<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549


                                   FORM 10-Q



                 Quarterly Report under Section 13 or 15(d) of
                      the Securities Exchange Act of 1934



For the Quarter Ended June 30, 1997              Commission File Number  1-14516


                           PRENTISS PROPERTIES TRUST
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



           MARYLAND                                            75-2661588
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                            Identification No.)



         3890 West Northwest Highway, Suite 400, Dallas, Texas  75220
             (Address of Registrant's Principal Executive Office)


                                (214) 654-0886
             (Registrant's Telephone Number, Including Area Code)



     Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (ii) has been subject to such
filing requirements for the past 90 days.

                       Yes    X       No
                            -----         -----

           The number of Common Shares, $.01 par value, outstanding
                    as of August 12, 1997, was 26,289,053.
<PAGE>
 
                           PRENTISS PROPERTIES TRUST


                                     INDEX
                                     -----


PART I:  FINANCIAL INFORMATION                                       PAGE NUMBER
                                                                     -----------
         Item 1.  Financial Statements

                  Consolidated Balance Sheets of Prentiss 
                  Properties Trust at June 30, 1997 (unaudited) 
                  and December 31, 1996                                    3

                  Consolidated Statements of Income of Prentiss 
                  Properties Trust for the three and six month 
                  periods ended June 30, 1997 (unaudited) and 
                  Combined Statements of Income of the Predecessor 
                  Company for the three and six month periods 
                  ended June 30, 1996 (unaudited)                          4
 
                  Consolidated Statement of Cash Flows of Prentiss 
                  Properties Trust for the six month period ended 
                  June 30, 1997 (unaudited) and Combined Statement 
                  of Cash Flows of the Predecessor Company for the 
                  six month period ended June 30, 1996 (unaudited)         5
 
                  Notes to Consolidated and Combined Financial 
                  Statements                                            6-12
 
         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                   13-19

         Item 3.  Quantitative and Qualitative Disclosures about
                  Market Risk                                              19
 
PART II: OTHER INFORMATION

         Item 1.  Legal Proceedings                                        20
         Item 2.  Changes in Securities                                    20
         Item 3.  Defaults Upon Mortgages and Notes Payable                20
         Item 4.  Submission of Matters to a Vote of Security Holders      20
         Item 5.  Other Information                                        20
         Item 6.  Exhibits and Reports on Form 8-K                         20
 
SIGNATURE                                                                  21

                                       2
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                          CONSOLIDATED BALANCE SHEETS

                   (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                           JUNE 30,     DECEMBER 31,
                                             1997          1996
                                          -----------   ------------
                                          (UNAUDITED)
                                  ASSETS
<S>                                       <C>          <C>
Real estate.............................    $776,830       $501,035
  Less: accumulated depreciation........     (25,754)       (18,507)
                                            --------       --------
                                             751,076        482,528
 
Deferred charges and other assets, net..      16,959         11,747
Receivables, net........................       8,979          5,356
Cash and cash equivalents...............       6,447          7,226
Escrowed cash...........................       1,649            867
Other receivables (affiliates)..........                      1,346
Investments in joint venture and            
 unconsolidated subsidiaries............      21,539         21,956
                                            --------       --------     
 Total assets...........................    $806,649       $531,026 
                                            ========       ========  
                                            
                     LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
 Debt on real estate....................    $257,035       $128,800
 Accounts payable and other liabilities.      22,885         15,868
 Distributions payable..................      11,831          7,309
 Other payables (affiliates)............       2,661              -
                                            --------       --------
   Total liabilities....................     294,412        151,977
                                            --------       --------
 
Minority interest in Operating              
 Partnership............................      56,971         52,857
                                            --------       -------- 
                                            
Minority interest in partnerships.......       1,005            971
                                            --------       -------- 
Commitments and contingencies
 
Shareholders' equity:
    Common shares $.01 par value,
     100,000,000 shares
    authorized, 26,280,907 and
     20,279,897 shares issued                
    and outstanding at June 30, 1997        
     and December 31,                       
    1996................................         263            203 
 Additional paid-in capital.............     457,684        326,309 
 Distributions in excess of accumulated
  earnings..............................      (3,686)        (1,291)
                                            --------       -------- 
  Total shareholders' equity............     454,261        325,221
                                            --------       -------- 
  Total liabilities and shareholders'       
   equity...............................    $806,649       $531,026
                                            ========       ======== 
</TABLE>                                   
  The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
                 CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
                                  (UNAUDITED)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  THE             PREDECESSOR             THE           PREDECESSOR
                                                COMPANY             COMPANY             COMPANY           COMPANY
                                          -------------------  ------------------  -----------------  ----------------
                                          THREE MONTHS ENDED   THREE MONTHS ENDED  SIX MONTHS ENDED   SIX MONTHS ENDED
                                             JUNE 30, 1997       JUNE 30, 1996       JUNE 30, 1997     JUNE 30, 1996
                                          -------------------  ------------------  -----------------  ----------------
<S>                                       <C>                  <C>                 <C>                <C>
Revenues:
  Rental income.........................             $29,118              $ 8,314           $51,093            $16,340
  Management fees.......................                 225                2,487               472              5,004
  Development, leasing, sale and other               
   fees.................................                 435                2,344               867              5,353 
                                                     -------              -------           -------            -------
   Total revenues.......................              29,778               13,145            52,432             26,697
                                                     -------              -------           -------            -------
 
Expenses:
 Property operating and maintenance.....               6,697                2,341            12,010              4,872
 Real estate taxes......................               3,246                  870             5,703              1,709
 General and administrative.............                 747                1,462             1,301              2,957
 Personnel costs, net...................                 655                3,356             1,364              6,923
 Interest expense.......................               4,380                1,579             7,033              2,548
 Amortization of deferred financing                  
  costs.................................                 194                  525               367                758
 Depreciation and amortization..........               5,051                1,792             8,886              3,573
                                                     -------              -------           -------            ------- 
   Total expenses.......................              20,970               11,925            36,664             23,340
                                                     -------              -------           -------            -------
 
Equity in income of joint venture and
 unconsolidated subsidiaries............               1,363                    5             2,782                 19
                                                     -------              -------           -------            -------
 
Income before minority interest, gain
 on sale and extraordinary item.........              10,171                1,225            18,550              3,376
Minority interest.......................              (1,267)                   -            (2,455)                 -
                                                     -------              -------           -------            -------
 
Income before gain on sale and          
 extraordinary item.....................               8,904                1,225            16,095              3,376
Gain on sale............................                 243                                    243                  
Extraordinary item (net of minority
 interest of $18)-early extinguishment
 of debt................................                   -                    -              (111)                 -
                                                     -------              -------           -------            -------
Net income..............................             $ 9,147              $ 1,225           $16,227            $ 3,376
                                                     =======              =======           =======            =======
 
Net income per common share before     
 extraordinary item.....................             $  0.37                                $  0.72
 
Extraordinary item......................                   -                                      -
                                                     -------                                -------
 
Net income per common share.............             $  0.37                                $  0.72
                                                     -------                                -------
 
Weighted average number of common       
 shares outstanding.....................              24,538                                 22,630
                                                     =======                                =======

</TABLE>

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

                                       4
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                            AND PREDECESSOR COMPANY
               CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                PREDECESSOR
                                             THE COMPANY          COMPANY
                                          -----------------  -----------------
                                          SIX MONTHS ENDED   SIX MONTHS ENDED
                                            JUNE 30, 1997      JUNE 30, 1996
                                          -----------------  -----------------
<S>                                       <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income.............................         $  16,227           $  3,376
 
 Adjustments to reconcile net income to
  net cash provided by operating
  activities:
   Minority interest....................             2,455                  -
   Extraordinary item...................               111                  -     
   Gain on sale.........................              (243)                 -    
   Depreciation and amortization........             8,886              3,573
   Amortization of deferred financing
    costs...............................               367                758  
   Equity in income of joint venture                        
    and unconsolidated subsidiaries.....            (2,782)               (19) 
   Non-cash compensation................                25                  -                       
 Changes in assets and liabilities,                                          
  net of non-cash effect of                                                   
  acquisitions:                                          5               (145)
   Provision for doubtful accounts......            (3,628)               295 
   Receivables..........................            (2,879)            (1,986) 
   Deferred charges and other assets....              (558)              (215)   
   Escrowed cash........................             4,547                559    
   Accounts payable and other
    liabilities.........................             4,007               (185)   
                                                 ---------           --------
   Amounts due to/from affiliates.......
  
 Net cash provided by operating         
  activities............................            26,540              6,011
                                                 ---------           --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of real estate................          (248,296)           (19,946)
 Investment in real estate..............           (17,300)            (1,767)
 Investment in unconsolidated subsidiary              (597)                 -
 Proceeds from sale of real estate......             3,030                  -
 Distributions received from joint
  venture and unconsolidated           
  subsidiaries..........................             3,669                  -
 Increase in escrowed cash..............                 -               (301)
                                                 ---------           --------
 
 Net cash used in investing activities..          (259,494)           (22,014)
                                                 ---------           --------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net proceeds from sale of common shares           135,775                  -
 Distributions paid to limited partners.            (2,340)                 -
 Distributions paid to common           
  shareholders..........................           (14,399)                 -
 Distributions paid to owners...........                 -             (3,625)
 Distributions paid for minority        
  interest in consolidated subsidiaries.               (17)                 -
 Proceeds from debt on real estate......           306,756             22,500
 Repayments of debt on real estate......          (193,600)              (155)
 Distribution of PPL income.............                 -             (1,814)
                                                 ---------           --------
 
 
 Net cash provided by financing         
  activities............................           232,175             16,906
                                                 ---------           --------

 Net increase in cash and cash          
  equivalents...........................              (779)               903
 Cash and cash equivalents, beginning   
  of period.............................             7,226              1,033 
                                                 ---------           --------
 Cash and cash equivalents, end of      
  period................................         $   6,447           $  1,936
                                                 =========           ========
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 Cash paid for interest.................         $   6,113           $  2,550
                                                 =========           ========
</TABLE>

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

                                       5
<PAGE>
 
1.   FORMATION TRANSACTIONS

     The Organization, IPO and Follow-on Offering

     Prentiss Properties Trust was formed under the laws of the state of
Maryland on July 12, 1996, to be a self-administered and self-managed real
estate investment trust ("REIT"). Prentiss Properties Trust owns a limited
partnership interest and a sole general partnership interest in Prentiss
Properties Acquisition Partners, L.P. (the "Operating Partnership") through a
wholly-owned subsidiary, Prentiss Properties I, Inc., a Delaware corporation.
Prentiss Properties Trust, as referred to herein, includes the Company, its
majority-owned Operating Partnership and subsidiaries (collectively, the
"Company").

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

     On October 22, 1996, the Company commenced operations after completing an
initial public offering (the "IPO") of 16,000,000 common shares of beneficial
interest, $0.01 par value per share ("Common Shares").  The Company issued an
additional 2,400,000 Common Shares on October 31, 1996, pursuant to the exercise
of the underwriters' over-allotment option.  The combined 18,400,000 Common
Shares were issued at a price per share of $20.00.  The Company used
approximately $87.4 million of the net proceeds and issued 1,879,897 Common
Shares of the Company for a total consideration of approximately $125.0 million
to purchase certain limited partners' interests in the Operating Partnership.
The Company contributed the remaining net proceeds of the IPO to the Operating
Partnership.  Subsequent to these transactions, the Company held an approximate
86.0% interest in the Operating Partnership.

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

     On April 30, 1997, the Company completed an equity offering (the "Follow-on
Offering") of 6,000,000 Common Shares of beneficial interest, $0.01 par value
per share.  The Common Shares were issued at a price per share of $24.00.  The
Company contributed the net proceeds of the Follow-on Offering to the Operating
Partnership.  Subsequent to this transaction and at June 30, 1997, the Company
holds an approximate 88.9% interest in the Operating Partnership.

     The Properties

     Upon completion of the IPO and certain related transactions (collectively,
the "Formation Transactions"), the Company owned 87 properties (the "Initial
Properties"), which consisted of 28 office (the "Initial Office Properties") and
59 industrial (the "Initial Industrial Properties") containing an aggregate of
8.9 million net rentable square feet.  Between the closing of the IPO and
December 31, 1996 and between January 1, 1997 and June 30, 1997, the Company
acquired 8 and 29 additional properties, respectively (the "Acquired
Properties").  Of the 37 Acquired Properties, 22 were acquired during the three
months ended June 30, 1997.  As of June 30, 1997, the Company owned 124
properties, 49 office and 75 industrial (the "Properties") containing 13.4
million square feet and located in 13 major markets throughout the U.S.

     The Acquired Properties consist of 21 Class "A" suburban office Properties
(the "Acquired Office Properties") totaling 2.4 million square feet and 16
suburban industrial Properties (the "Acquired Industrial Properties") totaling
2.1 million square feet.  The Acquired Office Properties are located in the
markets of Chicago, Illinois; Dallas, Texas; Sacramento, California; Detroit,
Michigan; Denver, Colorado; Atlanta, Georgia; and Northern Virginia.  The
Acquired Industrial Properties are located in the markets of Chicago; Illinois;
Milwaukee, Wisconsin; Los Angeles, California; Baltimore, Maryland; and Dallas,
Texas.  The purchase price of the Acquired Properties, excluding closing costs,
totaled approximately $357.9 million, which was funded with borrowings under 

                                       6
<PAGE>
 
the Line of Credit (as defined below) proceeds from the Follow-on Offering and
other indebtedness incurred or assumed directly by the Company (see Note 4).

     The Line of Credit

     Upon the closing of the IPO, the Company closed a three-year, $100 million
revolving credit facility (the "Line of Credit") with Bank One, Texas, N.A. and
NationsBank of Texas, N.A.  The Company may borrow to finance the acquisition of
additional properties and for other corporate purposes, including to obtain
additional working capital.  Initially, borrowings under the Line of Credit bore
interest at 30-day, 60-day or 90-day LIBOR (the "London Interbank Offered Rate")
at the option of the Company, plus 200 basis points per annum and is
collateralized by first mortgage liens on certain of the Properties.  On January
24, 1997, the Company increased the amount available under its Line of Credit
from $100 million to $150 million and reduced the interest rate on borrowings
under the Line of Credit from LIBOR plus 200 basis points to LIBOR plus 175
basis points.

2.  BASIS OF PRESENTATION

     The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership and
subsidiaries.  The combined financial statements of the Predecessor Company
include (i) the results of operations from 47 Properties for the periods
presented, (ii) the results of operations of the 3141 Fairview Park Drive
Property for the portion of the periods after a Prentiss Group member acquired
the Property in February 1996, (iii) a 25% equity interest in the Broadmoor
Austin Properties, (iv) a 15% equity interest in the Park West C2 Property for
the portion of the periods in which the Prentiss Group owned a non-controlling
interest, and (v) results of operations of the Prentiss Properties Service
Business conducted primarily by a member of the Prentiss Group in the periods
presented.  All significant intercompany balances and transactions have been
eliminated.

     The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission.  Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements.  In
the opinion of management, 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
months ended June 30, 1997 are not necessarily indicative of the results to be
obtained for the full fiscal year.  These financial statements should be read in
conjunction with the December 31, 1996 audited financial statements and notes
thereto of the Company, included in its annual report on Form 10-K for the
fiscal year ended December 31, 1996.

     Net income per Common Share has been computed by dividing net income
applicable to common shareholders by the weighted average number of Common
Shares outstanding.  Weighted average Common Shares outstanding include the
immaterial dilutive effect of common share equivalents.

3.  REAL ESTATE

     During the six months ended June 30, 1997, the Company acquired 29
Properties including 16 office Properties containing 1.5 million square feet and
13 industrial Properties containing 1.9 million square feet.  The acquisitions
are as follows:

 .  On January 14, 1997, the Company acquired a single Class "A" office Property
   containing 58,621 square feet located in the Northern Virginia area. The
   purchase price of the Property, excluding closing costs, totaled $6.1
   million.

 .  On February 20, 1997, the Company acquired a single industrial Property
   containing 360,000 square feet located in the Milwaukee, Wisconsin, area. The
   purchase price of the Property, excluding closing costs, totaled $9.8
   million.

                                       7
<PAGE>
 
 .  On March 18, 1997, the Company acquired a single industrial Property
   containing 143,924 square feet located in the Baltimore, Maryland, area. The
   purchase price of the Property, excluding closing costs, totaled $5.5
   million.
 
 .  On March 19, 1997, the Company acquired two industrial Properties containing
   237,344 square feet located in the Dallas, Texas, area. The purchase price of
   the Properties, excluding closing costs, totaled $8.7 million.

 .  On March 25, 1997, the Company acquired two industrial Properties containing
   228,382 square feet located in the Los Angeles, California, area. The
   purchase price of the Properties, excluding closing costs, totaled $7.0
   million.
 
 .  On April 2, 1997, the Company acquired six Class "A" office Properties
   containing 566,092 square feet located in the suburban Sacramento,
   California, area. The purchase price of the Properties, excluding closing
   costs, totaled $74.2 million.
 
 .  On April 8, 1997, the Company acquired a single Class "A" office Property
   containing 243,048 square feet located in the Atlanta, Georgia, area. The
   purchase price of the Property, excluding closing costs, totaled $24.8
   million, including $12.0 million of debt assumed in the purchase.
 
 .  On May 6, 1997, the Company acquired five Class "A" office Properties
   containing 323,728 square feet located in the Chicago, Illinois, area. The
   purchase price of the Properties, excluding closing costs, totaled $50.5
   million.
 
 .  On May 29, 1997, the Company acquired six industrial Properties containing
   468,750 square feet located in the Los Angeles, California, area. The
   purchase price of the Properties, excluding closing costs, totaled $16.3
   million.

 .  On June 4, 1997, the Company acquired two Class "A" office Properties
   containing 244,816 square feet located in the Detroit, Michigan, area. The
   purchase price of the Properties, excluding closing costs, totaled $21.8
   million.
 
 .  On June 4, 1997, the Company acquired a single Class "A" office Property
   containing 70,090 square feet in Dallas, Texas, adjacent to the Company's
   corporate office. The purchase price of the Property, excluding closing
   costs, totaled $5.5 million, including $3.1 million of debt assumed in the
   purchase.

 .  On June 19, 1997, the Company acquired a single industrial Property
   containing 455,858 square feet located in the Chicago, Illinois, area. The
   purchase price of the Property, excluding closing costs, totaled $11.3
   million.

4.  DEBT ON REAL ESTATE

     In February 1997, the Company closed a ten-year fixed rate mortgage loan
with an initial outstanding balance of $180.1 million (the "Mortgage Loan").
The Mortgage Loan is secured by liens on 53 Properties.  The Mortgage Loan was
obtained from an affiliate of Lehman Brothers Inc. ("Lehman"), the Managing
Underwriter of the Company's IPO and Follow-on Offering.  Under the terms of the
Mortgage Loan, the Company pays interest only at a rate of approximately 7.58%
until the Mortgage Loan's maturity in February 2007.  A portion of the proceeds
of the Mortgage Loan were used to (i) repay approximately $40.0 million of
variable rate loans made by the Mortgage Loan lender in connection with the IPO
and (ii) repay approximately $72.8 million of outstanding indebtedness under the
Line of Credit at December 31, 1996 and the additional $15.4 million drawn under
the Line of Credit during the three months ended March 31, 1997.  A portion of
the remaining proceeds from the Mortgage Loan was used to fund the acquisition
of the Properties acquired subsequent to the funding of the Mortgage Loan.

     In connection with the acquisition of Properties during the six months
ended June 30, 1997, the Company assumed debt totaling $15.1 million and had net
borrowings under the Line of Credit totaling $36.3 million.

                                       8
<PAGE>
 
5.  DISTRIBUTION

     On June 17, 1997, the Company declared a cash distribution for the second
quarter of 1997 in the amount of $.40 per share, payable on July 17, 1997 to
shareholders of record on June 30, 1997.  In addition, it was determined that a
distribution of $.40 per Unit would be made to the partners of the Operating
Partnership, payable on July 17, 1997.  The distributions were paid on July 17,
1997, totaling approximately $11.8 million.

6.  INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES

     Included in investments in joint venture and unconsolidated subsidiaries
are the Company's investment in the Broadmoor Austin Associates Joint Venture
("Broadmoor Austin"), the Company's investment in the Manager and the Company's
investment in a partnership owning a parcel of land in northwest Dallas.  The
Company accounts for its 49.9% investment in Broadmoor Austin, its 95%
investment in the Manager and its 51% interest in the land parcel using the
equity method of accounting, and thus reports its share of income and losses
based on its ownership interest in the respective entities.  At June 30, 1997,
the carrying value of the Company's interest in Broadmoor Austin, the Manager
and the land parcel totaled $15.7 million, $5.2 million and $0.6 million,
respectively.  The partnership owning the parcel of land in northwest Dallas had
no other assets at June 30, 1997, and no operations for the period then ended.
The difference between the carrying value of the Company's interest in Broadmoor
Austin and the book value of the underlying equity is being amortized over 40
years.

   The following is summarized financial information for 100% of Broadmoor
   Austin at June 30, 1997 and December 31, 1996 and for the six month periods
   ended June 30, 1997 and June 30, 1996:
<TABLE>
<CAPTION>
   BALANCE SHEET:                                JUNE 30, 1997          DECEMBER 31, 1996   
   -------------                            ----------------------   ---------------------- 
                                            (DOLLARS IN THOUSANDS)   (DOLLARS IN THOUSANDS) 
   <S>                                      <C>                      <C>                    
   Real estate and deferred charges, net..         $113,690                 $115,856        
   Total assets...........................         $127,846                 $129,513        
   Mortgage note payable..................         $140,000                 $140,000        
   Venturers' deficit.....................         $(15,611)                $(14,097)        
</TABLE> 
<TABLE> 
<CAPTION>
                                                   SIX MONTHS               SIX MONTHS      
                                                     ENDED                    ENDED         
   INCOME STATEMENT:                             JUNE 30, 1997            JUNE 30, 1996     
   ----------------                         ----------------------   ---------------------- 
                                            (DOLLARS IN THOUSANDS)   (DOLLARS IN THOUSANDS) 
   <S>                                      <C>                      <C>                    
   Rental income..........................         $  9,741                 $  9,917        
   Interest expense.......................         $  6,769                 $  6,788        
   Depreciation and amortization..........         $  2,167                 $  2,166        
   Net income.............................         $    512                 $    542         
</TABLE>

   The following is summarized financial information for 100% of the Manager at
   June 30, 1997 and for the six months then ended:
<TABLE>
<CAPTION>
   BALANCE SHEET:                                JUNE 30, 1997     
   -------------                            ---------------------- 
                                            (DOLLARS IN THOUSANDS) 
   <S>                                      <C>                    
   Total assets.......................             $ 9,242         
   Total liabilities..................             $ 3,810         
   Owners' equity.....................             $ 5,432          
</TABLE>
<TABLE> 
<CAPTION>
                                                   SIX MONTHS     
                                                     ENDED        
   INCOME STATEMENT:                             JUNE 30, 1997    
   ----------------                         ----------------------
                                            (DOLLARS IN THOUSANDS)
   <S>                                      <C>                   
   Fee income.........................             $11,835        
   Personnel costs, net...............             $ 5,966        
   General office and administrative..             $ 2,747        
   Net income.........................             $ 2,563         
</TABLE> 

                                       9
<PAGE>
 
7.   SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

     During the three months ended June 30, 1997, the Company declared cash
distributions totaling $11.8 million.  The distributions were paid July 17,
1997.

     In addition, during the three months ended June 30, 1997, the Company
assumed $15.1 million of mortgage debt and $1.9 million of net liabilities in
connection with the acquisition of Properties during the period.

     During the three months ended June 30, 1997, $4.4 million of the net
proceeds of the Company's Follow-on Offering was allocated to minority interest.
The remainder of the net proceeds increased Common Shares and additional paid-in
capital.

8.   RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS"), No. 128, "Earnings per
Share" ("EPS") and FAS No. 129, "Disclosure of Information about Capital
Structure."

     FAS No. 128 establishes standards for computing and presenting EPS by
eliminating the current presentation of primary EPS and requiring a dual
presentation of basic and diluted EPS on the face of the income statement.  FAS
No. 128 also requires a reconciliation of the numerator and denominator used in
computing basic and diluted EPS.

     FAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods.  Although early application
of FAS No. 128 is not permitted, it does require restatement of all prior-period
EPS data presented.  The Company believes that upon implementation, FAS No. 128
will not have a material impact on the financial statements of the Company.

     FAS No. 129 establishes standards for disclosure of information about an
entity's capital structure such as information about securities, liquidation
preference of preferred stock and redeemable stock.  FAS No. 129 is effective
for financial statements issued for periods ending after December 15, 1997.  The
Company believes that upon implementation, FAS No. 129 will not have a material
impact on the financial statements of the Company.

     In June 1997, the FASB issued FAS No. 130, "Comprehensive Income" and FAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."

     FAS No. 130 establishes standards for reporting comprehensive income by
showing changes in the amounts of those items that affect comprehensive income
on the face of the financial statements.  FAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement.

     FAS No. 130 becomes effective in 1998 and requires reclassification of
earlier financial statements for comparative purposes.  The Company believes
that upon implementation, FAS No. 130 will not have a material impact on the
financial statements of the Company.

     FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders.  FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers.

     FAS No. 131 supersedes FASB Statement 14, "Financial Reporting for Segments
of a Business Enterprise," and is effective for fiscal years beginning after
December 15, 1997.  The Company believes that upon implementation, FAS No. 131
will not have a material impact on the financial statements of the Company.

                                       10
<PAGE>
 
9.   PRO FORMA FINANCIAL INFORMATION

     Due to the 29 Properties acquired between January 1, 1997 and June 30,
1997, the historical results of operations for the same period may not be
indicative of future results of operations.  The following Pro Forma Condensed
Statements of Income for the six months ended June 30, 1997 and 1996 are
presented as if the IPO and related Formation Transactions, the Follow-on
Offering and property acquisitions had occurred January 1, 1996.  The pro forma
information is based upon historical information and does not purport to present
what actual results would have been had such transactions, in fact, occurred
January 1, 1996, or to project results for any future period.

                    PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                 SIX MONTHS ENDED       SIX MONTHS ENDED       
                                                   JUNE 30, 1997         JUNE 30, 1996         
                                               ---------------------  --------------------     
                                                (in thousands, except for per share data)      
     <S>                                       <C>                    <C>                      
     Total revenues..........................         $73,933               $71,126            
     Property operating and maintenance......          17,592                17,693            
     Real estate taxes.......................           7,923                 7,148            
     General and administrative..............           1,403                 1,215            
     Personnel costs, net....................           1,472                 1,029            
     Interest expense........................          15,306                15,306            
     Amortization of deferred financing costs                                                  
                                                          480                   480            
     Depreciation and amortization...........          12,139                12,139            
     Equity in joint venture and                                                               
      unconsolidated subsidiaries............           2,778                 1,957            
                                                      -------               -------            
     Income before minority interest, gain                                                     
      on sale and extraordinary item.........          20,396                18,073            
                                                                                               
     Minority interest.......................          (2,363)               (2,059)           
                                                      -------               -------            
     Income before gain on sale and                                                            
      extraordinary item.....................          18,033                16,014            
     Gain on sale............................             243                     -            
                                                                                               
     Extraordinary item......................            (111)                    -            
                                                      -------               -------            
     Net income..............................         $18,165               $16,014            
                                                      =======               =======            
                                                                                               
     Net income per common share before                                                        
      extraordinary item.....................         $  0.69               $  0.61            
                                                                                               
     Extraordinary item......................               -                     -            
                                                      -------               -------            
     Net income per common share.............         $  0.69               $  0.61            
                                                      =======               =======             
</TABLE>

10.  SUBSEQUENT EVENTS

     On July 29, 1997, the Company acquired a mortgage loan collateralized by a
271,055 square foot office property in Oakland, California.  The purchase price
of the mortgage loan, excluding closing costs, totaled $37.5 million.

     On July 31, 1997, the Company acquired a single office property containing
100,500 square feet located in the Phoenix, Arizona, area.  The purchase price
of the property, excluding closing costs, totaled $9.9 million.

     On August 1, 1997, the Company acquired three office properties containing
193,916 square feet located in the North Hollywood, California area.  The
purchase price of the properties, excluding closing costs, totaled $23.0
million.

     In April 1997, the Company reached an agreement with an affiliate of Lehman
Brothers, Inc., the managing lead underwriter of both of the Company's public
offerings of Common Shares to provide a new acquisition loan (the "New
Acquisition Loan"), with an aggregate principal balance of up to $120 million.
On July 29, 1997, the 

                                       11
<PAGE>
 
Company closed on the New Acquisition Loan with initial borrowings of $51.9
million. The proceeds were used to fund the purchase of the mortgage loan, as
described above, and repay $14.4 million of the outstanding balance on the Line
of Credit. The New Acquisition Loan is currently collateralized by a single
Property and bears interest at a rate of LIBOR plus 165 basis points and will
have a maturity of 13 months.

     The Company has agreements to acquire eight additional office properties
(the "Contracted Properties") in the near future for an aggregate purchase price
of approximately $92.3 million, excluding closing costs.  The agreements
relating to the Contracted Properties are subject to customary closing
conditions; therefore, there can be no assurances that the Company will acquire
all of the Contracted Properties.

                                       12
<PAGE>
 
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

This Form 10-Q may include 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.  These statements are identified by phrases such as the
Company "expects" or "anticipates" and words of similar effect.  The Company's
actual results may differ materially from those projected.  Factors that could
cause such a difference include:  the Company's inability or failure to acquire
properties under contract or additional properties; difficulties in integrating
and operating acquired properties; bankruptcy or default of major tenants
resulting in a failure or delay in payment of rent; and general risks associated
with investments in real estate, including the effect of changes in economic,
competitive and other market conditions in the markets where the Company's
properties are concentrated, non-renewal of expiring leases or inability to
relet vacated space at adequate rates, the inability of properties to generate
adequate cash flow to fund debt service and operating expenses, financing and
refinancing risks related to the Company's floating rate debt and new debt
necessary to support growth.  For additional information, please refer to the
detailed discussion of risks included in the Company's Prospectus dated April
29, 1997, under the caption "Risk Factors."

OVERVIEW

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

     On October 22, 1996, the Company commenced operations after completing an
initial public offering (the "IPO") of 16,000,000 common shares of beneficial
interest, $0.01 par value per share ("Common Shares").  The Company issued an
additional 2,400,000 Common Shares on October 31, 1996, pursuant to the exercise
of the underwriters' over-allotment option.  The combined 18,400,000 Common
Shares were issued at a price per share of $20.00.  The Company used
approximately $87.4 million of the net proceeds of the IPO and issued 1,879,897
Common Shares of the Company for a total consideration of approximately $125.0
million to purchase certain limited partners' interests in the Operating
Partnership.  The Company contributed the remaining net proceeds of the IPO to
the Operating Partnership.  Subsequent to these transactions, the Company held
an approximate 86.0% interest in the Operating Partnership.

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

     On April 30, 1997, the Company completed an equity offering (the "Follow-on
Offering") of 6,000,000 Common Shares of beneficial interest, $0.01 par value
per share.  The Common Shares were issued at a price per share of $24.00.  The
Company contributed the net proceeds of the Follow-on Offering to the Operating
Partnership.  Subsequent to this transaction and at June 30, 1997, the Company
holds an approximate 88.9% interest in the Operating Partnership.


RESULTS OF OPERATIONS

     As of June 30, 1997, the Company owned 124 properties, 49 office and 75
industrial (the "Properties") containing 13.4 million square feet and located in
13 major markets throughout the U.S.  The Predecessor Company includes: (i) the
results of operations from 47 Properties for the periods presented, (ii) the
results of operations of the 3141 Fairview Park Drive Property for the portion
of the periods after a Prentiss Group member acquired the Property in February
1996, (iii) a 25% equity interest in the Broadmoor Austin Properties, (iv) a 15%
equity interest in the Park West C2 Property for the portion of the periods in
which the Prentiss Group owned a non-controlling interest, and (v) results of
operations of the Prentiss Properties Service Business conducted primarily by a
member of the Prentiss Group in the periods presented.

                                       13
<PAGE>
 
     The results of operations for the periods ended June 30, 1997 and 1996
include the operations of the Company and Predecessor Company, respectively.
Consequently, the comparisons of the periods provide only limited information
regarding the operations of the Company as currently constituted.

Comparison of Three Months Ended June 30, 1997 to the Three Months Ended June
-----------------------------------------------------------------------------
30, 1996
--------

     Rental income increased by $20.8 million, or 250.2%, to $29.1 million from
$8.3 million primarily as a result of the Properties acquired concurrent with
and subsequent to the Company's IPO.  As described above, the Predecessor
Company includes results of operations of the 47 Properties and the 3141
Fairview Park Property for the complete three month period.  The rental income
for the combined 48 Properties increased by $1.0 million, or 12.4%, from the
three month period ended June 30, 1996, to the three month period ended June 30,
1997.  The increase of $1.0 million is primarily attributable to net increases
in rental income, including (i) $407,000 at the Milwaukee Industrial Properties,
(ii) $220,000 at the Walnut Glen Property, (iii) $160,000 at the Kansas City
Industrial Properties, and (iv) various other individually insignificant net
increases totaling $245,000.  The increase of $407,000 at the Milwaukee
Industrial Properties resulted primarily from the collection of past due rents
of $511,000, offset by a reduction in rental income resulting from space vacated
in March 1996.   The increase of $220,000 at the Walnut Glen Property is
attributable to a net increase in occupancy of approximately 50,000 square feet.
The increase of $160,000 at the Kansas City Industrial Properties results
primarily from the leasing of 200,000 square feet, or 100%, of one of the
Properties in February 1997.  The space, which was vacated in February 1996, was
leased at a net rate of $2.10 per square foot versus an expiring net rate of
approximately $1.80.  The 76 Properties acquired concurrent with or subsequent
to the IPO account for a $19.8 million increase in rental income.

     Property operating and maintenance expenses increased by $4.4 million, or
186.1%, primarily as a result of the Properties acquired concurrent with or
subsequent to the Company's IPO.  The property operating and maintenance
expenses for the 48 Predecessor Company Properties decreased by approximately
$76,000, or 3.2%, from the three month period ended June 30, 1996 to the three
month period ended June 30, 1997. The 76 Properties acquired concurrent with and
subsequent to the IPO account for a $4.4 million increase in property operating
and maintenance expense.

     Real estate taxes increased by $2.4 million, or 273.1%, primarily as a
result of the Properties acquired concurrent with and subsequent to the
Company's IPO.  The real estate tax expense for the 48 Predecessor Company
Properties increased by approximately $109,000, or 12.5%, from the three month
period ended June 30, 1996 to the three month period ended June 30, 1997.  The
increase in real estate taxes for the 48 Predecessor Company Properties results
primarily from an increase of real estate tax expense on the Walnut Glen
Property.  The 76 Properties acquired concurrent with and subsequent to the IPO
account for a $2.3 million increase in real estate tax expense.

     Interest expense increased by $2.8 million, or 177.4%, primarily as a
result of the increase in debt on real estate from $68.8 million at June 30,
1996 to $257.0 million at June 30, 1997. The increase in debt is attributable to
borrowings incurred and assumed in connection with the 76 real estate Properties
acquired concurrent with and subsequent to the IPO.

     The decrease in management fees and development, leasing, sale and other
fees as well as general and administrative expenses and personnel costs for the
three month period ended June 30, 1997 from the three month period ended June
30, 1996 is primarily attributable to the Company's use of the equity method of
accounting for the majority of the Company's third-party management service
business, and thus, the inclusion of the third-party management service
operations in the equity in income of joint venture and unconsolidated
subsidiaries line item for the three months ended June 30, 1997.  The
Predecessor Company's third-party management services are combined into the
operations of Predecessor Company and therefore included on a gross basis in the
line items (i) management fees, (ii) development, leasing, sale and other fees,
(iii) general and administrative, and (iv) personnel costs.

Comparison of Six Months Ended June 30, 1997 to the Six Months Ended June 30,
-----------------------------------------------------------------------------
1996
----

     Rental income increased by $34.8 million, or 212.7%, to $51.1 million from
$16.3 million primarily as a result of the Properties acquired concurrent with
and subsequent to the Company's IPO.  As described above, the Predecessor
Company includes results of operations of 47 Properties for the complete six
month period and the results of operations of the 3141 Fairview Park Property
for the portion of the period subsequent to its acquisition in 

                                       14
<PAGE>
 
February 1996. The rental income for the 47 Properties increased by $1.1, or
7.5%, from the six month period ended June 30, 1996, to the six month period
ended June 30, 1997. The increase of $1.1 million is primarily attributable to
incremental increases in rental income, including (i) $250,000 at the Milwaukee
Industrial Properties, (ii) $400,000 at the Walnut Glen Property, (iii) $180,000
at the Kansas City Industrial Properties, and (iv) various other individually
insignificant net increases totaling $270,000. The increase of $250,000 at the
Milwaukee Industrial Properties resulted primarily from the collection of past
due rents totaling $511,000 offset by a reduction in rental income resulting
from space vacated in March 1996. The incremental increase of $400,000 at the
Walnut Glen Property is attributable to a net increase in occupancy of 50,000
square feet. The increase of $180,000 at the Kansas City Industrial Properties
resulted from the leasing of 200,000 square feet, or 100%, of one of the
Properties in February 1997. The space, which was vacated in February 1996, was
leased at a net rate of $2.10 per square foot versus the expiring net rate of
approximately $1.80. The rental income for the 3141 Fairview Park Property
included in the Company's operations totaled approximately $1.9 million, an
increase of approximately $600,000 from the approximate $1.3 million included in
the Predecessor Company's operations. The increase resulted primarily from the
Predecessor Company's acquisition of the Property during the six months ended
June 30, 1996, and thus, the inclusion of its operations by the Company for the
entire period presented. The 76 Properties acquired concurrent with or
subsequent to the IPO account for a $33.0 million increase in rental income.

     Property operating and maintenance expenses increased by $7.1 million, or
146.5%, primarily as a result of the Properties acquired concurrent with or
subsequent to the Company's IPO.  The property operating and maintenance
expenses for the 47 Predecessor Company Properties decreased by approximately
$9,000, or 0.21%, from the six month period ended June 30, 1996 to the six month
period ended June 30, 1997.  The property operating and maintenance expenses of
the 3141 Fairview Park Property included in the Company's operations totaled
approximately $555,000, an increase of $85,000 from the approximate $470,000
included in the Predecessor Company's operations.  The increase resulted
primarily from the Predecessor Company's acquisition of the Property during the
six months ended June 30, 1996, and thus, the inclusion of its operations by the
Company for the entire period presented.  The 76 Properties acquired concurrent
with and subsequent to the IPO account for a $7.1 million increase in property
operating and maintenance expense.

     Real estate taxes increased by $4.0 million, or 233.7%, primarily as a
result of the Properties acquired concurrent with and subsequent to the
Company's IPO.  The real estate tax expense for the 47 Predecessor Company
Properties increased by approximately $67,000, or 4.1%, from the six month
period ended June 30, 1996 to the six month period ended June 30, 1997.  The
increase in real estate taxes results from an increase of real estate tax
expense of $149,000 on the Walnut Glen Property and other insignificant
increases, offset by a decrease in tax expenses of approximately $108,000 on the
Cumberland Office Park Properties.  The decrease of real estate tax expense on
the Cumberland Office Park Properties is attributable to a refund from the
taxing authority for previously paid, but contested, taxes.  The real estate tax
expense of the 3141 Fairview Park Property included in the Company's operations
totaled approximately $165,000, an increase of $70,000 from the approximate
$95,000 included in the Predecessor Company's operations.  The increase resulted
primarily from the Predecessor Company's acquisition of the Property during the
six months ended June 30, 1996, and thus, the inclusion of its operations by the
Company for the entire period presented.  The 76 Properties acquired concurrent
with and subsequent to the IPO account for a $3.9 million increase in real
estate tax expense.

     Interest expense increased by $4.5 million, or 176.0%, primarily as a
result of the increase in debt on real estate from $68.8 million at June 30,
1996 to $257.0 million at June 30, 1997. The increase in debt is attributable to
borrowings incurred and assumed in connection with the 76 real estate Properties
acquired concurrent with and subsequent to the IPO.

     The decrease in management fees and development, leasing, sale and other
fees as well as general and administrative expenses and personnel costs for the
six month period ended June 30, 1997 from the six month period ended June 30,
1996 is primarily attributable to the Company's use of the equity method of
accounting for the majority of the Company's third-party management service
business, and thus, the inclusion of the third-party management service
operations in the equity in income of joint venture and unconsolidated
subsidiaries line item for the six months ended June 30, 1997.  The Predecessor
Company's third-party management services are combined into the operations of
Predecessor Company and therefore included on a gross basis in the line items
(i) management fees, (ii) development, leasing, sale and other fees, (iii)
general and administrative, and (iv) personnel costs.

                                       15
<PAGE>
 
Funds from Operations
---------------------

     The Company generally considers Funds from Operations to be an appropriate
measure of liquidity of an equity REIT because industry analysts have accepted
it as such.  "Funds from Operations" as defined by the National Association of
Real Estate Investment Trusts ("NAREIT") means net income (computed in
accordance with GAAP) excluding gains (or losses) from debt restructuring and
sale of property, plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures.  The
Company's Funds from Operations may not be comparable to Funds from Operations
reported by other REITs that do not define that term using the current NAREIT
definition.  Funds from Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions.  The
following is a reconciliation of net income to Funds from Operations for the
three and six month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                  THE             PREDECESSOR             THE           PREDECESSOR
                                                COMPANY             COMPANY             COMPANY           COMPANY
                                          -------------------  ------------------  -----------------  ----------------
                                          THREE MONTHS ENDED   THREE MONTHS ENDED  SIX MONTHS ENDED   SIX MONTHS ENDED
                                             JUNE 30, 1997       JUNE 30, 1996       JUNE 30, 1997     JUNE 30, 1996
                                          -------------------  ------------------  -----------------  ----------------
                                                                      (dollars in thousands)
<S>                                       <C>                  <C>                 <C>                <C>
Net income                                     $ 9,147               $1,225           $16,227             $3,376
                                               
Add:                                           
  Real estate depreciation and                 
   amortization.........................         5,051                1,778             8,886              3,569
  Real estate depreciation and                     
   amortization of                               
     unconsolidated joint ventures......           530                  271             1,072                542
  Minority interest in Operating               
   Partnership..........................         1,240                    -             2,404                  -
  Extraordinary item....................             -                    -               111                  -
  Less:  Gain on sale of property.......          (243)                   -              (243)                 -
                                               -------               ------           -------             ------
                                               
Funds from Operations                           15,725                3,284            28,457              7,487
                                               -------               ------           -------             ------
                                               
Funds from Operations (Company's Share)        $13,863               $2,895           $24,839             $6,535
                                               =======               ======           =======             ======
</TABLE>

Liquidity and Capital Resources
-------------------------------

     Cash and cash equivalents were $6.4 million and $1.9 million at June 30,
1997 and June 30, 1996, respectively. The increase in cash and cash equivalents
is primarily a result of cash flows provided by operating and financing
activities exceeding cash flow used in investing activities. Net cash provided
by operating activities was $26.5 million for the six months ended June 30,
1997, compared to the $6.0 million for the six months ended June 30, 1996. The
increase is due primarily to the operating results of the Properties acquired
subsequent to the IPO.

     Net cash used in investing activities increased from $22.0 million for the
six months ended June 30, 1996 to $259.5 million for the six months ended June
30, 1997.  This increase is due primarily to the 29 real estate Properties
acquired in the six months ended June 30, 1997 exceeding that for the six months
ended June 30, 1996.

     Net cash provided by financing activities increased from $16.9 million for
the six months ended June 30, 1996 to $232.2 million for the six months ended
June 30, 1997.  This increase is primarily attributable to the net increase in
debt on real estate of the Company during the six months ended June 30, 1997
exceeding the increase by the Predecessor Company during the six months ended
June 30, 1996 and cash proceeds from the Company's Follow-on Offering, partially
offset by an increase in distributions paid during the six months ended June 30,
1997 from the distributions paid during the six months ended June 30, 1996.

                                       16
<PAGE>
 
     Upon the closing of the IPO, the Company closed a three-year, $100 million
revolving credit facility (the "Line of Credit") with Bank One, Texas, N.A. and
NationsBank of Texas, N.A.  The Company may borrow to finance the acquisition of
additional properties and for other corporate purposes, including to obtain
additional working capital.  Initially, borrowings under the Line of Credit bore
interest at 30-day, 60-day or 90-day LIBOR (the "London Interbank Offered Rate")
at the option of the Company, plus 200 basis points per annum and is
collateralized by first mortgage liens on certain of the Properties.  On January
24, 1997, the Company increased the amount available under its Line of Credit
from $100 million to $150 million and reduced the interest rate on borrowings
under the Line of Credit from LIBOR plus 200 basis points to LIBOR plus 175
basis points.

     In February 1997, the Company closed a ten-year fixed rate mortgage loan
with an initial outstanding balance of $180.1 million (the "Mortgage Loan").
The Mortgage Loan is collateralized by liens on 53 Properties.  The Mortgage
Loan was obtained from an affiliate of Lehman Brothers Inc. ("Lehman"), the
Managing Underwriter of the Company's IPO and Follow-on Offering.  Under the
terms of the Mortgage Loan, the Company pays interest only at a rate of
approximately 7.58% until the Mortgage Loan's maturity in February 2007.  A
portion of the proceeds from the Mortgage Loan was used to fund the acquisition
of the Properties acquired subsequent to the funding of the Mortgage Loan.  The
following table sets forth the Company's mortgage debt as of June 30, 1997:

                                 MORTGAGE DEBT
<TABLE>
<CAPTION>
                                                                                              ANNUAL     
                                PRINCIPAL     INTEREST                                       INTEREST    
       PROPERTY(IES)             AMOUNT         RATE     AMORTIZATION      MATURITY          PAYMENT     
       -------------            ---------     --------   ------------      --------          --------
<S>                          <C>              <C>        <C>           <C>                <C>
Mortgage Loan..............  $180,100,000(1)      7.58%      None      February 27, 2007  $13,651,580

FHP Building...............     6,000,000         7.30%      None      November 1, 2000       438,000
Walnut Glen................    10,000,000         7.50%      None      January 31, 2001       750,000
Crescent Centre............    12,000,000         7.95%      None      March 1, 2004          954,000
Bachman Creek-West.........     3,078,951         8.63%     25 yr      November 30, 2002      249,746
Broadmoor Austin(2)........    69,860,000         9.75%      None      April 1, 2001        6,811,350
Federal Express............     9,556,086         7.48%(3)   None      June 30, 1998          714,317(4)
Line of Credit.............    36,300,000         7.38%(5)   None      October 14, 1999     2,677,125
                             ------------         ----                                    -----------
 
Total/Weighted Average.....  $326,895,037         8.03%                                   $26,246,118
                             ============         ====                                    ===========
</TABLE>

(1) The Mortgage Loan is collateralized by the following 53 Properties:  Park
    West E1, Park West E2, One Northwestern Plaza, 3141 Fairview Park Drive,
    O'Hare Plaza II, 1717 Deerfield, 2411 Dulles Corner Road, 4401 Fair Lakes
    Court, Kansas City Industrial Properties (seven Properties), Los Angeles
    Industrial Properties (18 Properties), Milwaukee Industrial Properties (17
    Properties), and the Chicago Industrial Properties (3 Properties).
(2) The Company, through the Operating Partnership, owns a 49.9% general
    partnership interest in the entity that owns the Broadmoor Austin
    Properties, which interest is accounted for under the equity method of
    accounting.  The amount shown reflects the Company's proportionate share of
    the mortgage indebtedness collateralized by the Properties.
(3) Represents a variable rate equal to LIBOR + 1.85%; on August 8, 1997 LIBOR
    was equal to 5.63%.
(4) Interest payments related to this construction loan are not included in
    interest expense, as these costs are capitalized to the project.
(5) Represents a variable rate equal to LIBOR + 1.75%; on August 8, 1997 LIBOR
    was equal to 5.63%.

     The Company's policy is to limit combined indebtedness plus its pro rata
share of joint venture debt so that at the time such debt is incurred, it does
not exceed 50% of the Company's total market capitalization (the "Debt
Limitation").  As of June  30, 1997, the Company had outstanding total
indebtedness, including its pro rata share of joint venture debt of
approximately $326.9 million, or approximately 30.14% of total market
capitalization based on a Common Share price of $25.63 per share.  As of June
30, 1997, the Company had the approximate capacity to borrow up to an additional
$431.0 million under the Debt Limitation.  The amount of indebtedness that the
Company may incur, and the policies with respect thereto, are not limited by the
Company's Declaration of Trust and Bylaws, and are solely within the discretion
of the Company's Board of Trustees.

     The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements.  For
the three and six months ended June 30, 1997, the Company's recurring non-
incremental revenue-generating capital expenditures totaled $1.2 million and
$2.6 million, respectively.  The Company's recurring non-incremental revenue-
generating capital expenditures exclude approximately $743,000, related to the
Walnut Glen Property, reserved for during the formation of the Company.

                                       17
<PAGE>
 
     The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Code. The Company anticipates that these needs will be fully funded from the
Company's initial working capital and the cash flows provided by operating
activities and, when necessary to fund shortfalls resulting from the timing of
collections of accounts receivable in the ordinary course of business, from the
Line of Credit, leasing development and construction business and from the
Manager.  The Manager's sole source of income will be fees generated by its
office and industrial real estate management, leasing, development and
construction business.

     Since June 30, 1997, the Company has acquired four office properties and a
mortgage loan (the "Additional Acquisitions") and has agreements to acquire
eight office properties (the "Contracted Properties") in the near future.  The
agreements relating to the Contracted Properties are subject to customary
closing conditions; therefore, there can be no assurances that the Company will
acquire all of the Contracted Properties.  Upon the completion of the
acquisition of the Contracted Properties, the Company expects to have
approximately $489.6 million of mortgage indebtedness outstanding, including its
pro rata share of joint venture debt.

     In April 1997, the Company reached an agreement with an affiliate of Lehman
Brothers, Inc., the managing lead underwriter of both of the Company's public
offerings of Common Shares to provide a new acquisition loan (the "New
Acquisition Loan"), with an aggregate principal balance of up to $120 million.
On July 29, 1997, the Company closed on the New Acquisition Loan with initial
borrowings of $51.9 million.  The proceeds were used to fund the purchase of the
mortgage loan as described above and repay $14.4 million of the outstanding
balance on the Line of Credit.  The New Acquisition Loan is currently
collateralized by a single Property and bears interest at a rate of LIBOR plus
165 basis points and will have a maturity of 13 months.

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

     The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership.  The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and, to a limited extent, from fees generated by its office and
industrial real estate management property.


Inflation
---------

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


Recently Issued Accounting Standards
------------------------------------

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS"), No. 128, "Earnings per
Share" ("EPS") and FAS No. 129, "Disclosure of Information about Capital
Structure."

     FAS No. 128 establishes standards for computing and presenting EPS by
eliminating the current presentation of primary EPS and requiring a dual
presentation of basic and diluted EPS on the face of the income statement.  FAS
No. 128 also requires a reconciliation of the numerator and denominator used in
computing basic and diluted EPS.

     FAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods.  Although early application
of FAS No. 128 is not permitted, it does require restatement of 

                                       18
<PAGE>
 
all prior-period EPS data presented. The Company believes that upon
implementation, FAS No. 128 will not have a material impact on the financial
statements of the Company.

     FAS No. 129 establishes standards for disclosure of information about an
entity's capital structure such as information about securities, liquidation
preference of preferred stock and redeemable stock.  FAS No. 129 is effective
for financial statements issued for periods ending after December 15, 1997.  The
Company believes that upon implementation, FAS No. 129 will not have a material
impact on the financial statements of the Company.

     In June 1997, the FASB issued FAS No. 130, "Comprehensive Income" and FAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."

     FAS No. 130 establishes standards for reporting comprehensive income by
showing changes in the amounts of those items that affect comprehensive income
on the face of the financial statements.  FAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement.

     FAS No. 130 becomes effective in 1998 and requires reclassification of
earlier financial statements for comparative purposes.  The Company believes
that upon implementation, FAS No. 130 will not have a material impact on the
financial statements of the Company.

     FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders.  FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers.

     FAS No. 131 supersedes FASB Statement 14, "Financial Reporting for Segments
of a Business Enterprise," and is effective for fiscal years beginning after
December 15, 1997.  The Company believes that upon implementation, FAS No. 131
will not have a material impact on the financial statements of the Company.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

                                       19
<PAGE>
 
                          PART II:  OTHER INFORMATION
                          ---------------------------


ITEM 1.  LEGAL PROCEEDINGS

None.

ITEM 2.  CHANGES IN SECURITIES

None.

ITEM 3.  DEFAULTS UPON MORTGAGES AND NOTES PAYABLE

None.

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

None.

ITEM 5.  OTHER INFORMATION

Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     Exhibit 10.1 - Loan Agreement Between Prentiss Properties Natomas, L.P.,
Prentiss Properties Corporetum, L.P., Prentiss Properties Seven Mile, L.P., and
Prentiss Properties Gateway II, L.P., as Borrower and Lehman Brothers Realty
Corporation as Lender.

     Exhibit 27.1 - Financial Data Schedule

(b)  Reports on Form 8-K

     The Company filed a report on Form 8-K, dated April 2, 1997 and amended
June 12, 1997, with respect to the acquisition by the Operating Partnership, of
which the Company is the sole general partner through a wholly-owned subsidiary,
of six Class "A" office buildings in suburban Sacramento, California (the
"Natomas Properties").  The buildings total 566,092 square feet and are located
two miles from the state capital and have freeway access and visibility along
Interstate 5, California's main north-south artery.

                                       20
<PAGE>
 
                                   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 12, 1997                  By: /s/ Thomas P. Simon
                                            -----------------------------------
                                            Thomas P. Simon (Vice President)

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