as intended, is currently approximately 82% leased as compared to 61% leased at June 30, 2002.



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



The following is a discussion of the material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions, as described above, had on one or more line items of our consolidated
statements of income when comparing the three months ended June 30, 2003 to the three months ended June 30, 2002.



Rental Income. Rental income decreased by $671,000, or .8%, from $84.9 million to $84.2 million. The real estate acquisitions and development properties coming
on-line resulted in increases of $3.3 million and $741,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $661,000. These increases were offset by a decrease of $5.4 million from our other properties relating
primarily to occupancy declines in our portfolio.



Property Operating and
Maintenance. Property operating and maintenance costs increased by $445,000, or 2.1%, from $20.7 million to $21.2 million. The real estate acquisitions and development properties coming on-line resulted in increases of $840,000 and $340,000,
respectively. The leasing of our 123 North Wacker property resulted in an increase of $120,000. Property operating and maintenance expenses related to our other properties decreased by $855,000 relating primarily to a decrease in bad debt expense
during the period.



Real Estate Taxes. Real estate taxes decreased $1.2
million, or 11.0%, from $10.9 million to $9.7 million. Real estate acquisitions resulted in an increase of $375,000. The increase was offset by a decrease of $121,000 related to our 123 North Wacker property and a decrease related to our other
properties of $1.4 million. The decreases primarily resulted from real estate tax refunds received and lower estimates of current year taxes resulting from lower property tax assessments across our portfolio.



Service Business and Other Income/Operating Expenses of Service Business.Service
business and other income and the operating expenses of service business increased as a result of the acquisition of the remaining interest in Prentiss Properties Resources and the resulting consolidation of the accounts with and into the accounts
of the operating partnership. During the three months ended June 30, 2002, our proportionate share of the results of operations of Prentiss Properties Resources were included in the line item equity in income of joint ventures and
unconsolidated subsidiaries in our consolidated statement of income.



Interest Expense. Interest expense increased by $932,000, or 5.6%, from $16.8 million to $17.7 million, primarily as a result of an increase in weighted average borrowings outstanding for the three months ended June 30, 2003 compared
to the three months ended June 30, 2002, accompanied by a decrease in capitalized interest from $592,000 for the three months ended June 30, 2002 to $0 for the



31



---

##### Table of Contents

three months ended June 30, 2003. The increase was partially offset by a decrease in the weighted average interest rate
paid on outstanding borrowings from 6.59% to 6.52% for the respective periods.



Depreciation and Amortization. Depreciation and amortization increased by $1.1 million, or 6.4%, from $17.4 million to $18.5 million. The real estate acquisitions and development properties coming on-line resulted in increases of
$797,000 and $291,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $114,000. Other properties decreased by $147,000.



Minority Interests. Minority interests decreased by $135,000, or 5.0 %, from $2.7 million to $2.6 million, primarily due to the minority interest holders
proportionate share of the decrease in net income before discontinued operations and minority interests from $17.9 million for the three months ended June 30, 2002 to $16.2 million for the three months ended June 30, 2003.



Discontinued Operations. Discontinued operations decreased by $7.2 million, from $2.1
million for the three months ended June 30, 2002 to negative $5.1 million for the three months ended June 30, 2003. The decrease resulted from the recognition, during the three months ended June 30, 2003, of a loss on sale of real estate of $4.5
million and an impairment loss of $1.8 million accompanied by the shortened period of time the assets were included in our portfolio in 2003 versus 2002.



Gain on Sale of Properties. The gain on sale of properties of $778,000 resulted from the sale in May 2003 of a parcel of land in our Midwest Region.



32



---

##### Table of Contents

Results of Operations



Comparison of the six months ended June 30, 2003 to the six months ended June 30, 2002



The table below presents our consolidated statements of income for the six months ended June 30, 2003 and 2002:



|Consolidated Statements of Income                                                                                                  |  | Six Months Ended June 30, |        
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|(in thousands)                                                                                                                     |  | 2003                      |        
|Revenues:                                                                                                                          |  |                           |        
|Rental income                                                                                                                      |  | $                         | 167,111
|Service business and other income                                                                                                  |  |                           | 8,602  
|                                                                                                                                   |  |                           |        
|                                                                                                                                   |  |                           | 175,713
|                                                                                                                                   |  |                           |        
|Expenses:                                                                                                                          |  |                           |        
|Property operating and maintenance                                                                                                 |  |                           | 42,231 
|Real estate taxes                                                                                                                  |  |                           | 19,628 
|General and administrative and personnel cost                                                                                      |  |                           | 5,628  
|Operating expenses of service business                                                                                             |  |                           | 5,121  
|Interest expense                                                                                                                   |  |                           | 34,780 
|Amortization of deferred financing costs                                                                                           |  |                           | 1,045  
|Depreciation and amortization                                                                                                      |  |                           | 37,097 
|                                                                                                                                   |  |                           |        
|                                                                                                                                   |  |                           | 145,530
|                                                                                                                                   |  |                           |        
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                           | 30,183 
|                                                                                                                                   |  |                          
|Minority interests                                                                                                                 |  |                           | (5,214 
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                           | 1,338  
|                                                                                                                                   |  |                           |        
|Income from continuing operations                                                                                                  |  |                           | 26,307 
|                                                                                                                                   |  |                           |        
|Discontinued operations:                                                                                                           |  |                           |        
|Income from discontinued operations                                                                                                |  |                           | 187    
|Loss on sale of properties                                                                                                         |  |                           | (4,542 
|Minority interests related to discontinued operations                                                                              |  |                           | 160    
|                                                                                                                                   |  |                           |        
|                                                                                                                                   |  |                           |        
|                                                                                                                                   |  |                           | (4,195 
|Income before gain on sale of properties                                                                                           |  |                           | 22,112 
|                                                                                                                                   |  |                          
|Gain on sale of properties                                                                                                         |  |                           | 1,910  
|                                                                                                                                   |  |                           |        
|Net income                                                                                                                         |  | $                         | 24,022 
|Preferred dividends                                                                                                                |  |                           | (4,226 
|                                                                                                                                   |  |                           |        
|Net income applicable to common shareholders                                                                                       |  | $                         | 19,796 
|                                                                                                                                   |  |                           |        



Included below is a
discussion of the significant events or transactions that have impacted our results of operations when comparing the six months ended June 30, 2003 to the six months ended June 30, 2002.



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



In addition to the acquisition of
the Burnett Plaza property, during the period January 1, 2002 through June 30, 2003, we acquired four office properties containing in the aggregate approximately 787,000 net rentable square feet. The properties include the 12601 Fair Lakes Circle
building in our Mid-Atlantic Region, the Park West C3 building in our Southwest Region and the 410 Warrenville and Corporate Lakes III buildings in our Midwest Region.



33



---

##### Table of Contents

Leasing of Development Projects.Our results of operations, for the six months ended June 30, 2003, have been
bolstered by the contribution of several development projects. The projects include approximately 182,000 net rentable square feet in our Mid-Atlantic Region, 223,000 net rentable square feet in our Southwest Region and 40,000 net rentable square
feet in our Southern California Region. The projects were approximately 63% leased and rent paying for the six month period ended June 30, 2003 compared to approximately 48% for the six month period ended June 30, 2002.



Real Estate Dispositions. During the period January 1, 2002 through June 30, 2003, we
disposed of seven industrial properties containing 875,000 net rentable square feet and five office properties containing 533,000 net rentable square feet. The industrial properties were sold on September 10, 2002 and included all of the industrial
properties within our Mid-Atlantic Region. Three office properties containing 194,000 net rentable square feet were sold on October 17, 2002 and represented our only office holdings within the Los Angeles area, a market within our Southern
California Region. The remaining 339,000 net rentable square feet included the disposition on June 26, 2003 of two office properties within our Southwest Region. The sales resulted in aggregate gross proceeds of approximately $72.0 million which
were used to repay a portion of the outstanding borrowings under our revolving credit facility.



Other Significant Real Estate Transactions.On November 22, 1999, we acquired 123 North Wacker, a 537,000 net rentable square foot office property located in our Midwest Region for a purchase price of
approximately $87.3 million. The property was primarily leased to a single tenant whose intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to convert and market the building for lease
as a multi-tenant property. The property, which was vacated as intended, is currently approximately 82% leased as compared to 61% leased at June 30, 2002.



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



The following is a discussion of the material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions, as described above, had on one or more line items of our consolidated
statements of income when comparing the six months ended June 30, 2003 to the six months ended June 30, 2002.



Rental Income. Rental income increased by $3.1 million, or 1.9%, from $164.0 million to $167.1 million. The real estate acquisitions and development properties
coming on-line resulted in increases of $10.2 million and $1.4 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of $1.6 million. These increases were partially offset by a decrease of $10.1 million from our
other properties relating primarily to occupancy declines in our portfolio.



Property Operating and Maintenance. Property operating and maintenance costs increased by $3.2 million, or 8.2%, from $39.0 million to $42.2 million. The real estate acquisitions and development properties coming on-line resulted in
increases of $2.6 million and $859,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $527,000 and property operating and maintenance expenses related to our other properties decreased by $811,000 relating
primarily to a decrease in bad debt expense during the period.



Real Estate
Taxes. Real estate taxes decreased $1.2 million, or 6.0%, from $20.8 million to $19.6 million. Real estate acquisitions and development properties coming on-line resulted in increases of $693,000 and $7,000, respectively. The leasing of our 123
North Wacker property resulted in an increase of $242,000. The increases were offset by a decrease in our other properties of $2.2 million primarily as a result of real estate tax refunds received and lower estimates of current year taxes resulting
from lower property tax assessments across our portfolio.



Service Business
and Other Income/Operating Expenses of Service Business.Service business and other income and the operating expenses of service business increased as a result of the acquisition of the remaining interest in Prentiss Properties Resources and the
resulting consolidation of the accounts with and into the accounts of the operating partnership. During the six months ended June 30, 2002, our proportionate share of the results of operations of Prentiss Properties Resources were included in the
line item equity in income of joint ventures and unconsolidated subsidiaries in our consolidated statement of income.



Interest Expense. Interest expense increased by $1.9 million, or 5.7%, from $32.9 million to $34.8 million, primarily as a result of an increase in weighted
average borrowings outstanding for the six months ended June 30, 2003 compared to the six months ended June 30, 2002, accompanied by a decrease in capitalized interest from $2.4 million for the six months ended June 30, 2002 to $416,000 for the six
months ended June 30, 2003. The increase was partially offset by a decrease in the weighted average interest rate paid on outstanding borrowings from 6.71% to 6.56% for the respective periods.



34



---

##### Table of Contents

Depreciation and Amortization. Depreciation and amortization increased by $4.6 million, or 14.2%, from $32.5
million to $37.1 million. The real estate acquisitions and development properties coming on-line resulted in increases of $2.1 million and $1.2 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of $626,000.
Our other properties increased by $543,000 which is attributable to increases in depreciation and amortization of leasehold improvements which results from leasing activity incurred subsequent to our acquisition of these properties.



Minority Interests. Minority interests decreased by $309,000, or 5.6%, from $5.5
million to $5.2 million, primarily due to the minority interest holders proportionate share of the decrease in net income before discontinued operations and minority interests from $37.1 million for the six months ended June 30, 2002 to $33.4
million for the six months ended June 30, 2003.



Discontinued
Operations. Discontinued operations decreased by $8.2 million, from $4.0 million for the six months ended June 30, 2002 to negative $4.2 million for the three months ended June 30, 2003. The decrease resulted from the recognition, during the six
months ended June 30, 2003, of a loss on sale of real estate of $4.5 million and an impairment loss of $1.8 million accompanied by the shortened period of time the assets were included in our portfolio in 2003 versus 2002.



Gain on Sale of Properties. The gain on sale of properties of $1.9 million resulted
from the sale of two land parcels during the six months ended June 30, 2003.



Liquidity and Capital Resources



Cash and cash
equivalents were $7.4 million and $5.1 million at June 30, 2003 and December 31, 2002, respectively. The increase in cash and cash equivalents is a result of net cash provided by operating activities exceeding net cash used in investing and
financing activities.



Cash flows provided by operating
activities totaled $59.8 million for the six months ended June 30, 2003, compared to $73.2 million for the six months ended June 30, 2002. The change in cash flows from operating activities is attributable to (1) the factors discussed in our
analysis of results of operations for the six months ended June 30, 2003 compared to June 30, 2002 and (2) the timing of receipt of revenues and payment of expenses.



Net cash used in investing activities totaled $55.2 million for the six months ended June 30, 2003 compared to $131.2
million for the six months ended June 30, 2002. The decrease in net cash used in investing activities of $76.0 million is due primarily to a decrease of $48.3 million in cash used to purchase real estate and mortgage loans, a decrease of $9.8
million in cash used in the development and redevelopment of real estate, accompanied by an increase of $18.9 million in cash received from the sale of real estate.



Net cash used in financing activities totaled $2.3 million for the six months ended June 30, 2003 compared to cash provided
of $58.8 million for the six months ended June 30, 2002. The decrease in net cash from financing activities of $61.0 million is due primarily to net borrowings of $107.0 million for the six months ended June 30, 2002 compared to net borrowings of
$49.8 million for the six months ended June 30, 2003, a decrease in cash generated from the sale of common shares of $50.4 million, offset by cash used of $50.5 million during the six months ended June 30, 2002 for the repurchase of our outstanding
Series C Cumulative Redeemable Perpetual Preferred Units.



Net
cash flow from operations represents the primary source of liquidity to fund distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. We expect that our revolving credit facility will provide for funding of
working capital and revenue enhancing tenant improvements, unanticipated cash needs as well as acquisitions and development costs. Our principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements and the
minimum distributions required to maintain our REIT qualification under the Internal Revenue Code. In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income, excluding capital gains. We
expect to make distributions to our shareholders primarily based on our cash flow from operations distributed by our operating partnership. We anticipate that our short-term liquidity needs will be fully funded from cash flows provided by operating
activities and, when necessary to fund shortfalls resulting from the timing of collections of accounts receivable in the ordinary course of business, from our revolving credit facility. In the event that our cash flow needs exceed cash flows
provided by operating activities, we may be forced to incur additional debt or sell real estate properties to fund such cash flow needs.



Our net cash flow from operations is generally derived from rental revenues and operating expense reimbursements from tenants and, to a limited extent,
from fees generated by our office and industrial real estate management service business. Our net cash flow from operations is therefore dependent upon the occupancy level of our properties, the collectibility of rent from our tenants, the level of
operating and other expenses, and other factors. Material changes in these factors may adversely affect our net cash flow from



35



---

##### Table of Contents

operations. Such changes, in turn, would adversely affect our ability to fund distributions, debt service, capital
improvements and non-revenue enhancing tenant improvements. In addition, a material adverse change in our net cash flow from operations may affect the financial performance covenants under our revolving credit facility. If we fail to meet any of our
financial performance covenants, our revolving credit facility may become unavailable to us, or the interest charged on the revolving credit facility may increase. Either of these circumstances could adversely affect our ability to fund working
capital and revenue enhancing tenant improvements, unanticipated cash needs, acquisitions and development costs.



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



Debt Financing



As of June 30, 2003, we had outstanding total indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or
approximately 44.4% of total market capitalization based on a common share price of $29.99 per common share. The amount of indebtedness that we may incur, and the policies with respect thereto, are not limited by our declaration of trust and bylaws,
and are solely within the discretion of our board of trustees, limited only by various financial covenants in our credit agreements. Our credit agreements limit total indebtedness to 55% of total assets and require an interest coverage ratio of at
least 2 to 1.



We have in place a $300 million unsecured
revolving credit facility with a group of 12 banks. The facility, which was renewed in May 2002, matures in May 2005. The facility has a current interest rate of LIBOR plus 150 basis points and can vary between 125 basis points and 175 basis points
depending on our leverage. 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 June 30,
2003, we had net repayments of borrowings under our credit facility of $94.0 million and an outstanding balance of $107.5 million at June 30, 2003 resulting in an available balance of $192.5 million.



We have $2.8 million and $94.4 million of mortgages and notes payable
scheduled to mature in 2003 and 2004, respectively. We intend to refinance such debt at maturity or retire such debt through the issuance of additional equity or debt securities on or before the applicable maturity dates. If we are unable to raise
proceeds in a timely manner, pending availability, we will seek to borrow funds under our revolving credit facility, which would reduce the future availability of funds under such facility. We anticipate that our available cash and cash equivalents
and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to fund these capital requirements.



36



---

##### Table of Contents

The following table sets forth our mortgages and notes payable, including our pro rata share of joint
venture debt as of June 30, 2003:



|Borrower/Description                           |  | CurrentBalance |           | Amortization |       | Interest Rate |                | Maturity
|---------------------------------------------- |  | -------------- | --------- | ------------ | ----- | ------------- | -------------- | --------
|                                               |  | (in thousands) |           |              |       |               |                |         
|Broadmoor Austin Associates                    |  |                |           |              |       |               |                |         
|Broadmoor Austin(1)                            |  | $              | 70,833    |              | 16 yr |               | 7.04%          |         
|Burnett Plaza Associates                       |  |                |           |              |       |               |                |         
|Burnett Plaza                                  |  |                | 72,100    |              | None  |               | LIBOR + 2.15%  |         
|PL Properties Associates, L.P.                 |  |                |           |              |       |               |                |         
|Park West C2                                   |  |                | 33,731    |              | 30 yr |               | 6.63%          |         
|Prentiss Properties Acquisition Partners, L.P. |  |                |           |              |       |               |                |         
|Bachman West                                   |  |                | 2,788     |              | 25 yr |               | 8.63%          |         
|One Westchase Center                           |  |                | 23,250    |              | 25 yr |               | 7.84%          |         
|Collateralized Term Loan(2)                    |  |                | 71,188    |              | 25 yr |               | LIBOR + 1.625% |         
|Walnut Glen Tower                              |  |                | 33,766    |              | 30 yr |               | 6.92%          |         
|Revolving Credit Facility                      |  |                | 107,500   |              | None  |               | LIBOR + 1.500% |         
|Unsecured Term Loan-Commerz                    |  |                | 75,000    |              | None  |               | LIBOR + 1.500% |         
|Unsecured Term Loan-Eurohypo                   |  |                | 100,000   |              | None  |               | LIBOR + 1.375% |         
|Highland Court                                 |  |                | 4,552     |              | 25 yr |               | 7.27%          |         
|Plaza I & II                                   |  |                | 7,142     |              |       |               | 7.75%          |         
|7101 Wisconsin Avenue                          |  |                | 20,524    |              | 30 yr |               | 7.25%          |         
|2500 Cumberland Parkway                        |  |                | 14,100    |              | 30 yr |               | 7.46%          |         
|Ordway                                         |  |                | 48,225    |              | 30 yr |               | 7.95%          |         
|World Savings Center                           |  |                | 28,635    |              | 30 yr |               | 7.91%          |         
|One OHare Centre                              |  |                | 40,030    |              | 30 yr |               | 6.80%          |         
|3130 Fairview Park Drive                       |  |                | 22,411    |              | 30 yr |               | 7.00%          |         
|Research Office Center                         |  |                | 44,215    |              | 28 yr |               | 7.64%          |         
|Bannockburn Centre                             |  |                | 26,273    |              | 30 yr |               | 8.05%          |         
|Del Mar Loan                                   |  |                | 44,123    |              | 30 yr |               | 7.41%          |         
|Prentiss Properties Corporetum, L.P.           |  |                |           |              |       |               |                |         
|Corporetum Office Campus                       |  |                | 24,835    |              | 30 yr |               | 7.02%          |         
|Prentiss Properties Natomas, L.P.              |  |                |           |              |       |               |                |         
|Natomas Corporate Center                       |  |                | 36,297    |              | 30 yr |               | 7.02%          |         
|Prentiss Properties Real Estate Fund I, L.P.   |  |                |           |              |       |               |                |         
|PPREFI Portfolio Loan(3)                       |  |                | 180,100   |              | None  |               | 7.58%          |         
|Tysons International Partners                  |  |                |           |              |       |               |                |         
|1676 International(4)                          |  |                | 11,098    |              | 28 yr |               | 7.68%          |         
|8260 Greensboro(4)                             |  |                | 3,971     |              | 28 yr |               | 7.83%          |         
|                                               |  |                |           |              |       |               |                |         
|Total                                          |  | $              | 1,146,687 |              |       |               |                |         
|                                               |  |                |           |              |       |               |                |         



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

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

|(3) |  | The PPREFI Portfolio Loan is collateralized by the following 36 properties: the Los Angeles
industrial properties (18 properties), the Chicago industrial properties (four properties), the Cottonwood Office Center (three properties), Park West E1 and E2 (two properties), One Northwestern Plaza, 3141 Fairview Park Drive, 13825 Sunrise Valley
Drive, OHare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court, the WestPoint Office Building and the PacifiCare Building.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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.



37



---

##### Table of Contents

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



Hedging Activities



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



We may employ forwards or purchased
options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net income in the same period that the anticipated transaction occurs, expires or is otherwise terminated. The following table summarizes the
notional amounts and fair values of our derivative financial instruments at June 30, 2003. 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 RatePaid(Fixed) |   |  | EffectiveFixedRate |   |  | Swap Rate Received(Variable) at June 30, 2003 |   |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | -------------------- | - |  | ------------------ | - |  | --------------------------------------------- | - |  | -------------- |  | -------------- | -------
|                |  |                      |   |  |                    |   |  |                                               |   |  |                |  | (in thousands) |        
|$ 50 million    |  | 1.990                | % |  | 3.490              | % |  | 1.12                                          | % |  | August 2003    |  | $              | (42    
|$ 50 million    |  | 6.253                | % |  | 7.753              | % |  | 1.12                                          | % |  | September 2004 |  |                | (3,202 
|$ 60 million    |  | 6.248                | % |  | 7.748              | % |  | 1.12                                          | % |  | September 2004 |  |                | (3,839 
|$ 15 million    |  | 4.345                | % |  | 6.495              | % |  | 1.12                                          | % |  | July 2005      |  |                | (1,461 
|$ 25 million    |  | 4.345                | % |  | 6.495              | % |  | 1.12                                          | % |  | July 2005      |  |                | (877   
|$ 20 million    |  | 5.985                | % |  | 7.610              | % |  | 1.12                                          | % |  | March 2006     |  |                | (2,254 
|$ 30 million    |  | 5.990                | % |  | 7.615              | % |  | 1.12                                          | % |  | March 2006     |  |                | (3,385 
|$ 50 million    |  | 2.270                | % |  | 3.645              | % |  | 1.12                                          | % |  | August 2007    |  |                | 141    
|$ 25 million    |  | 2.277                | % |  | 3.652              | % |  | 1.12                                          | % |  | August 2007    |  |                | 64     
|                |  |                      |   |  |                    |   |  |                                               |   |  |                |  |                |        
|Total           |  |                      |   |  |                    |   |  |                                               |   |  |                |  | $              | (14,855
|                |  |                      |   |  |                    |   |  |                                               |   |  |                |  |                |        



Capital Improvements



Our properties require periodic investments of capital
for tenant-related capital expenditures and for general capital improvements. The majority of capital required relates to tenant-related capital expenditures and is dependent upon our leasing activity. Our leasing activity is a function of the
percentage of our in-place leases expiring in current and future periods accompanied by our exposure to tenant defaults and our ability to increase the average occupancy of our portfolio. For the six months ended June 30, 2003 capital expenditures
related to our in-service properties totaled $12.3 million. We classify capital expenditures for in-service properties as non-incremental and incremental revenue-enhancing capital expenditures representing our estimate of recurring versus
non-recurring capital requirements, respectively. Our non-incremental and incremental capital expenditures for the six months ended June 30, 2003 totaled approximately $11.6 million and $699,000, respectively.



Equity Financing



During the six months ended June 30, 2003, we issued 1,994 common shares of beneficial interest pursuant to our dividend
reinvestment plan, 56,835 common shares as a result of option exercises, and 16,054 shares related to our employee stock purchase plan. The cash proceeds totaling approximately $1.8 million were used to repay a portion of the outstanding borrowings
under our revolving credit facility.



38



---

##### Table of Contents

Off-Balance Sheet Arrangements



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



At June 30, 2003 we had the following off-balance sheet arrangements: (1) a
non-controlling 50% interest in Broadmoor Austin Associates, a real estate joint venture; (2) a 25% non-controlling interest in Tysons International Partners, a real estate joint venture; and (3) a 1% non-controlling interest in certain real estate
assets.



Our investment in unconsolidated joint ventures
represents less than .7% of our total assets as of June 30, 2003 and 2.2% of our cash flow from operations for the six months ended June 30, 2003. Our investments, however, do provide us with several benefits including increased market share,
important customer relations and a possible capital source to fund future real estate projects



Broadmoor Austin Associates and Tysons International Partners represent real estate joint ventures which own and operate office properties in Austin, Texas and Tysons Corner, Virginia, respectively. We act as managing
venture partner and have the authority to conduct the business affairs of each joint venture, subject to approval and veto rights of the other venture partner. We account for our interest in these joint ventures using the equity method of
accounting. Our 1% interest in other real estate assets represents a carried interest that is accounted for using the cost method of accounting.



The following information summarizes the financial position at June 30, 2003 for the investments in which we held an unconsolidated interest at June 30,
2003:





|Summary of Financial Position: (in
thousands) |  | Total Assets |         | Total Debt(1) |   | Total Equity |  |   | CompanysInvestment
|--------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------ |  | - | -------------------
|Broadmoor Austin Associates                   |  | $            | 106,077 |               | $ | 141,666      |  | $ | (36,221            
|Tysons International Partners                 |  |              | 96,235  |               |   | 60,278       |  |   | 33,842             
|Other Investments                             |  |              |        |               |   |             |  |   |                   
|                                              |  |              |         |               |   |              |  |   |                    
|                                              |  |              |         |               |   |              |  |   |                    
|                                              |  |              |         |               |   |              |  |   |                    



|(1) |  | The mortgage debt, all of which is non-recourse, is collateralized by the individual real
estate property or properties within each venture, the net book value of which totaled $175.4 million at June 30, 2003. Our proportionate share of the non-recourse mortgage debt totaled $85.9 million at June 30, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following information summarizes the results of operations for the
unconsolidated investments which impacted our results of operations for the three and six months ended June 30, 2003.



For the three months ended June 30, 2003:



|Summary of Operations: (in
thousands) |  | TotalRevenue |       | NetIncome |   | CompanysShare of NetIncome/(Loss)
|------------------------------------- |  | ------------ | ----- | --------- | - | ----------------------------------
|Broadmoor Austin Associates           |  | $            | 5,055 |           | $ | 1,210                             
|Tysons International Partners         |  |              | 3,329 |           |   | 427                               
|                                      |  |              |       |           |   |                                   
|                                      |  |              |       |           |   |                                   
|                                      |  |              |       |           |   |                                   



39



---

##### Table of Contents

For the six months ended June 30, 2003:



|Summary of Operations: (in
thousands) |  | TotalRevenue |        | NetIncome |   | CompanysShare of NetIncome/(Loss)
|------------------------------------- |  | ------------ | ------ | --------- | - | ----------------------------------
|Broadmoor Austin Associates           |  | $            | 10,111 |           | $ | 2,338                             
|Tysons International Partners         |  |              | 6,574  |           |   | 676                               
|                                      |  |              |        |           |   |                                   



In connection with the
disposition of a real estate property in May 2001, we entered into a financial guarantee with a maximum future potential payment of $1.4 million. The financial guarantee, provided to the third party purchaser, guarantees payment of an amount not to
exceed the $1.4 million potential maximum if certain tenants, as defined in the purchase and sale agreement, fail to extend their leases beyond the maturities of their current in-place leases. See further discussion and table presented under the
Contractual Obligations and Commercial Commitments section below.



Contractual Obligations and Commercial Commitments



We have contractual obligations including mortgages and notes payable and ground lease obligations. The table below presents, as of June 30, 2003, our future scheduled principal repayments of mortgages and notes payable and ground lease
obligations, including our pro rata share of debt and ground lease obligations of our of joint venture properties:



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



As a condition of the
purchase and sale and as security for our guarantee, as discussed under the Off-Balance Sheet Arrangements section above, we provided to the title company at closing, irrevocable letters of credit, totaling $1.4 million, drawn on a financial
institution and identifying the purchaser as beneficiary. The balance of the letters of credit which total $1.3 million at June 30, 2003, expires as follows:



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



Funds from Operations



Funds from operations is a widely recognized measure of
REIT operating performance. Funds from operations is a non-GAAP financial measure and, as defined by the National Association of Real Estate Investment Trusts, means net income, computed in accordance with GAAP excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures and subsidiaries. We believe that funds from operations is
helpful to investors and our management as a measure of our operating



40



---

##### Table of Contents

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



|Funds from operations                                                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------
|(in thousands)                                                             |  | 2003                       |        |                         
|Net income                                                                 |  | $                          | 8,512  |                         
|Add:                                                                       |  |                            |        |                         
|Real estate depreciation and amortization(1)                               |  |                            | 19,466 |                         
|Real estate depreciation and amortization of unconsolidated joint ventures |  |                            | 738    |                         
|Minority interests(2)                                                      |  |                            | 244    |                         
|Loss on impairment of real estate                                          |  |                            | 1,792  |                         
|Loss on sale of real estate                                                |  |                            | 4,542  |                         
|                                                                           |  |                            |        |                         
|Less:                                                                      |  |                            |        |                         
|Gain on sales                                                              |  |                            | (778   | )                       
|                                                                           |  |                            |        |                         
|Funds from operations                                                      |  | $                          | 34,516 |                         
|                                                                           |  |                            |        |                         



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

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



Funds from operations decreased by $3.1 million and $4.4 million for the
three and six months ended June 30, 2003 from the three and six months ended June 30, 2002, respectively, as a result of the factors discussed in the analysis of operating results.



Recently Issued Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities.
This interpretation requires consolidation of an entity by an enterprise if that enterprise will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur,
or both. An entity subject to this interpretation is called a variable interest entity. The disclosure provisions of this interpretation are effective for financial statements issued after January 31, 2003. A public entity with a variable interest
entity created before February 1, 2003, shall apply the consolidation provisions of this interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. All enterprises with
variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this interpretation immediately.



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



Prentiss Properties Resources was
incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services business serves a broad base of clients, including major
financial institutions and pension funds, large corporate users, real estate advisory firms and real estate investment groups. Through Prentiss Properties Resources, we offer a full range of fee-based



41



---

##### Table of Contents

services, including property management, leasing, tenant construction, insurance, accounting, tax, acquisition,
disposition, facilities management, and corporate and asset management services. At December 31, 2002 Prentiss Properties Resources had net assets totaling $6.5 million. Our investment totaled $6.3 million representing our maximum exposure to loss
as a result of our involvement with Prentiss Properties Resources.



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



We are currently evaluating whether our equity investments in
Broadmoor Austin Associates and Tysons International Partners qualify as variable interest entities and if so, determining whether we are the beneficiary, thus requiring consolidation. Regardless, we do not anticipate that the provisions of FASB
Interpretation No. 46 will have a material impact on our financial condition and results of operations.



In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of
Financial Accounting Standards No. 133. The amendments set forth in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The statement is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The impact from the implementation of this statement, which we believe
will not have a material impact on our financial statements, will be dependent upon whether we enter into derivative transactions, subsequent to June 30, 2003, included within the scope of this statement or whether we modify, subsequent to June 30,
2003, derivative instruments existing at June 30, 2003.



In May
2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. We believe that the impact from
the implementation of this statement will not have a material impact on our financial statements.



Inflation



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





42



---

##### Table of Contents

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 June 30, 2003, we had outstanding total indebtedness, including our pro rata share
of joint venture debt, of approximately $1.1 billion, or approximately 44.4% 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 62.9% of our outstanding debt was subject to fixed rates with a weighted average interest rate of
7.44% at June 30, 2003. Of the remaining $425.8 million, or 37.1%, representing our variable rate debt, $250.0 million was effectively locked at an interest rate (before the spread over LIBOR) of 4.57% 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.



|(dollars in thousands)    |  | 2003 |        |   | 2004 |   |         | 2005 |  |   | 2006    |   |  | 2007 |        |   | Thereafter |   |         | Total |  | Fair Value |        
|------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---------- | - | ------- | ----- |  | ---------- | -------
|Liabilities               |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Long-Term Debt:           |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|                          |  |      |        |   |      |   |         |     
|Fixed Rate                |  | $    | 7,491  |   |      | $ | 32,334  |      |  | $ | 42,700  |   |  | $    | 14,389 |   |            | $ | 197,222 |       |  | $          | 426,763
|Average Interest Rate     |  |      | 7.44   | % |      |   | 7.43    | %    |  |   | 7.45    | % |  |      | 7.46   | % |            |   | 7.39    | %     |  |            | 7.41   
|Variable Rate             |  | $    | 375    |   |      | $ | 70,813  |      |  | $ | 179,600 |   |  | $    | 75,000 |   |            |   |        |       |  | $          | 100,000
|Average Interest Rate     |  |      | 2.76   | % |      |   | 2.76    | %    |  |   | 2.70    | % |  |      | 2.55   | % |            |   | 2.53    | %     |  |            | 2.53   
|                          |  |      |        |   |      |   |         |     
|Interest Rate Derivatives |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Interest Rate Swaps:      |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Variable to Fixed         |  | $    | 50,000 |   |      | $ | 110,000 |      |  | $ | 40,000  |   |  | $    | 50,000 |   |            | $ | 75,000  |       |  |            |       
|Average Pay Rate          |  |      | 4.57   | % |      |   | 4.68    | %    |  |   | 3.84    | % |  |      | 2.64   | % |            |   | 2.27    | %     |  |            |       
|Average Receive Rate      |  |      | 1.12   | % |      |   | 1.12    | %    |  |   | 1.12    | % |  |      | 1.12   | % |            |   | 1.12    | %     |  |            |       



Item 4.
Controls and Procedures



As of
June 30, 2003, 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 were 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 and
include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.



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





43



---

##### 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



On August 13, 2003, we agreed to sell 2.3 million common shares, which included 300,000 common shares to cover the underwriters over-allotment option, at $28.90 per share, net of underwriting discounts and commissions. The closing is
expected to occur on August 18, 2003. The offering is pursuant to our universal shelf Registration Statement on Form S-3, File No. 333-49433, as amended, which was declared effective by the SEC on July 29, 2002. The offering is being underwritten by
Deutsche Bank Securities Inc. Copies of the prospectus supplement and accompanying prospectus may be obtained from Deutsche Bank Securities Inc. in New York. After deducting underwriting discounts and commissions of $1.2 million and estimated
offering expenses, we will receive net offering proceeds of approximately $57.5 million.



We will contribute the net proceeds of the sale of the common shares to the operating partnership in exchange for additional common units of limited partnership interest in the operating partnership. In July 2003, we
entered into a contract to purchase one office property in Virginia containing approximately 228,000 net rentable square feet for approximately $51.0 million. We expect the closing of the transaction, which is subject to satisfactory completion of
due diligence, to occur during the third quarter of 2003. Our operating partnership intends to use a portion of the net proceeds to purchase this property. The operating partnership will use the remaining net proceeds, or if this acquisition does
not close, all the net proceeds, to acquire additional office properties as suitable opportunities arise or to redeem, in part, its outstanding 8.30% Series B cumulative redeemable perpetual preferred units at a redemption price of $50.00 per Series
B preferred unit plus accumulated and unpaid dividends. Although we monitor and evaluate acquisition opportunities on an ongoing basis, we have no other present agreements, commitments or understandings with respect to the acquisition of any office
properties at this time.



The above represents our current
intentions for the use of the net proceeds. We might change how we use the estimated net proceeds in response to, among other things, changes in our business plans, future revenues and expenses and industry, regulatory or competitive conditions. The
amount of our expenses and their timing will vary depending on a number of factors, including changes in our expected operations or business plan and changes in economic and industry conditions. Any such changes will be at the discretion of our
board of trustees and officers. As of the date of this Form 10-Q, no payments of expenses or uses of net proceeds constituted direct or indirect payments to any of our directors, officers or general partners or their associates, persons owning 10%
or more of any class of our equity securities, or to any of our affiliates.



This Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of such jurisdiction.



Item 3.
Defaults Upon Senior Securities



None.



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



On May 15, 2003, we held our Annual Meeting of shareholders. At the meeting, two Class I trustees, Thomas F. August and Lawrence A. Wilson were elected to serve as trustees until the 2006 Annual Meeting of the
shareholders, and until the respective successor of each is duly elected and qualified. Each of Michael V. Prentiss, Ronald G. Steinhart, Dr. Leonard M. Riggs, Jr., Thomas J. Hynes, Jr. and Barry J.C. Parker continue their terms of office as members
of our board of trustees.



The votes cast for the trustees
were:



|Thomas F. August   |  |           
|------------------ |  | ----------
|Votes for:         |  | 35,370,320
|Votes withheld:    |  |          
|Broker non-votes:  |  |          
|Abstentions:       |  | 383,565   
|                   | 
|Lawrence A. Wilson |  |           
|Votes for:         |  | 35,370,504
|Votes withheld:    |  | 183       
|Broker non-votes:  |  |          
|Abstentions:       |  | 383,382   



44



---

##### Table of Contents

The shareholders also ratified the appointment of PricewaterhouseCoopers LLP as our independent
accountants for 2003.



The votes cast were as follows:



|                  |  | PricewaterhouseCoopers LLP
|----------------- |  | --------------------------
|Votes for:        |  | 34,883,808                
|Votes against:    |  | 856,344                   
|Broker non-votes: |  |                          
|Abstentions:      |  | 13,733                    



Item 5.
Other Information



None.



Item 6.
Exhibits and Reports on Form 8-K



|(a) |  | Exhibits:
|--- |  | ---------



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



45



---

##### Table of Contents

|      | 
|----- | 
|4.5   | 
|      | 
|10.1  | 
|      | 
|10.2* | 
|      | 
|10.3* | 
|      | 
|31.1* | 
|      | 
|31.2* | 
|      | 
|32.1* | 
|      | 
|32.2* | 

---

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



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



On April 21, 2003, we furnished to the Securities and Exchange Commission a Current Report on Form 8-K. The Current Report on Form 8-K
relates to our earnings release for the quarter ended March 31, 2003.



46



---

##### 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 TRUST
|--------------------- |  |  |  | -------------------------
|                      |  |  | 
|Date: August 14, 2003 |  |  |  | By:                      



47