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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended September 30, 2003



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number 1-14516



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PRENTISS PROPERTIES TRUST

(Exact Name of Registrant as Specified in its Charter)



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



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

(Address of 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 November 11, 2003, was 42,098,076 and the number of outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 3,773,585.



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PRENTISS PROPERITES TRUST



INDEX



|Part I:   |  | FINANCIAL INFORMATION |  | Page Number                                                                                                                                             
|--------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                       | 
|          |  | Item 1.               |  | Financial Statements                                                                                                                                    
|          |  |                       | 
|          |  |                       |  | Consolidated Balance Sheets of Prentiss Properties Trust at September 30, 2003 (unaudited) and December 31, 2002                                        
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Income of Prentiss Properties Trust for the three and nine months ended September 30, 2003 and 2002 (unaudited)              
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Comprehensive Income of Prentiss Properties Trust for the three and nine months ended September 30, 2003 and 2002 (unaudited)
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Cash Flows of Prentiss Properties Trust for the nine months ended September 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 |  | 45                   



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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;                                                                                                                     |  |       Limited ability of shareholders to effect a change of control;                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                           | 
|      Our real estate acquisition, redevelopment, development and construction
activities;                                                                                |  |       Our failure to qualify as a REIT;                                                                        
|                                                                                                                                                                           | 
|      Factors that could result in the poor operating performance of our properties including
tenant defaults and increased costs such as taxes, insurance and utilities; |  |       Conflicts of interest;                                                                                   
|                                                                                                                                                                           | 
|      Competition in markets where we have properties;                                                                                                                    |  |       Changes in our investment, financing and borrowing policies without shareholder
approval;                
|                                                                                                                                                                           | 
|      Environmental and Americans with Disabilities Act compliance issues related to our
properties;                                                                      |  |       Our dependence on key personnel;                                                                         
|                                                                                                                                                                           | 
|      Some of our properties may be subject to uninsured losses;                                                                                                          |  |       Our third-party property management, leasing, development and construction business and
related services;
|                                                                                                                                                                           | 
|      Our properties are illiquid assets;                                                                                                                                 |  |       The effect of shares available for future sale on the price of common shares;
and                        
|                                                                                                                                                                           | 
|      Our incurrence of debt and use of variable rate debt and derivative financial
instruments;                                                                          |  |       Changes in market conditions including market interest rates.                                            



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



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PART I

FINANCIAL INFORMATION



Item 1.
Financial Statements



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blank)



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PRENTISS PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|                                                                                                                                                                                                                              |  | September 30,2003 |            |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ---------------- | -
|                                                                                                                                                                                                                              |  |                   | (unaudited | ) |                  |  
|ASSETS                                                                                                                                                                                                                        |  |                   |            |   |                  |  
|Operating real estate:                                                                                                                                                                                                        |  |                   |            |   |                  |  
|Land                                                                                                                                                                                                                          |  | $                 | 309,898    |   |                  | $
|Buildings and improvements                                                                                                                                                                                                    |  |                   | 1,683,543  |   |                  |  
|Less: accumulated depreciation                                                                                                                                                                                                |  |                   | (200,034   | ) |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|                                                                                                                                                                                                                              |  |                   | 1,793,407  |   |                  |  
|                                                                                                                                                                                                                              |  |                  
|Construction in progress                                                                                                                                                                                                      |  |                   |           |   |                  |  
|Land held for development                                                                                                                                                                                                     |  |                   | 63,699     |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Deferred charges and other assets, net                                                                                                                                                                                        |  |                   | 194,484    |   |                  |  
|Notes receivable                                                                                                                                                                                                              |  |                   | 13,354     |   |                  |  
|Accounts receivable, net                                                                                                                                                                                                      |  |                   | 43,137     |   |                  |  
|Cash and cash equivalents                                                                                                                                                                                                     |  |                   | 9,184      |   |                  |  
|Escrowed cash                                                                                                                                                                                                                 |  |                   | 11,825     |   |                  |  
|Investments in securities                                                                                                                                                                                                     |  |                   | 2,239      |   |                  |  
|Investments in joint ventures and unconsolidated subsidiaries                                                                                                                                                                 |  |                   | 14,326     |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Total assets                                                                                                                                                                                                                  |  | $                 | 2,145,655  |   |                  | $
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                          |  |                   |            |   |                  |  
|Mortgages and notes payable                                                                                                                                                                                                   |  | $                 | 1,009,596  |   |                  | $
|Interest rate hedges                                                                                                                                                                                                          |  |                   | 11,398     |   |                  |  
|Accounts payable and other liabilities                                                                                                                                                                                        |  |                   | 77,316     |   |                  |  
|Mandatorily redeemable preferred units                                                                                                                                                                                        |  |                   | 10,000     |   |                  |  
|Other payables (affiliates)                                                                                                                                                                                                   |  |                   |           |   |                  |  
|Distributions payable                                                                                                                                                                                                         |  |                   | 28,483     |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Total liabilities                                                                                                                                                                                                             |  |                   | 1,136,793  |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Minority interest in operating partnership                                                                                                                                                                                    |  |                   | 122,974    |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Minority interest in real estate partnerships                                                                                                                                                                                 |  |                   | 1,645      |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|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, 44,809,308 and 43,965,756 (includes 3,158,898 and 4,984,401 in
treasury) shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively |  |                   | 448        |   |                  |  
|Additional paid-in capital                                                                                                                                                                                                    |  |                   | 913,625    |   |                  |  
|Common shares in treasury at cost, 3,158,898 and 4,984,401 shares at September 30, 2003 and December 31, 2002,
respectively                                                                                                   |  |                   | (77,985    | ) |                  |  
|Unearned compensation                                                                                                                                                                                                         |  |                   | (2,569     | ) |                  |  
|Accumulated other comprehensive income                                                                                                                                                                                        |  |                   | (10,606    | ) |                  |  
|Distributions in excess of earnings                                                                                                                                                                                           |  |                   | (38,670    | ) |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Total shareholders equity                                                                                                                                                                                                    |  |                   | 884,243    |   |                  |  
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  
|Total liabilities and shareholders equity                                                                                                                                                                                    |  | $                 | 2,145,655  |   |                  | $
|                                                                                                                                                                                                                              |  |                   |            |   |                  |  



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



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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per
share amounts)



|                                                                                                                                   |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                                                                                   |  | 2003                            |        |   | 2002                           |  
|Revenues:                                                                                                                          |  |                                 |        |   |                                |  
|Rental income                                                                                                                      |  | $                               | 85,154 |   |                                | $
|Service business and other income                                                                                                  |  |                                 | 3,552  |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|                                                                                                                                   |  |                                 | 88,706 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Expenses:                                                                                                                          |  |                                 |        |   |                                |  
|Property operating and maintenance                                                                                                 |  |                                 | 21,448 |   |                                |  
|Real estate taxes                                                                                                                  |  |                                 | 8,254  |   |                                |  
|General and administrative and personnel costs                                                                                     |  |                                 | 2,747  |   |                                |  
|Expenses of service business                                                                                                       |  |                                 | 2,478  |   |                                |  
|Interest expense                                                                                                                   |  |                                 | 17,503 |   |                                |  
|Amortization of deferred financing costs                                                                                           |  |                                 | 678    |   |                                |  
|Depreciation and amortization                                                                                                      |  |                                 | 19,561 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|                                                                                                                                   |  |                                 | 72,669 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                                 | 16,037 |   |                                |  
|Minority interests                                                                                                                 |  |                                 | (2,598 | ) |                                |  
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                                 | 595    |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Income from continuing operations                                                                                                  |  |                                 | 14,034 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Discontinued operations:                                                                                                           |  |                                 |        |   |                                |  
|Income/(loss) from discontinued operations                                                                                         |  |                                 | 106    |   |                                |  
|Gain/(loss) on sale of properties                                                                                                  |  |                                 | 85     |   |                                |  
|Minority interests related to discontinued operations                                                                              |  |                                 | (7     | ) |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|                                                                                                                                   |  |                                 | 184    |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Income before gain on sale of land                                                                                                 |  |                                 | 14,218 |   |                                |  
|                                                                                                                                   |  |                                 |        |  
|Gain on sale of land                                                                                                               |  |                                 |       |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Net income                                                                                                                         |  | $                               | 14,218 |   |                                | $
|Preferred dividends                                                                                                                |  |                                 | (2,113 | ) |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Net income applicable to common shareholders                                                                                       |  | $                               | 12,105 |   |                                | $
|                                                                                                                                   |  |                                 |        |   |                                |  
|Basic earnings per common share:                                                                                                   |  |                                 |        |   |                                |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                               | 0.30   |   |                                | $
|Discontinued operations                                                                                                            |  |                                 |       |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Net income applicable to common shareholders  basic                                                                               |  | $                               | 0.30   |   |                                | $
|                                                                                                                                   |  |                                 |        |   |                                |  
|Weighted average number of common shares outstanding  basic                                                                       |  |                                 | 40,231 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Diluted earnings per common share:                                                                                                 |  |                                 |        |   |                                |  
|Income from continuing operations applicable to common shareholders                                                                |  | $                               | 0.30   |   |                                | $
|Discontinued operations                                                                                                            |  |                                 |       |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  
|Net income applicable to common shareholders  diluted                                                                             |  | $                               | 0.30   |   |                                | $
|                                                                                                                                   |  |                                 |        |   |                                |  
|Weighted average number of common shares and common share equivalents outstanding  diluted                                        |  |                                 | 40,484 |   |                                |  
|                                                                                                                                   |  |                                 |        |   |                                |  



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



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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)



|                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|----------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                            |  | 2003                            |        |   | 2002                           |  
|Net income                                                  |  | $                               | 14,218 |   |                                | $
|                                                            |  |                                 |        |   |                                |  
|Unrealized gains and losses on securities:                  |  |                                 |        |   |                                |  
|Unrealized (losses) arising during the period               |  |                                 | (103   | ) |                                |  
|Unrealized gains on interest rate hedges:                   |  |                                 |        |   |                                |  
|Unrealized gains/(losses) arising during the period         |  |                                 | 3,376  |   |                                |  
|Reclassification adjustment for losses included in earnings |  |                                 |       |   |                                |  
|                                                            |  |                                 |        |   |                                |  
|Other comprehensive income                                  |  |                                 | 3,273  |   |                                |  
|Comprehensive income                                        |  | $                               | 17,491 |   |                                | $
|                                                            |  |                                 |        |   |                                |  



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



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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)



|                                                                                      |  | Nine Months EndedSeptember 30, |         
|------------------------------------------------------------------------------------- |  | ------------------------------ | --------
|                                                                                      |  | 2003                           |         
|Cash Flows from Operating Activities:                                                 |  |                                |         
|Net income                                                                            |  | $                              | 38,240  
|Adjustments to reconcile net income to net cash provided by operating activities:     |  |                                |         
|Minority interests                                                                    |  |                                | 7,659   
|Loss/(gain) on sale of real estate, net                                               |  |                                | 2,547   
|Loss on impairment of discontinued operations                                         |  |                                | 1,792   
|Provision for doubtful accounts                                                       |  |                                | 1,488   
|Depreciation and amortization                                                         |  |                                | 58,721  
|Amortization of deferred financing costs                                              |  |                                | 1,723   
|Non-cash compensation                                                                 |  |                                | 2,008   
|Reclassification of accumulated other comprehensive income                            |  |                                | 263     
|Gain on derivative financial instrument                                               |  |                                | (230    
|Changes in assets and liabilities:                                                    |  |                                |         
|Deferred charges and other assets                                                     |  |                                | (4,952  
|Accounts receivable                                                                   |  |                                | (4,970  
|Escrowed cash                                                                         |  |                                | (1,342  
|Other payables/receivables (affiliates)                                               |  |                                |        
|Accounts payable and other liabilities                                                |  |                                | (9,196  
|                                                                                      |  |                                |         
|Net cash provided by operating activities                                             |  |                                | 93,751  
|                                                                                      |  |                                |         
|Cash Flows from Investing Activities:                                                 |  |                                |         
|Development/redevelopment of real estate                                              |  |                                | (5,069  
|Purchase of real estate                                                               |  |                                | (109,755
|Purchase of mortgage loan                                                             |  |                                |        
|Capital expenditures for in-service properties                                        |  |                                | (21,489 
|Distributions in excess of earnings of joint ventures and unconsolidated subsidiaries |  |                                | 269     
|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                                                 |  |                                | 57,088  
|                                                                                      |  |                                |         
|Net cash used in investing activities                                                 |  |                                | (78,889 
|                                                                                      |  |                                |         
|Cash Flows from Financing Activities:                                                 |  |                                |         
|Net proceeds from sale of common shares                                               |  |                                | 71,402  
|Purchase of treasury shares                                                           |  |                                |        
|Redemption of preferred units                                                         |  |                                |        
|Capital contribution from consolidated joint ventures                                 |  |                                | 250     
|Distributions paid to limited partners                                                |  |                                | (2,514  
|Distributions paid to common shareholders                                             |  |                                | (65,649 
|Distributions paid to preferred shareholders                                          |  |                                | (6,339  
|Distributions paid to preferred unitholders                                           |  |                                | (6,477  
|Proceeds from mortgages and notes payable                                             |  |                                | 404,685 
|Repayments of mortgages and notes payable                                             |  |                                | (406,116
|                                                                                      |  |                                |         
|Net cash used in financing activities                                                 |  |                                | (10,758 
|                                                                                      |  |                                |         
|Net change in cash and cash equivalents                                               |  |                                | 4,104   
|Cash and cash equivalents, beginning of period                                        |  |                                | 5,080   
|                                                                                      |  |                                |         
|Cash and cash equivalents, end of period                                              |  | $                              | 9,184   
|                                                                                      |  |                                |         
|Supplemental Cash Flow Information:                                                   |  |                                |         
|Cash paid for interest                                                                |  | $                              | 52,050  
|                                                                                      |  |                                |         



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



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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 September 30, 2003:



|(units in thousands)      |  | CommonUnits |  | %      |   |  | Series DConvertiblePreferredUnits |  | %      |   |  | Series BPreferredUnits |  | %      |   |  | Series EPreferredUnits |  | %      |  
|------------------------- |  | ----------- |  | ------ | - |  | --------------------------------- |  | ------ | - |  | ---------------------- |  | ------ | - |  | ---------------------- |  | ------ | -
|Prentiss Properties Trust |  | 41,733      |  | 96.56  | % |  | 3,774                             |  | 100.00 | % |  |                       |  | 0.00   | % |  |                       |  | 0.00   | %
|Third parties             |  | 1,488       |  | 3.44   | % |  |                                  |  | 0.00   | % |  | 1,900                  |  | 100.00 | % |  | 200                    |  | 100.00 | %
|                          |  |             |  |        |   |  |                                   |  |        |   |  |                        |  |        |   |  |                        |  |        |  
|Total                     |  | 43,221      |  | 100.00 | % |  | 3,774                             |  | 100.00 | % |  | 1,900                  |  | 100.00 | % |  | 200                    |  | 100.00 | %
|                          |  |             |  |        |   |  |                                   |  |        |   |  |                        |  |        |   |  |                        |  |        |  



As of September 30,
2003, we owned interests in a diversified portfolio of 130 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  | Number ofBuildings |  | Net RentableSquare Feet
|--------------------- |  | ------------------ |  | -----------------------
|                      |  |                    |  | (in thousands)         
|Office properties     |  | 99                 |  | 15,104                 
|Industrial properties |  | 31                 |  | 2,294                  
|                      |  |                    |  |                        
|Total                 |  | 130                |  | 17,398                 
|                      |  |                    |  |                        



As of September 30,
2003, our properties were 91% leased to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 11.2 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 September 30, 2003, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California;
and (5) Southern California.



At September 30, 2003, our
properties were located in 11 markets, which were included in our reportable segments as follows:



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



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Transactions



On July 24, 2003 we completed the sale, to an unrelated third party, of nine office properties containing 644,000 net rentable square feet. The sale,
which included all of our properties in the Atlanta, Georgia area, represented an exit from the Atlanta market. The gross proceeds from the sale, totaling approximately $40.1 million, 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, in our June 30, 2003 statements, we recorded an impairment loss of $1.8 million representing the amount by which the carrying amount of the
properties exceeded our estimate of fair value, less cost to sell. The impairment loss is included in the line item income/(loss) from discontinued operations in our consolidated statement of income for the nine months ended September
30, 2003. In conjunction with the sale of the properties, we restructured the $14.1 million loan with EuroHypo which included a release of the underlying collateral and conversion of the loan to an unsecured obligation.



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 or held for sale during the periods presented.
The summary includes the results of operations before gain/(loss) on sale for the three and nine months ended September 30, 2003 and 2002, respectively:



|Discontinued Operations:                   |  | Three Months EndedSeptember 30, |     |      | Nine Months EndedSeptember 30, |       
|------------------------------------------ |  | ------------------------------- | --- | ---- | ------------------------------ | ------
|(in thousands)                             |  | 2003                            |     | 2002 |                                |       
|Property revenues:                         |  |                                 |     |      |                                |       
|Rental income                              |  | $                               | 650 |      | $                              | 5,936 
|                                           |  |                                 |     |      |                                |       
|Property revenues                          |  |                                 | 650 |      |                                | 5,936 
|                                           |  |                                 |     |      |                                |       
|Property expenses:                         |  |                                 |     |      |                                |       
|Property operating and maintenance         |  |                                 | 424 |      |                                | 2,065 
|Real estate taxes                          |  |                                 | 120 |      |                                | 604   
|Depreciation and amortization              |  |                                 |    |      |                                | 1,487 
|                                           |  |                                 |     |      |                                |       
|Property expenses                          |  |                                 | 544 |      |                                | 4,156 
|                                           |  |                                 |     |      |                                |       
|Loss on impairment of real estate          |  |                                 |    |      |                                | (2,855
|                                           |  |                                 |     |      |                                |       
|Income/(loss) from discontinued operations |  | $                               | 106 |      | $                              | (1,075
|                                           |  |                                 |     |      |                                |       



During the month of
August 2003, we completed the sale of 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 shares were issued from our common
shares held in treasury. After deducting underwriting discounts and commissions, we received net proceeds of approximately $66.5 million. The net proceeds of the sale of the common shares were contributed to the operating partnership in exchange for
common units of limited partnership interest in the operating partnership. Initially, proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving credit facility. Subsequently, we used a portion of the
proceeds for a property acquisition as described below.



On
August 28, 2003, we acquired from an unrelated third party, the 2291 Wood Oak Drive building containing approximately 228,000 net rentable square feet for approximately $52.1 million, including transaction costs. The acquisition was effectively
funded from the sale of common shares as discussed above. We allocated the purchase price of the property as follows:



|(in thousands)                              |  |  
|------------------------------------------- |  | -
|Land                                        |  | $
|Building and improvements                   |  |  
|Tenant improvements and leasing commissions |  |  
|Above market lease value                    |  |  
|In-place lease value at market              |  |  
|                                            |  |  
|                                            |  | $
|                                            |  |  



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2. Basis of Presentation



The accompanying financial statements are unaudited; however, our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by
accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements
for these interim periods have been included. The results for the three and nine month periods ended September 30, 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. Deferred Charges and Other Assets, Net



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



|                                               |  | (in thousands)    |        
|---------------------------------------------- |  | ----------------- | -------
|                                               |  | September 30,2003 |        
|Deferred leasing costs and tenant improvements |  | $                 | 259,484
|In-place lease value at market                 |  |                   | 2,399  
|Above/(below) market lease value               |  |                   | (91    
|Deferred financing costs                       |  |                   | 15,213 
|Prepaid operating costs and other assets       |  |                   | 11,320 
|                                               |  |                   |        
|                                               |  |                   | 288,325
|Less: accumulated amortization                 |  |                   | (93,841
|                                               |  |                   |        
|                                               |  | $                 | 194,484
|                                               |  |                   |        



We record the
amortization related to deferred leasing costs and tenant improvements and in-place lease value at market, above/(below) market lease value, deferred financing costs and prepaid operating costs in the line items, Depreciation and
amortization, rental income, amortization of deferred financing costs, and property operating and maintenance, respectively, in our consolidated statements of income.



4. Accounts Receivable, Net



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



|                                      |  | (in thousands)    |       
|------------------------------------- |  | ----------------- | ------
|                                      |  | September 30,2003 |       
|Rents and services                    |  | $                 | 10,619
|Accruable rental income               |  |                   | 40,829
|Other                                 |  |                   | 889   
|                                      |  |                   |       
|                                      |  |                   | 52,337
|Less: allowance for doubtful accounts |  |                   | (9,200
|                                      |  |                   |       
|                                      |  | $                 | 43,137
|                                      |  |                   |       



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5. Investments in Joint Ventures and Unconsolidated Subsidiaries



The following information summarizes the financial position at September 30,
2003 and December 31, 2002 and the results of operations for the three and nine month periods ended September 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)                   |  | Sept. 30,2003 |         | Dec. 31,2002  |   | Sept. 30,2003 |  | Dec. 31,2002 |                     
|Broadmoor Austin Associates(1)   |  | $             | 104,638 |               | $ | 108,929       |  | $            | 140,136             
|Prentiss Properties Resources(2) |  |               |        |               |   | 12,406        |  |              |                    
|Tysons International Partners(3) |  |               | 95,693  |               |   | 94,873        |  |              | 60,097              
|Other Investments(4)             |  |               |        |               |   |              |  |              |                    
|                                 |  |               |         |               |   |               |  |              |                     
|                                 |  |               |         |               |   |               |  |              |                     
|                                 |  |               |         |               |   |               |  |              |                     



|Summary of Operations for the Three MonthsEnded September 30, 2003 and 2002: |  | Total Revenue |        | Net Income |   |        | Companys Share of Net Income/(Loss) |     
|---------------------------------------------------------------------------- |  | ------------- | ------ | ---------- | - | ------ | ------------------------------------ | ----
|(in thousands)                                                               |  | 2003          |        | 2002       |   | 2003   |                                      | 2002
|Broadmoor Austin Associates                                                  |  | $             | 4,952  |            | $ | 4,972  |                                      | $   
|Prentiss Properties Resources                                                |  |               |       |            |   | 3,240  |                                      |     
|Tysons International Partners                                                |  |               | 3,140  |            |   | 3,241  |                                      |     
|                                                                             |  |               |        |            |   |        |                                      |     
|Total                                                                        |  |               |        |            |   |        |                                      |     
|                                                                             |  |               |        |            |   |        |                                      |     
|                                                                             |  |               |       
|Summary of Operations for the Nine MonthsEnded September 30, 2003 and 2002:  |  | Total Revenue |        | Net Income |   |        | Companys Share of Net Income/(Loss) |     
|(in thousands)                                                               |  | 2003          |        | 2002       |   | 2003   |                                      | 2002
|Broadmoor Austin Associates                                                  |  | $             | 15,064 |            | $ | 14,916 |                                      | $   
|Burnett Plaza Associates(6)                                                  |  |               |       |            |   | 4,302  |                                      |     
|PPS Partners LLC(7)                                                          |  |               |       |            |   | 44     |                                      |     
|Prentiss Properties Resources                                                |  |               |       |            |   | 10,676 |                                      |     
|Tysons International Partners                                                |  |               | 9,716  |            |   | 9,793  |                                      |     
|                                                                             |  |               |        |            |   |        |                                      |     
|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) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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7. Mortgages and Notes Payable



At September 30, 2003, we had mortgages and notes payable of $1.01 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 September 30, 2003 and December 31, 2002:



|                                  |  | (in thousands)    |           |                  |   |              |  |                 
|--------------------------------- |  | ----------------- | --------- | ---------------- | - | ------------ |  | ----------------
|Description                       |  | September 30,2003 |           | December 31,2002 |   | Amortization |  | Interest Rate(3)
|Collateralized term loan          |  | $                 | 71,000    |                  | $ | 71,563       |  | 25 yr           
|Revolving credit facility         |  |                   | 58,000    |                  |   | 156,000      |  | None            
|Unsecured term loan - Commerz     |  |                   | 75,000    |                  |   | 75,000       |  | None            
|Unsecured term loan - EuroHypo I  |  |                   | 100,000   |                  |   |             |  | None            
|Unsecured term loan - EuroHypo II |  |                   | 14,050    |                  |   |             |  | 30 yr           
|PPREFI portfolio loan             |  |                   | 180,100   |                  |   | 180,100      |  | None            
|Mortgage notes payable            |  |                   | 511,446   |                  |   | 528,364      |  | (1)             
|                                  |  |                   |           |                  |   |              |  |                 
|                                  |  | $                 | 1,009,596 |                  | $ | 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 7.38% at September 30, 2003. Maturity dates range from December 2003 through June 2013 with a weighted average maturity of 5.63 years from September 30, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



Our mortgages and notes payable at September 30, 2003 consisted of $619.4 million of fixed rate, non-recourse, long-term mortgages, $14.1 million of fixed
rate, recourse, debt and $376.1 million of floating rate debt, $275.0 million of which was hedged at September 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, 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



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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 $8.1 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 September 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.



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FINANCIAL STATEMENTS



|Notional Amount |  | Swap Rate Paid(Fixed) |   |  | EffectiveFixed Rate |   |  | Swap Rate Received(Variable) atSeptember 30, 2003 |   |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | --------------------- | - |  | ------------------- | - |  | ------------------------------------------------- | - |  | -------------- |  | -------------- | -------
|                |  |                       |   |  |                     |   |  |                                                   |   |  |                |  | (in thousands) |        
|$ 50 million    |  | 6.253                 | % |  | 7.753               | % |  | 1.12                                              | % |  | September 2004 |  | $              | (2,566 
|$ 60 million    |  | 6.248                 | % |  | 7.748               | % |  | 1.12                                              | % |  | September 2004 |  |                | (3,076 
|$ 25 million    |  | 4.345                 | % |  | 6.495               | % |  | 1.12                                              | % |  | July 2005      |  |                | (1,241 
|$ 15 million    |  | 4.345                 | % |  | 6.495               | % |  | 1.12                                              | % |  | July 2005      |  |                | (745   
|$ 20 million    |  | 5.985                 | % |  | 7.485               | % |  | 1.12                                              | % |  | March 2006     |  |                | (1,950 
|$ 30 million    |  | 5.990                 | % |  | 7.490               | % |  | 1.12                                              | % |  | March 2006     |  |                | (2,928 
|$ 50 million    |  | 2.270                 | % |  | 3.645               | % |  | 1.12                                              | % |  | August 2007    |  |                | 743    
|$ 25 million    |  | 2.277                 | % |  | 3.652               | % |  | 1.12                                              | % |  | August 2007    |  |                | 365    
|                |  |                       |   |  |                     |   |  |                                                   |   |  |                |  |                |        
|Total           |  |                       |   |  |                     |   |  |                                                   |   |  |                |  | $              | (11,398
|                |  |                       |   |  |                     |   |  |                                                   |   |  |                |  |                |        



Cash payments made
under our interest rate hedges exceeded cash receipts from our interest rate hedges by $2.5 million and $2.0 million for the three months ended September 30, 2003 and 2002, respectively.



9. Accounts Payable and Other Liabilities



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



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



10. Distributions



On September 12, 2003, we declared a cash distribution for the third
quarter of 2003 in the amount of $0.56 per share, payable on October 10, 2003 to common shareholders of record on September 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 $26.3 million and were paid October 10, 2003. In addition, quarterly distributions totaling $2.2 million in the aggregate were declared in
September 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 October 3, 2003 and October 15, 2003, respectively.



11. Supplemental Disclosure of Non-Cash Activities



During the three months ended September 30, 2003, we declared cash distributions totaling $26.3 million payable to holders of common shares, operating
partnership units and Series D Convertible Preferred Shares. The distributions were paid October 10, 2003. In addition, distributions totaling $2.2 million were declared in September 2003, payable to holders of our Series B Perpetual Preferred Units
and Series E Preferred Units. The distributions were paid on October 3, 2003 and October 15, 2003 to the holders of our Series B Perpetual Preferred Units and Series E Preferred Units, respectively.



Pursuant to our long-term incentive plan, during the nine months ended
September 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.



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FINANCIAL STATEMENTS



During the nine months ended September 30, 2003, 12,693 common shares were issued pursuant to the
conversion of 12,693 common units of our operating partnership. The common shares had a market value of approximately $369,000 on the conversion date.



During the nine months ended September 30, 2003, common shares held in treasury decreased by $40.5 million resulting from a decrease of $54.8 million,
representing 2.3 million common shares reissued pursuant to the completion of an equity offering during the period, partially offset by the reclassification of $2.2 million from investment in securities to common shares held in treasury,
representing 82,500 common shares held by us pursuant to an employee deferred compensation plan and $12.1 million related to 391,641 common shares surrendered as payment of the exercise price and statutory withholdings for certain share options
exercised during the period.



We marked-to-market our
investments in securities and our interest rate hedges. During the nine months ended September 30, 2003, we recorded an unrealized loss of $249,000 and an unrealized gain of $5.1 million on our investments in securities and interest rate hedges,
respectively.



On January 1, 2003, in connection with the
consolidation of Prentiss Properties Resources, the following assets and liabilities were recorded in the consolidated balance sheet 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 nine months ended September 30, 2003, we assumed liabilities of approximately $1.7 million. As a result of property sales during the nine months ended September 30, 2003, we removed approximately $1.4 million, $160,000 and
$1.4 million of receivables, other assets and liabilities, respectively.



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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 nine month periods ended September 30, 2003 and 2002:



For the Three Months Ended September 30, 2003

(in thousands)



|                                               |  | Mid- Atlantic |         | Midwest |   | Southwest |  | NorthernCalifornia |         |  | SouthernCalifornia |         | TotalSegments |  | CorporateNotAllocable ToSegments |         |  | ConsolidatedTotal
|---------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | ------------------ | ------- |  | ------------------ | ------- | ------------- |  | -------------------------------- | ------- |  | -----------------
|Revenues                                       |  | $             | 23,011  |         | $ | 15,644    |  | $                  | 29,964  |  | $                  | 11,881  |               |  | $                                | 7,655   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Income from continuing operations              |  | $             | 11,370  |         | $ | 5,663     |  | $                  | 11,829  |  | $                  | 4,696   |               |  | $                                | 3,850   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Additions to long-lived assets:                |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Development/redevelopment                      |  | $             | 26      |         | $ | 586       |  | $                  | 53      |  | $                  | (5      | )             |  | $                                | 35      |  | $                
|Purchase of real estate                        |  |               | 52,142  |         |   |          |  |                    |        |  |                    |        |               |  |                                  |        |  |                  
|Capital expenditures for in-service properties |  |               | 1,448   |         |   | 1,773     |  |                    | 3,754   |  |                    | 1,595   |               |  |                                  | 650     |  |                  
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Total additions                                |  | $             | 53,616  |         | $ | 2,359     |  | $                  | 3,807   |  | $                  | 1,590   |               |  | $                                | 685     |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Investment balance in equity method investees  |  | $             | 9,390   |         | $ |          |  | $                  | 3,829   |  | $                  |        |               |  | $                                |        |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  
|Assets                                         |  | $             | 621,177 |         | $ | 410,935   |  | $                  | 637,441 |  | $                  | 266,083 |               |  | $                                | 177,722 |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |  |                    |         |               |  |                                  |         |  |                  



For the Three Months Ended
September 30, 2002

(in thousands)



|                                               |  | Mid- Atlantic |         | Midwest |   | Southwest |  | NorthernCalifornia |         | SouthernCalifornia |   | TotalSegments |  | CorporateNotAllocable ToSegments |         |  | ConsolidatedTotal
|---------------------------------------------- |  | ------------- | ------- | ------- | - | --------- |  | ------------------ | ------- | ------------------ | - | ------------- |  | -------------------------------- | ------- |  | -----------------
|Revenues                                       |  | $             | 20,674  |         | $ | 15,880    |  | $                  | 29,232  |                    | $ | 10,974        |  | $                                | 7,532   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Income from continuing operations              |  | $             | 12,030  |         | $ | 5,638     |  | $                  | 12,562  |                    | $ | 4,587         |  | $                                | 3,822   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Additions to long-lived assets:                |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Development/redevelopment                      |  | $             | 1,178   |         | $ | 3,443     |  | $                  | 797     |                    | $ | 29            |  | $                                | 523     |  | $                
|Purchase of real estate                        |  |               |        |         |   |          |  |                    |        |                    |   |              |  |                                  |        |  |                  
|Capital expenditures for in-service properties |  |               | 1,390   |         |   | 604       |  |                    | 3,815   |                    |   | 1,099         |  |                                  | 755     |  |                  
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Total additions                                |  | $             | 2,568   |         | $ | 4,047     |  | $                  | 4,612   |                    | $ | 1,128         |  | $                                | 1,278   |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Investment balance in equity method investees  |  | $             | 9,939   |         | $ |          |  | $                  | 3,852   |                    | $ |              |  | $                                |        |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  
|Assets                                         |  | $             | 562,768 |         | $ | 384,277   |  | $                  | 641,967 |                    | $ | 266,948       |  | $                                | 202,287 |  | $                
|                                               |  |               |         |         |   |           |  |                    |         |                    |   |               |  |                                  |         |  |                  



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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



For the Nine Months Ended September 30, 2003

(in thousands)



|                                                            |  | Mid- Atlantic |        | Midwest |   | Southwest |  | NorthernCalifornia |         | SouthernCalifornia |   | TotalSegments |  | CorporateNotAllocable ToSegments |        |  | ConsolidatedTotal
|----------------------------------------------------------- |  | ------------- | ------ | ------- | - | --------- |  | ------------------ | ------- | ------------------ | - | ------------- |  | -------------------------------- | ------ |  | -----------------
|Revenues                                                    |  | $             | 67,416 |         | $ | 45,526    |  | $                  | 89,086  |                    | $ | 35,551        |  | $                                | 23,509 |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Income from continuing operations                           |  | $             | 33,678 |         | $ | 14,866    |  | $                  | 32,859  |                    | $ | 14,807        |  | $                                | 11,011 |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Additions to long-lived assets:                             |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Development/redevelopment                                   |  | $             | 1,257  |         | $ | 3,413     |  | $                  | 384     |                    | $ | 1             |  | $                                | 14     |  | $                
|Purchase of real estate                                     |  |               | 52,142 |         |   | 31,361    |  |                    | 28,035  |                    |   |              |  |                                  |       |  |                  
|Capital expenditures for in-service properties              |  |               | 4,491  |         |   | 2,946     |  |                    | 8,044   |                    |   | 3,989         |  |                                  | 2,019  |  |                  
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Total additions                                             |  | $             | 57,890 |         | $ | 37,720    |  | $                  | 36,463  |                    | $ | 3,990         |  | $                                | 2,033  |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|                                                            |  |              
|For the Nine Months Ended September 30, 2002 (in thousands) |  |               |        |         |   |           | 
|                                                            |  |               |        |         |   |           |  |                   
|                                                            |  | Mid- Atlantic |        | Midwest |   | Southwest |  | NorthernCalifornia |         | SouthernCalifornia |   | TotalSegments |  | CorporateNotAllocable ToSegments |        |  | ConsolidatedTotal
|Revenues                                                    |  | $             | 60,727 |         | $ | 46,983    |  | $                  | 85,870  |                    | $ | 33,370        |  | $                                | 22,371 |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Income from continuing operations                           |  | $             | 32,982 |         | $ | 19,028    |  | $                  | 35,389  |                    | $ | 14,238        |  | $                                | 10,967 |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Additions to long-lived assets:                             |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Development/redevelopment                                   |  | $             | 5,420  |         | $ | 9,049     |  | $                  | 3,893   |                    | $ | 95            |  | $                                | 1,682  |  | $                
|Purchase of real estate                                     |  |               |       |         |   |          |  |                    | 107,475 |                    |   |              |  |                                  | 10,597 |  |                  
|Capital expenditures for in-service properties              |  |               | 3,036  |         |   | 1,243     |  |                    | 9,569   |                    |   | 1,912         |  |                                  | 2,399  |  |                  
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  
|Total additions                                             |  | $             | 8,456  |         | $ | 10,292    |  | $                  | 120,937 |                    | $ | 2,007         |  | $                                | 14,678 |  | $                
|                                                            |  |               |        |         |   |           |  |                    |         |                    |   |               |  |                                  |        |  |                  



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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 nine months ended September 30, 2003 and 2002:



|(in thousands, except per share data)                                   |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|----------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|Reconciliation of the numerator used for basic earnings per share       |  | 2003                            |        |   | 2002                           |  
|Income from continuing operations                                       |  | $                               | 14,034 |   |                                | $
|Preferred dividends                                                     |  |                                 | (2,113 | ) |                                |  
|Gain on sale of properties                                              |  |                                 |       |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Income from continuing operations applicable to common shareholders     |  | $                               | 11,921 |   |                                | $
|                                                                        |  |                                 |        |  
|Discontinued operations                                                 |  |                                 | 184    |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Net income applicable to common shareholders                            |  | $                               | 12,105 |   |                                | $
|                                                                        |  |                                 |        |   |                                |  
|Reconciliation of the denominator used for basic earnings per share     |  |                                 |        |   |                                |  
|Weighted average common shares outstanding                              |  |                                 | 40,231 |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Basic earnings per share                                                |  | $                               | 0.30   |   |                                | $
|                                                                        |  |                                 |        |   |                                |  
|Reconciliation of the numerator used for dilutive earnings per share    |  |                                 |        |   |                                |  
|Income from continuing operations                                       |  | $                               | 14,034 |   |                                | $
|Preferred dividends                                                     |  |                                 | (2,113 | ) |                                |  
|Gain on sale of properties                                              |  |                                 |       |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Income from continuing operations applicable to common shareholders     |  | $                               | 11,921 |   |                                | $
|                                                                        |  |                                 |        |  
|Discontinued operations                                                 |  |                                 | 184    |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|                                                                        |  | $                               | 12,105 |   |                                | $
|                                                                        |  |                                 |        |   |                                |  
|Reconciliation of the denominator used for dilutive earnings per share  |  |                                 |        |   |                                |  
|Weighted average common shares outstanding                              |  |                                 | 40,231 |   |                                |  
|Preferred shares(1)                                                     |  |                                 |       |   |                                |  
|Options                                                                 |  |                                 | 253    |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Weighted average common shares and common share equivalents outstanding |  |                                 | 40,484 |   |                                |  
|                                                                        |  |                                 |        |   |                                |  
|Diluted earnings per share                                              |  | $                               | 0.30   |   |                                | $
|                                                                        |  |                                 |        |   |                                |  



|(1) | Preferred shares for the three and nine months ended September 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 all periods presented.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 nine months ended September 30, 2003 and 2002 would approximate the
pro forma amounts below:



|                                             |  | (amounts in thousands, except per share data)
|-------------------------------------------- |  | ---------------------------------------------
|Three Months Ended September 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)
|-------------------------------------------- |  | ---------------------------------------------
|Nine Months Ended September 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. Per this interpretation, 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 and
all enterprises with variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this interpretation immediately. On October 9, 2003 the Financial Accounting Standards Board issued
FASB Staff Position FIN 46-6 deferring the effective date, for variable interest entities created before February 1, 2003, until the end of the first interim or annual period ending after December 15, 2003.



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.



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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. In addition, we are evaluating whether the provisions of
FASB Interpretation No. 46 will have a material impact on our financial condition and results of operations.



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). 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. Certain provisions of the statement that were to be initially effective for financial instruments entered into or modified after
May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003 were deferred indefinitely by the Financial Accounting Standards Board. As a result of the deferred provisions, companies are not required to
recognize non-controlling interests of a limited-life subsidiary as a liability in the consolidated financial statements. In evaluating the provisions of the statement that were not deferred, we determined that our Series E Preferred Units qualify
as a mandatorily redeemable financial instrument and; thus, should be classified as a liability and measured at fair value in our consolidated balance sheet at September 30, 2003. We determined that the fair value of the Series E Preferred Units
equaled the $ 10.0 million carrying amount at September 30, 2003 and as a result the reclassification had no impact on current period earnings.



16. Subsequent Events



On October 2, 2003, we completed an interest rate swap agreement for a notional amount of $30.0 million which takes effect following the September 30,
2004 expiration of two existing swaps totaling $110.0 million. The new agreement exchanges floating rate LIBOR for fixed rate LIBOR of 3.8565 percent on $30.0 million of our variable rate borrowings. The interest rate swap agreement has an effective
date of October 1, 2004 and matures September 30, 2008.



Through our dividend reinvestment plan, on October 17th, 2003, we issued 357,292 common shares of
beneficial interest resulting in net proceeds of $11.0 million. The proceeds were used to repay a portion of the outstanding borrowings under our revolving credit facility.



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##### 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 September 30, 2003, we owned interests in a diversified portfolio of 130 primarily suburban Class A office and suburban industrial properties as
follows:



|                      |  | Number ofBuildings |  | Net RentableSquare Feet
|--------------------- |  | ------------------ |  | -----------------------
|                      |  |                    |  | (in millions)          
|Office properties     |  | 99                 |  | 15.1                   
|Industrial properties |  | 31                 |  | 2.3                    
|                      |  |                    |  |                        
|Total                 |  | 130                |  | 17.4                   
|                      |  |                    |  |                        



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 third quarter 2003 regional revenues and the 11 markets in which our properties are located, with the first market being the location of each regional office:



|Region              |  | Revenues       |        | Market
|------------------- |  | -------------- | ------ | ------
|                    |  | (in thousands) |        |       
|Mid-Atlantic        |  | $              | 23,011 |       
|Midwest             |  |                | 15,644 |       
|Southwest           |  |                | 29,964 |       
|Northern California |  |                | 11,881 |       
|Southern California |  |                | 7,655  |       
|                    |  |                |        |       
|Total               |  | $              | 88,155 |       
|                    |  |                |        |       



In addition to the
$88.2 million of regional revenues, during the three months ended September 30, 2003, we recognized $551,000 of revenue consisting primarily of interest income which was not allocated to our regions.



At September 30, 2003, we had 15.8 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 15.8 million square feet of in-place leases expire as follows:



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##### Table of Contents

|           |  | Square Feet    |  |       |  
|---------- |  | -------------- |  | ----- | -
|           |  | (in thousands) |  |       |  
|2003       |  | 318            |  | 2.0   | %
|2004       |  | 2,071          |  | 13.1  | %
|2005       |  | 1,669          |  | 10.5  | %
|2006       |  | 2,019          |  | 12.8  | %
|2007       |  | 2,044          |  | 12.9  | %
|Thereafter |  | 7,702          |  | 48.7  | %
|           |  |                |  |       |  
|           |  | 15,823         |  | 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 207,000 net rentable square feet of WorldCom related leases and have received approximately 18,000 net rentable square feet back upon lease expiration.



We have three remaining office lease agreements with WorldCom subsidiaries
totaling approximately 46,537 net rentable square feet in two of our office properties. Annualized base rental revenue from the three remaining leases equates to approximately $1.0 million, or less than 0.4% of our annualized base rental revenue.
All rent due as of September 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 $100,000 at
September 30, 2003, all of which was reserved at September 30, 2003. 18,039 net rentable square feet of the currently in-place WorldCom related office leases were recently renewed. The in-place WorldCom leases, totaling 46,537 net rentable square
feet, expire as follows: 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 the rooftop antenna 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.



On October 20, 2003, we executed a letter of intent to form a joint venture between our operating partnership, as the 51% general partner and Stichting
Pensioenfonds ABP, a Netherlands based pension fund, as the 49% limited partner. The venture, as currently contemplated by the letter of intent, will target a combination of stabilized and value-added, Class A office buildings in our
core markets of Washington D.C./Northern Virginia, Chicago, Dallas/Ft. Worth, Northern California and San Diego/Orange County. Closing of the joint venture agreement is expected to occur prior to December 31, 2003.



The letter of intent contemplates that the operating partnership will provide
property management, leasing and asset management services to the venture.



The letter of intent contemplates that the venture will initially be seeded with two of our recent acquisitions, 2291 Wood Oak Drive and Corporate Lakes III. The operating partnership will contribute the assets in
exchange for cash proceeds from the limited partner in an amount equal to 49% of the original acquisition cost, including all transaction costs. With total equity contributions of $204 million and target leverage of 60% loan-to-value, the joint
venture will seek to invest up to $510 million over an 18 month investment horizon, based on a 51%/49% contribution split between us and Stichting Pensioenfonds ABP, respectively.



The joint venture, if consummated, will be consolidated with and into the accounts of the operating partnership. The impact
on our results of operations from the formation of the joint venture will be dependent on the performance of the office buildings acquired pursuant to the joint venture and our ability to find adequate investment opportunities. Likewise, our
liquidity may be materially impacted if we are successful at investing and obtaining targeted leverage as contemplated in the letter of intent.



Although it is the intent of each of Stichting Pensioenfonds ABP and us to enter into the joint venture as contemplated by the letter of intent, such
action is contingent on Stichting Pensioenfonds ABPs due diligence to be performed on the seed properties and the negotiating of a joint venture agreement satisfactory to both parties.



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Third Quarter 2003 Transactions



On July 24, 2003 we completed the sale, to an unrelated third party, of nine office properties containing 644,000 net
rentable square feet. The sale, which included all of our properties in the Atlanta, Georgia area, represented an exit from the Atlanta market. The gross proceeds from the sale totaling approximately $40.1 million 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, in our prior quarterly statements, we recorded an impairment loss of $1.8 million representing the amount by which
the carrying amount of the properties exceeded our estimate of fair value, less cost to sell. The impairment loss is included in the line item income/(loss) from discontinued operations in our consolidated statement of income for the
nine months ended September 30, 2003. In conjunction with the sale of the properties, we restructured the $14.1 million loan with EuroHypo which included a release of the underlying collateral and conversion of the loan to an unsecured obligation.



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 or held for sale during the periods presented.
The summary includes the results of operations before gain/(loss) on sale for the three and nine months ended September 30, 2003 and 2002, respectively:



|Discontinued Operations:                   |  | Three MonthsEnded September 30, |     |      | Nine Months Ended September 30, |       
|------------------------------------------ |  | ------------------------------- | --- | ---- | ------------------------------- | ------
|(in thousands)                             |  | 2003                            |     | 2002 |                                 |       
|Property revenues:                         |  |                                 |     |      |                                 |       
|Rental income                              |  | $                               | 650 |      | $                               | 5,936 
|                                           |  |                                 |     |      |                                 |       
|Property revenues                          |  |                                 | 650 |      |                                 | 5,936 
|                                           |  |                                 |     |      |                                 |       
|Property expenses:                         |  |                                 |     |      |                                 |       
|Property operating and maintenance         |  |                                 | 424 |      |                                 | 2,065 
|Real estate taxes                          |  |                                 | 120 |      |                                 | 604   
|Depreciation and amortization              |  |                                 |    |      |                                 | 1,487 
|                                           |  |                                 |     |      |                                 |       
|Property expenses                          |  |                                 | 544 |      |                                 | 4,156 
|                                           |  |                                 |     |      |                                 |       
|Loss on impairment of real estate          |  |                                 |    |      |                                 | (2,855
|                                           |  |                                 |     |      |                                 |       
|Income/(loss) from discontinued operations |  | $                               | 106 |      | $                               | (1,075
|                                           |  |                                 |     |      |                                 |       



During the month of
August 2003, we completed the sale of 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. After deducting underwriting discounts
and commissions, we received net proceeds of approximately $66.5 million. The net proceeds of the sale of the common shares were contributed to the operating partnership in exchange for common units of limited partnership interest in the operating
partnership. Initially, proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving credit facility. Subsequently, we used a portion of the proceeds for a property acquisition as described below.



On August 28, 2003, we acquired from an unrelated third party,
the 2291 Wood Oak Drive building containing approximately 228,000 net rentable square feet for approximately $52.1 million, including transaction costs. The acquisition was effectively funded from the sale of common shares as discussed above.



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.



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



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

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

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

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

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



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



Real estate, leasehold improvements and land holdings are classified as long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying amount or fair value, less cost to sell.
With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered. All of our long-lived assets were classified as held and used at September 30, 2003. Our operating
real estate, which comprises the majority of our long-lived assets, had a carrying amount of $1.8 billion at September 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. The recognition of an impairment loss would negatively impact earnings. We did not recognize any impairment losses during the three months ended September
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 September 30, 2003, we had total receivables of $52.3 million and an
allowance for doubtful accounts of $9.2 million, resulting in a net receivable balance of $43.1 million. Of the $52.3 million in total receivables, $40.8 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 which would negatively impact earnings. The table below presents bad debt expense
recognized during the three months ended September 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 September 30, 2003 and 2002:



|                                              |  | Three MonthsEnded September 30,
|--------------------------------------------- |  | -------------------------------
|(in thousands)                                |  | 2003                           
|Bad debt expense                              |  | $                              
|Less: Bad debts realized during the period    |  |                                
|                                              |  |                                
|Increase 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, a decrease or increase in earnings. The table below presents real
estate related depreciation and amortization expense, including real estate depreciation and amortization included



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in income from continuing operations as well as discontinued operations, for the three months ended September 30, 2003 and 2002:



|                                          |  | Three Months EndedSeptember 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 as an increase to rental income 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 September
30, 2003, we acquired one office property in our Mid-Atlantic Region. Based on our estimate of the fair value of each component of the real estate property acquired, we allocated the purchase price as follows:



|(in thousands)                              |  |  
|------------------------------------------- |  | -
|Land                                        |  | $
|Building and improvements                   |  |  
|Tenant improvements and leasing commissions |  |  
|Above market lease value                    |  |  
|In-place lease value at market              |  |  
|                                            |  |  
|                                            |  | $
|                                            |  |  



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



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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
September 30, 2003, such derivatives were used to hedge the variable cash flows associated with a portion of our variable-rate debt.



As of September 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, 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 September 30,
2003 and 2002. The table also presents the estimated fair value of our in-place swap agreements as of September 30, 2003 and 2002.



|                                                        |  | Three Months EndedSeptember 30, |        
|------------------------------------------------------- |  | ------------------------------- | -------
|(in thousands)                                          |  | 2003                            |        
|Net cash paid under our interest rate swap agreements   |  | $                               | 2,509  
|Fair value of interest rate swaps at September 30, 2003 |  | $                               | (11,398



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Results of Operations



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



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



|Consolidated Statements of Income                                                                                                  |  | Three Months Ended September 30, |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------
|(in thousands)                                                                                                                     |  | 2003                             |       
|Revenues:                                                                                                                          |  |                                  |       
|Rental income                                                                                                                      |  | $                                | 85,154
|Service business and other income                                                                                                  |  |                                  | 3,552 
|                                                                                                                                   |  |                                  |       
|                                                                                                                                   |  |                                  | 88,706
|                                                                                                                                   |  |                                  |       
|Expenses:                                                                                                                          |  |                                  |       
|Property operating and maintenance                                                                                                 |  |                                  | 21,448
|Real estate taxes                                                                                                                  |  |                                  | 8,254 
|General and administrative and personnel cost                                                                                      |  |                                  | 2,747 
|Expenses of service business                                                                                                       |  |                                  | 2,478 
|Interest expense                                                                                                                   |  |                                  | 17,503
|Amortization of deferred financing costs                                                                                           |  |                                  | 678   
|Depreciation and amortization                                                                                                      |  |                                  | 19,561
|                                                                                                                                   |  |                                  |       
|                                                                                                                                   |  |                                  | 72,669
|                                                                                                                                   |  |                                  |       
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                                  | 16,037
|                                                                                                                                   |  |                                 
|Minority interests                                                                                                                 |  |                                  | (2,598
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                                  | 595   
|                                                                                                                                   |  |                                  |       
|Income from continuing operations                                                                                                  |  |                                  | 14,034
|                                                                                                                                   |  |                                  |       
|Discontinued operations:                                                                                                           |  |                                  |       
|Income/(loss) from discontinued operations                                                                                         |  |                                  | 106   
|Gain on sale of properties                                                                                                         |  |                                  | 85    
|Minority interests related to discontinued operations                                                                              |  |                                  | (7    
|                                                                                                                                   |  |                                  |       
|                                                                                                                                   |  |                                  | 184   
|                                                                                                                                   |  |                                  |       
|Net income                                                                                                                         |  | $                                | 14,218
|Preferred dividends                                                                                                                |  |                                  | (2,113
|                                                                                                                                   |  |                                  |       
|Net income applicable to common shareholders                                                                                       |  | $                                | 12,105
|                                                                                                                                   |  |                                  |       



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



Acquisition of Real Estate. During the period July 1, 2002 through September 30, 2003,
we acquired five office properties containing in the aggregate approximately 1.0 million net rentable square feet as follows:



|Property                |  | Date of Acquisition |  | Region       |  | Net Rentable Square Feet |  | Purchase Price
|----------------------- |  | ------------------- |  | ------------ |  | ------------------------ |  | --------------
|                        |  |                     |  |              |  | (in thousands)           |  | (in thousands)
|12601 Fair Lakes Circle |  | November 18, 2002   |  | Mid-Atlantic |  | 264                      |  | $             
|2291 Wood Oak Drive     |  | August 28, 2003     |  | Mid-Atlantic |  | 228                      |  |               
|410 Warrenville Road    |  | May 8, 2003         |  | Midwest      |  | 60                       |  |               
|Corporate Lakes III     |  | June 18, 2003       |  | Midwest      |  | 124                      |  |               
|Park West C3            |  | February 4, 2003    |  | Southwest    |  | 339                      |  |               
|                        |  |                     |  |              |  |                          |  |               
|                        |  |                     |  |              |  | 1,015                    |  | $             
|                        |  |                     |  |              |  |                          |  |               



Leasing of Development Projects.Our results of operations, for the three months ended September 30, 2003, have been bolstered by increased occupancy at two development projects. The projects include approximately 182,000 net rentable square feet in our Mid-Atlantic Region and
40,000 net rentable square feet in our Southern California Region. The projects were approximately 10% leased and rent paying for the three month period ended September 30, 2002 compared to approximately 42% for the three month period ended
September 30, 2003.



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Real Estate Dispositions. During the period July 1, 2002 through September 30, 2003, we disposed of seven
industrial properties containing 875,000 net rentable square feet and fourteen office properties containing 1.2 million 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.
Two office properties, containing 339,000 net rentable square feet within our Southwest region, were sold on June 26, 2003. The remaining 644,000 net rentable square feet included the disposition on July 24, 2003 of nine office properties in our
Mid-Atlantic region. The sales resulted in aggregated gross proceeds of approximately $112.1 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 540,000 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 85% leased as compared to
71% leased at September 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 September 30, 2003 to the three months ended September 30, 2002.



Rental Income. Rental income increased by $1.2 million, or 1.5%, from
$83.9 million to $85.1 million. The real estate acquisitions and development properties coming on-line resulted in increases of $4.7 million and $539,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of
$503,000. These increases were offset by a decrease of $4.6 million from our other properties relating primarily to occupancy and rental rate declines in our portfolio and a decrease in termination fee income recognized for the three months ended
September 30, 2003 compared to September 30, 2002.



Property Operating and
Maintenance. Property operating and maintenance costs increased by $1.2 million, or 5.7%, from $20.3 million to $21.5 million. The real estate acquisitions and development properties coming on-line resulted in increases of $1.0 million and
$198,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $166,000. Property operating and maintenance expenses related to our other properties decreased by $246,000. The decrease in property operating and
maintenance expenses at our other properties primarily related to the decrease from the three months ended September 30, 2002 to the three months ended September 30, 2003 of bad debt expenses recognized at our properties.



Real Estate Taxes. Real estate taxes decreased by $990,000, or 10.7%, from $9.2
million to $8.2 million. Real estate acquisitions and development properties coming on-line resulted in increases of $517,000 and $69,000, respectively. The increases were offset by decreases of $143,000 and $1.4 million from our other properties
and our 123 North Wacker property, respectively. 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/Expenses of Service Business.Service business and
other income and the 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 September 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 $270,000, or 1.6%, from $17.2 million to $17.5 million, primarily as a result of an increase in weighted average borrowings outstanding for the three months ended September 30, 2003 compared to the three
months ended September 30, 2002, accompanied by a decrease in capitalized interest from $553,000 for the three months ended September 30, 2002 to $0 for the three months ended September 30, 2003. The increase was partially offset by a decrease in
the weighted average interest rate paid on outstanding borrowings from 6.82% to 6.70% for the respective periods.



Depreciation and Amortization. Depreciation and amortization increased by $2.6 million, or 15.4%, from $17.0 million to $19.6 million. The real estate acquisitions
and development properties coming on-line resulted in increases of $1.3 million and $284,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $317,000. Other properties increased by $586,000 which is
attributable to the depreciation and amortization expense related to capital expenditures incurred at our properties subsequent to acquisition.



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Minority Interests. Minority interests decreased by $126,000, or 4.6%, 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 $18.5 million for the three months ended September 30, 2002 to $16.6 million for the three
months ended September 30, 2003.



Discontinued Operations. Discontinued
operations decreased by $6.9 million, from $7.1 million for the three months ended September 30, 2002 to $184,000 for the three months ended September 30, 2003. The decrease resulted from the recognition, during the three months ended September 30,
2002, of a gain on sale of real estate of $8.5 million, offset by an impairment loss of $2.9 million during the same period, accompanied by the shortened period of time and the number of assets that were included in our portfolio as discontinued
operations during the three months ended September 30, 2003 compared to the three months ended September 30, 2002.



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Results of Operations



Comparison of the nine months ended September 30, 2003 to the nine months ended September 30, 2002



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



|Consolidated Statements of Income                                                                                                  |  | Nine Months EndedSeptember 30, |        
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------
|(in thousands)                                                                                                                     |  | 2003                           |        
|Revenues:                                                                                                                          |  |                                |        
|Rental income                                                                                                                      |  | $                              | 252,265
|Service business and other income                                                                                                  |  |                                | 12,154 
|                                                                                                                                   |  |                                |        
|                                                                                                                                   |  |                                | 264,419
|                                                                                                                                   |  |                                |        
|Expenses:                                                                                                                          |  |                                |        
|Property operating and maintenance                                                                                                 |  |                                | 63,679 
|Real estate taxes                                                                                                                  |  |                                | 27,882 
|General and administrative and personnel cost                                                                                      |  |                                | 8,375  
|Expenses of service business                                                                                                       |  |                                | 7,599  
|Interest expense                                                                                                                   |  |                                | 52,283 
|Amortization of deferred financing costs                                                                                           |  |                                | 1,723  
|Depreciation and amortization                                                                                                      |  |                                | 56,658 
|                                                                                                                                   |  |                                |        
|                                                                                                                                   |  |                                | 218,199
|                                                                                                                                   |  |                                |        
|Income from continuing operations before minority interests and equity in income of joint ventures and unconsolidated
subsidiaries |  |                                | 46,220 
|                                                                                                                                   |  |                               
|Minority interests                                                                                                                 |  |                                | (7,812 
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                                | 1,933  
|                                                                                                                                   |  |                                |        
|Income from continuing operations                                                                                                  |  |                                | 40,341 
|                                                                                                                                   |  |                                |        
|Discontinued operations:                                                                                                           |  |                                |        
|Income from discontinued operations                                                                                                |  |                                | 293    
|(Loss)/gain on sale of properties                                                                                                  |  |                                | (4,457 
|Minority interests related to discontinued operations                                                                              |  |                                | 153    
|                                                                                                                                   |  |                                |        
|                                                                                                                                   |  |                                | (4,011 
|                                                                                                                                   |  |                                |        
|Income before gain on sale of land                                                                                                 |  |                                | 36,330 
|                                                                                                                                   |  |                               
|Gain on sale of land                                                                                                               |  |                                | 1,910  
|                                                                                                                                   |  |                                |        
|Net income                                                                                                                         |  | $                              | 38,240 
|Preferred dividends                                                                                                                |  |                                | (6,339 
|                                                                                                                                   |  |                                |        
|Net income applicable to common shareholders                                                                                       |  | $                              | 31,901 
|                                                                                                                                   |  |                                |        



Included below is a
discussion of the significant events or transactions that have impacted our results of operations when comparing the nine months ended September 30, 2003 to the nine months ended September 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 and the assumption of debt. 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 September 30, 2003, we acquired five office
properties containing in the aggregate approximately 1.0 million net rentable square feet. The properties acquired between January 1, 2002 and September 30, 2003 are as follows:



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|Property                |  | Date of Acquisition |  | Region       |  | Net Rentable Square Feet |  | Purchase Price
|----------------------- |  | ------------------- |  | ------------ |  | ------------------------ |  | --------------
|                        |  |                     |  |              |  | (in thousands)           |  | (in thousands)
|12601 Fair Lakes Circle |  | November 18, 2002   |  | Mid-Atlantic |  | 264                      |  | $             
|2291 Wood Oak Drive     |  | August 28, 2003     |  | Mid-Atlantic |  | 228                      |  |               
|410 Warrenville Road    |  | May 8, 2003         |  | Midwest      |  | 60                       |  |               
|Corporate Lakes III     |  | June 18, 2003       |  | Midwest      |  | 124                      |  |               
|Burnett Plaza           |  | March 7, 2002       |  | Southwest    |  | 1,025                    |  |               
|Park West C3            |  | February 4, 2003    |  | Southwest    |  | 339                      |  |               
|                        |  |                     |  |              |  |                          |  |               
|                        |  |                     |  |              |  | 2,040                    |  | $             
|                        |  |                     |  |              |  |                          |  |               



Leasing of Development Projects.Our results of operations, for the nine months ended September 30, 2003, have been bolstered by increased occupancy at three 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 49% leased and rent paying for the nine month period ended September 30, 2002 compared to
approximately 61% for the nine month period ended September 30, 2003.



Real
Estate Dispositions. During the period January 1, 2002 through September 30, 2003, we disposed of seven industrial properties containing 875,000 net rentable square feet and fourteen office properties containing 1.2 million 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. Two office properties, containing 339,000 net rentable square feet, within our Southwest region were sold on June 26, 2003. The
remaining 644,000 net rentable square feet included the disposition on July 24, 2003 of nine office properties in our Mid-Atlantic region.



Other Significant Real Estate Transactions.On November 22, 1999, we acquired 123 North Wacker, a 540,000 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 85% leased as compared to 71% leased at September 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 nine months ended September 30, 2003 to the nine months ended September 30, 2002.



Rental Income. Rental income increased by $4.3 million, or 1.7%, from $248.0 million
to $252.3 million. The real estate acquisitions and development properties coming on-line resulted in increases of $14.6 million and $2.1 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of $2.1 million.
These increases were offset by a decrease of $14.5 million from our other properties relating primarily to occupancy and rental rate declines in our portfolio and a decrease in termination fee income recognized for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002.



Property
Operating and Maintenance. Property operating and maintenance costs increased by $4.4 million, or 7.3%, from $59.3 million to $63.7 million. The real estate acquisitions and development properties coming on-line resulted in increases of $3.7
million and $1.3 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of $693,000 and property operating and maintenance expenses related to our other properties decreased by $1.3 million. The decrease in
property operating and maintenance expenses at our other properties primarily relates to a decrease from the nine months ended September 30, 2002 to the nine months ended September 30, 2003 of bad debt expenses recognized at our properties



Real Estate Taxes. Real estate taxes decreased $2.2 million, or 7.4%,
from $30.1 million to $27.9 million. Real estate acquisitions and development properties coming on-line resulted in increases of $1.1 million and $274,000, respectively. The increases were offset by a decrease of $1.2 million and $2.4 million
related to our 123 North Wacker property and our other properties, respectively. The decreases were primarily a result of real estate tax refunds received and lower estimates of current year taxes resulting from lower property tax assessments across
our portfolio.



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Service Business and Other Income/Expenses of Service Business.Service business and other income and the 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 nine months
ended September 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
$2.1 million, or 4.3%, from $50.2 million to $52.3 million, primarily as a result of an increase in weighted average borrowings outstanding for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002,
accompanied by a decrease in capitalized interest from $2.9 million for the nine months ended September 30, 2002 to $416,000 for the nine months ended September 30, 2003. The increase was partially offset by a decrease in the weighted average
interest rate paid on outstanding borrowings from 6.74% to 6.61% for the respective periods.



Depreciation and Amortization. Depreciation and amortization increased by $7.2 million, or 14.6%, from $49.4 million to $56.6 million. The real estate acquisitions and development properties coming on-line
resulted in increases of $3.5 million and $1.5 million, respectively. The leasing of our 123 North Wacker property resulted in an increase of $943,000. Our other properties increased by $1.1 million which is attributable to the depreciation and
amortization expense related to capital expenditures incurred at our properties subsequent to acquisition.



Minority Interests. Minority interests decreased by $435,000, or 5.3%, from $8.2 million to $7.8 million, primarily due to the minority interest holders proportionate share of the decrease in net income before
discontinued operations and minority interests from $55.6 million for the nine months ended September 30, 2002 to $50.1 million for the nine months ended September 30, 2003.



Discontinued Operations. Discontinued operations decreased by $15.1 million, from $11.1 million for the nine months ended September
30, 2002 to negative $4.0 million for the nine months ended September 30, 2003. The decrease resulted from a recognition during the nine months ended September 30, 2002 of a gain on sale of $8.5 million, offset by an impairment loss $2.9 million
during the same period, compared to a recognition for the nine months ended September 30, 2003 of a loss on sale of $4.5 million and an impairment loss of $1.8 million. Discontinued operations are also impacted by the shortened period of time and
the number of assets that were included in our portfolio as discontinued operations during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002.



Gain on Sale of Land. The gain on sale of land of $1.9 million resulted from the sale of two land parcels during the nine months
ended September 30, 2003.



Liquidity and Capital Resources



Cash and cash equivalents were $9.2 million and $5.1 million at September
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 $93.8 million for the
nine months ended September 30, 2003 compared to $122.7 million for the nine months ended September 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 nine months ended September 30, 2003 compared to September 30, 2002 and (2) the timing of receipt of revenues and payment of expenses.



Net cash used in investing activities totaled $78.9 million for the nine months ended September 30, 2003 compared to $111.4 million for the nine months
ended September 30, 2002. The decrease in net cash used in investing activities of $32.5 million is due primarily to a decrease of $47.0 million in cash used to purchase mortgage loans, a decrease of $15.1 million in cash used in the development and
redevelopment of real estate and an increase of $23.8 million in cash received from the sale of real estate, offset by an increase of $50.9 million of cash used in the purchase of real estate.



Net cash used in financing activities totaled $10.8 million for the nine
months ended September 30, 2003 compared to cash used of $10.4 million for the nine months ended September 30, 2002. The increase in net cash used for financing activities of $405,000 is due primarily to net repayments of debt totaling $1.4 million
for the nine months ended September 30, 2003 compared to net borrowings of $67.4 million for the nine months ended September 30, 2002, an increase of $2.7 million in distributions paid, offset by a decrease in cash used for the redemption of
preferred units of $50.5 million accompanied by an increase in cash generated from the sale of common shares of $19.4 million.



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



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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 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 September 30, 2003, we had outstanding total indebtedness, including our pro rata share of joint venture debt, of
approximately $1.1 billion, or approximately 41.2% of total market capitalization based on a common share price of $31.00 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.



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 September 30, 2003, we had net repayments of borrowings under our credit facility
of $49.5 million and an outstanding balance of $58.0 million at September 30, 2003 resulting in an available balance of $242.0 million.



As of September 30, 2003, we had $2.8 million and $94.1 million of mortgages and notes payable scheduled to mature in 2003 and 2004, respectively.
Subsequent to quarter end we repaid the $2.8 million scheduled to mature in 2003 and $23.1 million of scheduled 2004 maturities using proceeds from our revolving credit facility. We intend to refinance the remaining 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.



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



|Borrower/Description                           |  | CurrentBalance |           | Amortization |       | Interest Rate |                | Maturity
|---------------------------------------------- |  | -------------- | --------- | ------------ | ----- | ------------- | -------------- | --------
|                                               |  | (in thousands) |           |              |       |               |                |         
|Broadmoor Austin Associates                    |  |                |           |              |       |               |                |         
|Broadmoor Austin(1)                            |  | $              | 70,068    |              | 16 yr |               | 7.04%          |         
|Burnett Plaza Associates                       |  |                |           |              |       |               |                |         
|Burnett Plaza                                  |  |                | 72,100    |              | None  |               | LIBOR + 2.15%  |         
|PL Properties Associates, L.P.                 |  |                |           |              |       |               |                |         
|Park West C2                                   |  |                | 33,602    |              | 30 yr |               | 6.63%          |         
|Prentiss Properties Acquisition Partners, L.P. |  |                |           |              |       |               |                |         
|Bachman West                                   |  |                | 2,773     |              | 25 yr |               | 8.63%          |         
|One Westchase Center                           |  |                | 23,111    |              | 25 yr |               | 7.84%          |         
|Collateralized Term Loan(2)                    |  |                | 71,000    |              | 25 yr |               | LIBOR + 1.500% |         
|Walnut Glen Tower                              |  |                | 33,656    |              | 30 yr |               | 6.92%          |         
|Revolving Credit Facility                      |  |                | 58,000    |              | None  |               | LIBOR + 1.500% |         
|Unsecured Term Loan-Commerz                    |  |                | 75,000    |              | None  |               | LIBOR + 1.500% |         
|Unsecured Term Loan  EuroHypo - I             |  |                | 100,000   |              | None  |               | LIBOR + 1.375% |         
|Highland Court                                 |  |                | 4,520     |              | 25 yr |               | 7.27%          |         
|Plaza I & II                                   |  |                | 7,097     |              | 18 yr |               | 7.75%          |         
|7101 Wisconsin Avenue                          |  |                | 20,456    |              | 30 yr |               | 7.25%          |         
|Unsecured Term Loan  EuroHypo - II            |  |                | 14,050    |              | 30 yr |               | 7.46%          |         
|Ordway                                         |  |                | 48,098    |              | 30 yr |               | 7.95%          |         
|World Savings Center                           |  |                | 28,569    |              | 30 yr |               | 7.91%          |         
|One OHare Centre                              |  |                | 39,884    |              | 30 yr |               | 6.80%          |         
|3130 Fairview Park Drive                       |  |                | 22,334    |              | 30 yr |               | 7.00%          |         
|Research Office Center                         |  |                | 44,089    |              | 28 yr |               | 7.64%          |         
|Bannockburn Centre                             |  |                | 26,204    |              | 30 yr |               | 8.05%          |         
|Del Mar Loan                                   |  |                | 44,004    |              | 30 yr |               | 7.41%          |         
|Prentiss Properties Corporetum, L.P.           |  |                |           |              |       |               |                |         
|Corporetum Office Campus                       |  |                | 24,760    |              | 30 yr |               | 7.02%          |         
|Prentiss Properties Natomas, L.P.              |  |                |           |              |       |               |                |         
|Natomas Corporate Center                       |  |                | 36,189    |              | 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)                          |  |                | 11,065    |              | 28 yr |               | 7.68%          |         
|8260 Greensboro(4)                             |  |                | 3,959     |              | 28 yr |               | 7.83%          |         
|                                               |  |                |           |              |       |               |                |         
|Total                                          |  | $              | 1,094,688 |              |       |               |                |         
|                                               |  |                |           |              |       |               |                |         



|(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.



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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 September 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 September 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.



|NotionalAmount |  | Swap Rate Paid (Fixed) |   |  | Effective Fixed Rate |   |  | Swap Rate Received (Variable) at Sept. 30, 2003 |   |  | Swap Maturity  |  | Fair Value     |        
|-------------- |  | ---------------------- | - |  | -------------------- | - |  | ----------------------------------------------- | - |  | -------------- |  | -------------- | -------
|               |  |                        |   |  |                      |   |  |                                                 |   |  |                |  | (in thousands) |        
|$ 50 million   |  | 6.253                  | % |  | 7.753                | % |  | 1.12                                            | % |  | September 2004 |  | $              | (2,566 
|$ 60 million   |  | 6.248                  | % |  | 7.748                | % |  | 1.12                                            | % |  | September 2004 |  |                | (3,076 
|$ 25 million   |  | 4.345                  | % |  | 6.495                | % |  | 1.12                                            | % |  | July 2005      |  |                | (1,241 
|$ 15 million   |  | 4.345                  | % |  | 6.495                | % |  | 1.12                                            | % |  | July 2005      |  |                | (745   
|$ 20 million   |  | 5.985                  | % |  | 7.485                | % |  | 1.12                                            | % |  | March 2006     |  |                | (1,950 
|$ 30 million   |  | 5.990                  | % |  | 7.490                | % |  | 1.12                                            | % |  | March 2006     |  |                | (2,928 
|$ 50 million   |  | 2.270                  | % |  | 3.645                | % |  | 1.12                                            | % |  | August 2007    |  |                | 743    
|$ 25 million   |  | 2.277                  | % |  | 3.652                | % |  | 1.12                                            | % |  | August 2007    |  |                | 365    
|               |  |                        |   |  |                      |   |  |                                                 |   |  |                |  |                |        
|Total          |  |                        |   |  |                      |   |  |                                                 |   |  |                |  | $              | (11,398
|               |  |                        |   |  |                      |   |  |                                                 |   |  |                |  |                |        



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 nine months ended September 30, 2003 capital
expenditures related to our in-service properties totaled $21.5 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 nine months ended September 30, 2003 totaled approximately $20.2 million and $1.3 million, respectively.



Equity Financing



On August 18, 2003, we completed the sale of 2.3 million common shares of beneficial interest, which included 300,000 common
shares to cover the underwriters over-allotment option, at $28.90 per share, net of underwriting discounts and before transaction costs. The shares were issued from our common shares held in treasury. Proceeds received totaled $66.5 million
which were contributed to the operating partnership in exchange for additional common units of limited partnership interest in the opening partnership. Our operating partnership used a portion of the proceeds to purchase the 2291 Wood Oak Drive
building.



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Also during the nine months ended September 30, 2003, we issued 843,552 common shares related primarily
to the issuance of 714,959 common shares as a result of option exercises. The proceeds received from the issuance of the 843,552 common shares totaled approximately $5.3 million of cash and $12.1 million representing the value of 391,641 shares
surrendered as payment for the exercise price of $11.8 million and statutory tax withholdings of approximately $300,000 in connection with certain option exercises. The cash proceeds were used to repay a portion of the outstanding borrowings under
our revolving credit facility.



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 September 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 September 30, 2003 and 2.1% of our cash flow from operations for the nine months ended September 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 September 30,
2003 for the investments in which we held an unconsolidated interest at September 30, 2003:



|Summary of Financial Position: (in
thousands) |  | Total Assets |         | Total Debt(1) |   | Total Equity |  |   | Companys Investment
|--------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------ |  | - | --------------------
|Broadmoor Austin Associates                   |  | $            | 104,638 |               | $ | 140,136      |  | $ | (36,225             
|Tysons International Partners                 |  |              | 95,693  |               |   | 60,097       |  |   | 34,070              
|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 $173.6 million at September 30, 2003. Our proportionate share of the non-recourse mortgage debt totaled $85.1 million at September 30, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Summary of Operationsfor the Three Months Ended September 30, 2003: (in
thousands) |  | Total Revenue |       | Net Income |   | Companys Share of Net Income
|---------------------------------------------------------------------------------- |  | ------------- | ----- | ---------- | - | -----------------------------
|Broadmoor Austin Associates                                                        |  | $             | 4,952 |            | $ | 1,076                        
|Tysons International Partners                                                      |  |               | 3,140 |            |   | 228                          
|                                                                                   |  |               |       |            |   |                              
|                                                                                   |  |               |       |            |   |                              
|                                                                                   |  |               |       |            |   |                              



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##### Table of Contents

|Summary of Operations for the Nine Months Ended September 30, 2003: (in thousands) |  | Total Revenue |        | Net Income |   | Companys Share of NetIncome
|---------------------------------------------------------------------------------- |  | ------------- | ------ | ---------- | - | ----------------------------
|Broadmoor Austin Associates                                                        |  | $             | 15,064 |            | $ | 3,414                       
|Tysons International Partners                                                      |  |               | 9,716  |            |   | 904                         
|                                                                                   |  |               |        |            |   |                             
|                                                                                   |  |               |        |            |   |                             
|                                                                                   |  |               |        |            |   |                             



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 September 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              |  |                       
|Ground 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 September 30, 2003, expires as follows:



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



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##### Table of Contents

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 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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|(in thousands)                                                             |  | 2003                            |        |   | 2002                           |  
|Net income                                                                 |  | $                               | 14,218 |   |                                | $
|Adjustments:                                                               |  |                                 |        |   |                                |  
|Real estate depreciation and amortization(1)                               |  |                                 | 19,437 |   |                                |  
|Real estate depreciation and amortization of unconsolidated joint ventures |  |                                 | 739    |   |                                |  
|Minority interests(2)                                                      |  |                                 | 448    |   |                                |  
|(Gain)/loss on sale of real estate(3)                                      |  |                                 | (85    | ) |                                |  
|                                                                           |  |                                 |        |   |                                |  
|Funds from operations                                                      |  | $                               | 34,757 |   |                                | $
|                                                                           |  |                                 |        |   |                                |  



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

|(3) | Impairment losses on real estate are not added back in our reconciliation of net income to funds from operations; therefore, for periods in which impairment losses
are recognized, funds from operations is negatively impacted. We recognized impairment losses of $2.9 million and $1.8 million during the three months ended September 30, 2002 and the three months ended June 30, 2003, respectively. Therefore funds
from operations were negatively impacted for the three and nine months ended September 30, 2002 by $2.9 million and by $1.8 million for the nine months ended September 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Funds from operations increased by $352,000 and decreased by $5.8 million for
the three and nine months ended September 30, 2003 from the three and nine months ended September 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. Per this interpretation, 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 and all enterprises with variable interests in variable interests entities created after January 31, 2003, shall apply the consolidation provisions of this
interpretation immediately. On October 9, 2003 the Financial Accounting Standards Board issued FASB Staff Position FIN 46-6 deferring the effective date, for variable interest entities created before February 1, 2003, until the end of the first
interim or annual period ending after December 15, 2003.



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##### Table of Contents

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 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. In addition, we are evaluating whether the provisions of FASB Interpretation No. 46 will have a material impact on our financial condition and
results of operations.



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). 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. Certain
provisions of the statement that were to be initially effective for financial instruments entered into or modified after May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003 were deferred
indefinitely by the Financial Accounting Standards Board. As a result of the deferred provisions, companies are not required to recognize non-controlling interests of a limited-life subsidiary as a liability in the consolidated financial statements.
In evaluating the provisions of the statement that were not deferred, we determined that our Series E Preferred Units qualify as a mandatorily redeemable financial instrument and; thus, should be classified as a liability and measured at fair value
in our consolidated balance sheet at September 30, 2003. We determined that the fair value of the Series E Preferred Units equaled the $ 10.0 million carrying amount at September 30, 2003 and as a result the reclassification had no impact on current
period earnings.



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.



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##### 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 September 30, 2003,
we had outstanding total indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 41.2% 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 arrangements. In addition, we may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps and floors to mitigate our interest rate risk on a
related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes. Approximately 65.6% of our outstanding debt was
subject to fixed rates with a weighted average interest rate of 7.44% at September 30, 2003. Of the remaining $376.1 million, or 34.4%, representing our variable rate debt, $275.0 million was effectively locked at an interest rate (before the spread
over LIBOR) of 4.82% through our interest rate swap agreements. We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.



The following table provides information about our financial instruments that
are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations outstanding at September 30, 2003, including our pro rata share of joint venture debt totaling $85.1 million, the table presents
principal cash flows and related weighted average interest rates for the debt outstanding during the periods. For interest rate swaps, the table presents notional amounts and weighted average interest rates for in-place swaps during the period.
Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on 30-day LIBOR as of September 30, 2003. The fair value of our fixed rate debt indicates the estimated
principal amount of debt having similar debt service requirements, which could have been borrowed by us at September 30, 2003. The rate assumed in the fair value calculation of fixed rate debt is equal to 4.75%, representing our estimated borrowing
rate for fixed rate debt instruments similar in term to those outstanding at September 30, 2003. The fair value of our variable to fixed interest rate swaps indicates the estimated amount that would have been paid by us had they been terminated at
September 30, 2003.



|(dollars in thousands)    |  | 2003 |       |   | 2004 |   |         | 2005 |  |   | 2006    |   |  | 2007 |        |   | Thereafter |   |         | Total |  | Fair Value |        
|------------------------- |  | ---- | ----- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---------- | - | ------- | ----- |  | ---------- | -------
|Liabilities               |  |      |       |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Long-Term Debt:           |  |      |       |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|                          |  |      |       |   |      |   |         |     
|Fixed Rate                |  | $    | 5,142 |   |      | $ | 32,260  |      |  | $ | 42,624  |   |  | $    | 14,311 |   |            | $ | 197,143 |       |  | $          | 427,108
|Average Interest Rate     |  |      | 7.44  | % |      |   | 7.43    | %    |  |   | 7.45    | % |  |      | 7.46   | % |            |   | 7.39    | %     |  |            | 7.41   
|Variable Rate             |  | $    | 187   |   |      | $ | 70,813  |      |  | $ | 130,100 |   |  | $    | 75,000 |   |            |   |        |       |  | $          | 100,000
|Average Interest Rate     |  |      | 2.75  | % |      |   | 2.75    | %    |  |   | 2.71    | % |  |      | 2.55   | % |            |   | 2.53    | %     |  |            | 2.53   
|                          |  |      |       |   |      |   |         |     
|Interest Rate Derivatives |  |      |       |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Interest Rate Swaps:      |  |      |       |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Variable to Fixed         |  | $    |      |   |      | $ | 110,000 |      |  | $ | 40,000  |   |  | $    | 50,000 |   |            | $ | 75,000  |       |  |            |       
|Average Pay Rate          |  |      | 4.82  | % |      |   | 4.66    | %    |  |   | 3.80    | % |  |      | 2.63   | % |            |   | 2.27    | %     |  |            |       
|Average Receive Rate      |  |      | 1.12  | % |      |   | 1.12    | %    |  |   | 1.12    | % |  |      | 1.12   | % |            |   | 1.12    | %     |  |            |       



Item 4. Controls and Procedures



As of September 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.



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##### Table of Contents

PART II

OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 2. Changes in Securities and Use of Proceeds



During the month of August 2003, we completed the sale of 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 offering was 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 was 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 offering expenses totaling
approximately $.4 million, proceeds totaled approximately $66.1 million.



We contributed the net proceeds from 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 August 2003, we
purchased one office property in Virginia containing approximately 228,000 net rentable square feet for approximately $52.1 million. The operating partnership will use the remaining 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.



The above represents our current intentions for the use of the remaining net
proceeds. We might change how we use the remaining 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



None



Item 5. Other Information



None.



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##### Table of Contents

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*        |  | Amendment No. 2 to the Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|3.5         |  | 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).
|            | 
|3.6         |  | 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).                                                                                         
|            | 
|3.7         |  | 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).                                                                                                                                                                                                                                                                                            
|            | 
|3.8         |  | 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).                                              
|            | 
|3.9         |  | 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)).                                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|4.5         |  | Form of Series D Preferred Share Certificate (filed as Exhibit 4.4 to our Report on Form 10-K, filed March 27, 2001, File No. 001-14516, and incorporated by reference
herein).                                                                                                                                                                                                                                                                                            
|            | 
|10.1        |  | Fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 99.1 to our Form 8-K, File
No. 001-14516, filed on August 14, 2003).                                                                                                                                                                                                                                                
|            | 
|10.2*       |  | Sixth Amendment to the Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition Partners, L.P.                                                                                                                                                                                                                                                                                                                                       
|            | 
|10.3        |  | Credit Agreement, dated May 22, 2003, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Eurohypo AG, New York Branch, as Administrative Agent, Bank One, NA, as
Syndication Agent, and other lenders as named therein.                                                                                                                                                                                                                                    
|            | 
|10.4        |  | Stock Purchase Agreement, dated January 1, 2003, by and between Prentiss Properties Acquisition Partners, L.P. and Ampulla LLC, a single member Limited Liability Company, owned by
Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust.                                                                                                                                                                                                               
|            | 
|31.1*       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|31.2*       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|32.1*       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|32.2*       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        



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---

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



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



On July 17, 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 June 30, 2003. On August 14, 2003, we filed a Current Report on Form 8-K for the purpose of filing the Fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P.



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##### Table of Contents

SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  | PRENTISS PROPERTIES TRUST
|----------------------- |  | -------------------------
|                        |  |                          
|Date: November 12, 2003 |  | By:                      
|                        |  |                          



45