<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549


                                   FORM 10-Q



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


For the Quarter Ended March 31, 1999              Commission File Number 1-14516



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



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


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


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



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

                         Yes       X              No __
                                 -----                 

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding
as of May 12, 1999, was 37,898,320 and the number of outstanding Participating
Cumulative Redeemable Preferred Shares of Beneficial Interest, Series A, was
3,773,585.
<PAGE>
 
PRENTISS PROPERIES TRUST


                                     INDEX
                                     -----
<TABLE>
<CAPTION>

PART I:   FINANCIAL INFORMATION                                                    PAGE NUMBER
                                                                                   -----------
<S>                                                                                <C>
          Item 1.  Financial Statements
            
                   Consolidated Balance Sheets of Prentiss Properties
                   Trust at March 31, 1999 (unaudited) and December 31, 1998                4
                                                                                      
                   Consolidated Statements of Income of Prentiss Properties           
                   Trust for the three month periods ended March 31, 1999            
                   and 1998 (unaudited)                                                     5  
                                                                                      
                   Consolidated Statements of Cash Flows of Prentiss                  
                   Properties Trust for the three month periods ended March          
                   31, 1999 and 1998 (unaudited)                                            6   
                                                                                     
                   Notes to Consolidated Financial Statements                            7-13
                                                                                      
          Item 2.  Management's Discussion and Analysis of Financial                 
                   Condition and Results of Operations                                  14-23
                                                                                      
          Item 3.  Quantitative and Qualitative Disclosures about Market Risk           23-24 
                                                                                       
PART II:  OTHER INFORMATION                                                           
                                                                                            
          Item 6.   Exhibits and Reports on Form 8-K                                    25-26    
          
SIGNATURE                                                                                  27
</TABLE>

                                       2
<PAGE>
 
                          FORWARD-LOOKING STATEMENTS

     This Form 10-Q and the documents incorporated by reference herein contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").  When used in
this Form    10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to the
Company's management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company.  These
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including, but not limited to, risks, uncertainties and assumptions
related to the following:

<TABLE>
<S>                                                      <C> 
 .  The geographic concentration of our properties;       .  Conflicts of interest;

 .  The Company's real estate acquisition,                .  Change in our investment, financing and borrowing
   redevelopment, development and construction              policies without shareholder approval;
   activities;
 .  Operating performance of properties;                  .  The Company's dependence on key personnel;

 .  The Company's incurrence of debt;                     .  The Company's third-party property management,
                                                            leasing, development and construction business and
                                                            related services; and

 .  Limited ability of shareholders to effect a change    .  Effect of shares available for future sale on price
   of control;                                              of common shares.

 .  The Company's failure to qualify as a Real Estate
   Investment Trust ("REIT");
</TABLE>

     Should on or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the Company's current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions, relating to the
Company's 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 in the Company's Form 10-K, filed on March 29,
1999, under the caption "Risk Factors".



                                    PART I
                             FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

                                       3
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                          CONSOLIDATED BALANCE SHEETS

                   (dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                  MARCH 31,            DECEMBER 31,
                                                                                    1999                  1998
                                                                            --------------------  --------------------
                                                                                (UNAUDITED)
                                                        ASSETS
<S>                                                                         <C>                   <C>
Real estate.....................................................                  $1,829,161            $1,810,735   
       Less: accumulated depreciation...........................                     (70,678)              (61,232)   
                                                                                  ----------            ----------   
                                                                                   1,758,483             1,749,503   
                                                                                                                     
Deferred charges and other assets, net..........................                      82,652                74,560   
Receivables, net................................................                      20,578                20,484   
Cash and cash equivalents.......................................                      17,151                 5,523   
Escrowed cash...................................................                       3,280                 8,172   
Other receivables (affiliates)..................................                       3,687                 2,245   
Investments in joint ventures and unconsolidated subsidiary.....                      18,609                10,658   
                                                                                  ----------            ----------   
     Total assets...............................................                  $1,904,440            $1,871,145   
                                                                                  ==========            ==========    
 
                     LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:                                                                
 Debt on real estate............................................                  $  871,777            $  800,263 
 Accounts payable and other liabilities.........................                      51,715                62,410 
 Distributions payable..........................................                      19,316                17,774 
                                                                                  ----------            ----------    
                                                                                                
      Total liabilities.........................................                     942,808               880,447
                                                                                  ----------            ----------
 
Minority interest in operating partnership......................                     128,437               128,775
                                                                                  ----------            ----------
Minority interest in real estate partnerships...................                       1,380                 1,345
                                                                                  ----------            ----------
Commitments and contingencies
 
Shareholders' equity:
 Preferred shares $.01 par value, 20,000,000
  shares authorized, 3,773,585 shares issued and
  outstanding...................................................                     100,000               100,000 
 Common shares $.01 par value, 100,000,000 shares                                       
  authorized, 39,955,395 (includes 2,098,800 in treasury)
  and 39,930,288 (includes 998,800 in treasury)
  shares issued and outstanding at March 31, 1999
  and December 31, 1998, respectively...........................                         400                   399 
 Additional paid-in capital.....................................                     787,746               787,193 
 Distributions in excess of accumulated earnings................                      (3,095)               (3,700) 
 Common shares in treasury, at cost, 2,098,800                                        
   and 998,800 at March 31, 1999 and
   December 31, 1998, respectively..............................                     (53,236)              (23,314)
                                                                                  ----------            ---------- 
                                                                                                                      
   Total shareholders' equity...................................                     831,815               860,578
                                                                                  ----------            ----------
   Total liabilities and shareholders' equity...................                  $1,904,440            $1,871,145
                                                                                  ==========            ==========
</TABLE>

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

                                       4
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)
                     (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                         THREE MONTHS             THREE MONTHS
                                                                                            ENDED                    ENDED
                                                                                        MARCH 31, 1999           MARCH 31, 1998
                                                                                   ------------------------  ----------------------
<S>                                                                                <C>                       <C>
Revenues:
  Rental income.............................................................                  $70,960                 $49,965       
  Mortgage interest.........................................................                        -                     960       
  Management fees...........................................................                      169                     262       
  Development, leasing, sale and other fees.................................                      263                     186       
                                                                                              -------                 -------       
      Total revenues........................................................                   71,392                  51,373       
                                                                                              -------                 -------       

Expenses:                                                                                                                           
  Property operating and maintenance........................................                   16,080                  11,496       
  Real estate taxes.........................................................                    8,586                   5,275       
  General and administrative and personnel costs, net.......................                    2,100                   1,872       
  Interest expense..........................................................                   13,494                   8,146       
  Amortization of deferred financing costs..................................                      249                     196       
  Depreciation and amortization.............................................                   12,144                   8,515       
                                                                                              -------                 -------       
      Total expenses........................................................                   52,653                  35,500       
                                                                                              -------                 -------       

Equity in income of joint ventures and unconsolidated subsidiary............                    1,142                   1,246       
                                                                                              -------                 -------       

Income before gains on sale, minority interest, and extraordinary items.....                   19,881                  17,119       
Gains on sale...............................................................                       96                   2,555       
Minority interest...........................................................                   (2,720)                 (1,270)      
                                                                                              -------                 -------       

Income before extraordinary items...........................................                   17,257                  18,404       
Extraordinary items.........................................................                                           (8,908)      
                                                                                              -------                 -------       

Net income..................................................................                  $17,257                 $ 9,496       
Preferred dividends.........................................................                   (1,509)                 (1,136)      
                                                                                              -------                 -------       
Net income applicable to common shareholders................................                  $15,748                 $ 8,360       
                                                                                              =======                 =======       

Net income per common share before extraordinary items - basic..............                  $  0.41                 $  0.47       

Extraordinary items.........................................................                        -                   (0.24)      
                                                                                              -------                 -------       

Net income per common share - basic                                                           $  0.41                 $  0.23       
                                                                                              -------                 -------       

Weighted average number of common shares outstanding - basic................                   38,101                  36,716       
                                                                                              =======                 =======       

Net income per common share before                                                                                                  
   extraordinary items - diluted............................................                  $  0.41                 $  0.47       

Extraordinary items.........................................................                        -                   (0.24)      
                                                                                              -------                 -------       

Net income per common share - diluted.......................................                  $  0.41                 $  0.23       
                                                                                              =======                 =======       

Weighted average number of common shares and                                                                                        
   common share equivalents outstanding - diluted...........................                   41,891                  37,105       
                                                                                              =======                 ======= 
</TABLE>

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

                                       5
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                            (dollars in thousands)


<TABLE>
<CAPTION>
                                                                                         THREE MONTHS                THREE MONTHS
                                                                                             ENDED                       ENDED
                                                                                        MARCH 31, 1999              MARCH 31, 1998
                                                                                    -----------------------       ------------------

<S>                                                                                 <C>                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income..............................................................               $  17,257                   $   9,496 
                                                                                                                               
  Adjustments to reconcile net income to net cash provided by                                                                  
  operating activities:                                                                                                        
       Minority interest.....................................................                2,720                       1,270 
       Extraordinary items...................................................                    -                       8,908 
       Gains on sale.........................................................                  (96)                     (2,555)
       Provision for doubtful accounts.......................................                   20                         495 
       Depreciation and amortization.........................................               12,144                       8,515 
       Amortization of deferred financing costs..............................                  249                         196 
       Equity in income of joint ventures and unconsolidated subsidiary......               (1,142)                     (1,246)
       Non-cash compensation.................................................                   25                          13 
  Changes in assets and liabilities:                                                                                           
       Deferred charges and other assets.....................................               (1,108)                       (155)
       Receivables...........................................................                 (114)                     (4,018)
       Escrowed cash.........................................................                1,228                        (775)
       Other receivables (affiliates)........................................               (1,442)                      1,710 
       Accounts payable and other liabilities................................              (11,062)                     (4,782)
                                                                                         ---------                   --------- 
                                                                                                                               
  Net cash provided by operating activities                                                 18,679                      17,072 
                                                                                         ---------                   --------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                          
       Purchase and development of real estate...............................              (21,535)                   (149,877)
       Investment in real estate.............................................               (9,870)                    (26,003)
       Investment in joint ventures..........................................               (8,228)                            
       Investment in mortgage note receivable................................                                              345 
       Proceeds from sale of real estate.....................................                3,207                       8,092 
       Distributions received from joint ventures and unconsolidated                         1,356                         362 
       subsidiary............................................................                                                  
                                                                                         ---------                   --------- 
       Net cash used in investing activities.................................              (35,070)                   (167,081)
                                                                                         ---------                   --------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                          
       Net proceeds from sale of common shares...............................                  536                     106,995 
       Net proceeds from sale of preferred shares............................                                           25,000  
       Purchase of treasury shares...........................................              (26,257)                          - 
       Distributions paid to limited partners................................                 (692)                     (1,480)
       Distributions paid to common shareholders.............................              (15,573)                    (13,277)
       Distributions paid to preferred shareholders..........................               (1,509)                        (25)
       Proceeds from debt on real estate.....................................              276,343                     207,091 
       Repayments of debt on real estate.....................................             (204,829)                   (171,009)
                                                                                         ---------                   --------- 
       Net cash provided by financing activities.............................               28,019                     153,295 
                                                                                         ---------                   --------- 
                                                                                                                               
       Net change in cash and cash equivalents...............................               11,628                       3,286 
       Cash and cash equivalents, beginning of period........................                5,523                       7,075 
                                                                                         ---------                   --------- 
       Cash and cash equivalents, end of period..............................           $   17,151                   $  10,361 
                                                                                         =========                   ========= 
SUPPLEMENTAL CASH FLOW INFORMATION:                                                                                            
       Cash paid for interest................................................           $   14,406                   $   8,227 
                                                                                         =========                   ========= 
</TABLE>

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

                                       6
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


1.   THE ORGANIZATION

     Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The Company is self-
administered in that it provides its own administrative services, such as
accounting, tax and legal, internally through its own employees. The Company is
self-managed in that it internally provides all the management and maintenance
services that its properties require through its own employees such as property
managers, leasing professionals and engineers. The Company operates principally
through Prentiss Properties Acquisition Partners, L.P. and its subsidiaries (the
"Operating Partnership") and Prentiss Properties Limited, Inc. (the
"Manager")(collectively referred to herein as the "Company").  As of March 31,
1999 the Company owned interests in a diversified portfolio of 234 primarily
suburban Class A office and suburban industrial properties containing
approximately 21.2 million net rentable square feet. The properties consist of
129 office buildings (the "Office Properties") containing approximately 14.1
million net rentable square feet and 105 industrial buildings (the "Industrial
Properties" and together with the Office Properties, the "Properties")
containing approximately 7.1 million net rentable square feet. The Properties
include 11 Properties containing 1.6 million square feet that are in various
stages of development or have been recently developed by the Company and are in
various stages of lease-up (the "Development Properties"). The Development
Properties upon completion will include 1.3 million square feet of office space
and 262,000 square feet of industrial space. As of March 31, 1999, the Office
Properties and Industrial Properties, exclusive of the Development Properties,
were approximately 94% leased to approximately 1,250 tenants and approximately
98% leased to approximately 300 tenants, respectively. In addition to managing
the Properties that the Company owns or has ownership interest in, the Company
manages approximately 27.1 million net rentable square feet in office,
industrial and other properties that are owned by third parties.

     The Properties

     During the three months ended March 31, 1999, the Company acquired a 20%
equity interest in Burnett Plaza Associates ("Burnett Plaza"), a joint venture
owning one Class A Office Property containing approximately 1.0 million square
feet. The Company accounts for its interest in Burnett Plaza using the equity
method of accounting; and therefore, the equity investment is included in the
Company's Consolidated Balance Sheet in the line item "Investments in Joint
Ventures and Unconsolidated Subsidiary." See further discussion of Investments
in Joint Ventures and Unconsolidated Subsidiary in Note 6.

     Common Shares Repurchased

     On February 2, 1998, the Company closed a direct placement of 1,100,000
common shares to an affiliate of Union Bank of Switzerland ("UBS") for a gross
consideration of $29.7 million, or $27.00 per share. The sales to UBS and its
affiliates were exempt from registration under Section 4(2) of the Securities
Act. In a related transaction, the Company entered into a forward stock contract
with UBS which provided that during the first year after the closing of the
direct placement, the Company would have the right to consummate a share
settlement with UBS based on the then market price for the common shares. On
January 21, 1999, the Company reacquired all of the 1,100,000 common shares for
approximately $30.0 million, including $3.7 million of previously escrowed cash
and proceeds from borrowings under the Company's line of credit.

2.   BASIS OF PRESENTATION

     The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the disclosures required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results for the three months ended March 31, 1999 are not
necessarily indicative of the results to be obtained for the full fiscal year.
These financial statements should be read in conjunction with the December 31,
1998 audited financial statements and notes thereto of the Company, included in
its annual report on Form 10-K for the fiscal year ended December 31, 1998.

                                       7
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

3.   REAL ESTATE

     On March 30, 1999, the Company sold a 12.6 acre parcel of land in the
Chicago, Illinois, area for total proceeds of $3.2 million resulting in a gain
on sale of approximately $96,000.
 
4    DEBT ON REAL ESTATE

     At March 31, 1999, the Company had debt on real estate of $871.8 million,
excluding the Company's proportionate share of debt on its 50% and 20% equity
investments in the joint ventures owning the Broadmoor Austin Properties (as
defined herein) and the Burnett Plaza Property, respectively.

     The Company's mortgage debt transactions for the three months ended March
31, 1999 are summarized in the table below:
 
<TABLE>
<CAPTION>
                                                                                          (in thousands)
     <S>                                                                                      <C>
     DEBT ON REAL ESTATE AT DECEMBER 31, 1998.........................                        $ 800,263
                                                                             
     ACTIVITY FOR THE THREE MONTHS ENDING MARCH 31, 1999:                    
        Property mortgage loans completed.............................                           85,500
        Net borrowings under the line of credit.......................                          105,300
        Construction loan draws.......................................                            1,226
        Mortgage loans repaid.........................................                         (120,000)
        Other activity................................................                             (512)
                                                                                              ---------
     DEBT ON REAL ESTATE AT MARCH 31, 1999............................                        $ 871,777
                                                                                              =========
</TABLE>
 
     During the period, the Company closed three property mortgage loans with
two lenders totaling in the aggregate $85.5 million. On January 6, 1999, the
Company completed two 10-year non-recourse property mortgage loans with an
affiliate of Lehman Brothers. The loans totaling $26.0 million and $38.0 million
bear interest at 7.02% per annum and are collateralized by the Company's
Corporetum Office Campus and Natomas Corporate Center Properties, respectively.
On March 9, 1999, the Company completed a $21.5 million, 10-year non-recourse
mortgage loan with John Hancock Mutual Life Insurance Company. The loan bears
interest at 7.25% per annum and is collaterallized by the 7101 Wisconsin Avenue
Property.
 
     During the period, the Company had net borrowings under its $300.0 million
line of credit (the "Line of Credit") of $105.3 million resulting in an
outstanding balance of $227.3 million at March 31, 1999. The Company's Line of
Credit bears interest at LIBOR plus 137.5 basis points and matures January 2,
2001.

     On January 4, 1999, the Company repaid a $120.0 million loan with Lehman
Brothers. The loan, which was repaid with borrowings under the Company's Line of
Credit was collateralized by the Corporetum Office Campus, Natomas Corporate
Center, Seven Mile Crossing and The Academy Properties and bore interest at
LIBOR plus 125 basis points.

     The Company's debt balance at March 31, 1999, excluding its share of
unconsolidated joint venture debt, was $871.8 million. Of this amount, $516.9
million was fixed rate, non-recourse, long-term mortgages. The remaining $354.9
million was floating rate debt, of which $110.0 million was hedged which
effectively fixed the interest rate until September 2004. Future scheduled
principal repayments of debt on real estate are as follows:

                                       8
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                          (in thousands)
          <S>                                             <C> 
          1999.......................................       $  2,141         
          2000.......................................         22,622         
          2001.......................................        246,423         
          2002.......................................        105,042         
          2003.......................................         63,963         
          Thereafter.................................        431,586         
                                                            --------         
                                                            $871,777/(A)/
</TABLE>

        /(A)/  The amount shown excludes the Company's 50% and 20% share of the
               mortgage indebtedness which is collateralized by the Broadmoor
               Austin Properties and the Burnett Plaza Property, respectively.

5.   DISTRIBUTION

     On March 17, 1999, the Company declared a cash distribution for the first
quarter of 1999 in the amount of $.40 per share, payable on April 16, 1999 to
common shareholders of record on March 31, 1999.  Additionally, it was
determined that a distribution of $.40 per unit would be made to the partners of
the Operating Partnership, and the holders of the Company's Series A Convertible
Preferred Shares (the "Series A Convertible Preferred Shares"). The total
distributions were paid on April 16, 1999, totaling approximately $17.3 million.
In addition, a quarterly distribution equal to an annualized 8.3% of the face
amount of the Series B Perpetual Preferred Units (the "Series B Perpetual
Preferred Units"), or $2.0 million, was declared on March 31, 1999 and paid on
April 1, 1999.

6.   INVESTMENT IN JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARY

     Included in Investments in Joint Ventures and Unconsolidated Subsidiary are
the Company's investment in Broadmoor Austin Associates ("Broadmoor Austin"),
the Company's investment in the recently acquired Burnett Plaza and the
Company's investment in the Manager. The Company accounts for its 50%, 20% and
95% investments in Broadmoor Austin, Burnett Plaza and the Manager,
respectively, using the equity method of accounting, and thus reports its share
of income and losses based on its ownership interest in the respective entities.
At March 31, 1999, the carrying value of the Company's interest in Broadmoor
Austin, Burnett Plaza and the Manager totaled $6.4 million, $8.2 million and
$4.0 million, respectively. The difference between the carrying value of the
Company's interest in Broadmoor Austin and the book value of the underlying
equity is being amortized over 40 years.

   The following is summarized financial information for 100% of Broadmoor
   Austin at March 31, 1999 and December 31, 1998 and for the three months ended
   March 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                     MARCH 31, 1999           DEC. 31, 1998
                                                    ---------------           -------------
BALANCE SHEET:                                                   (in thousands)
--------------
<S>                                                 <C>                       <C>
   Real estate and deferred charges, net......         $106,929                 $108,013
   Total assets...............................         $121,402                 $123,255
   Mortgage note payable......................         $154,000                 $154,000
   Venturers' deficit.........................         $(33,342)                $(32,915)
</TABLE>

<TABLE> 
<CAPTION>
                                                      THREE MONTHS           THREE MONTHS 
                                                         ENDED                  ENDED
                                                     MARCH 31, 1999           MARCH 31, 1998
                                                     --------------           --------------
                                                                 (in thousands)
<S>                                                  <C>                      <C> 
INCOME STATEMENT:
-----------------
Rental and other income........................        $4,947                   $  4,879
Interest expense...............................        $2,710                   $  3,358
Depreciation and amortization..................        $1,064                   $  1,064
Extraordinary item.............................        $    -                   $ 12,900
Net income (loss)..............................        $1,002                   $(12,642)
</TABLE>

                                       9
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

   The Company acquired a 20% equity interest in the joint venture owning the
   Burnett Plaza Property at the close of the first quarter 1999. The following
   is summarized financial information for 100% of Burnett Plaza at March 31,
   1999:

<TABLE>
<CAPTION>
                                                      MARCH 31, 1999
                                                      --------------
BALANCE SHEET:                                        (in thousands)
--------------
<S>                                                   <C> 
   Real estate and deferred charges, net.......         $84,673
   Total assets................................         $89,837
   Mortgage note payable.......................         $47,000
   Venturers' equity...........................         $41,187
</TABLE>

   The following is summarized financial information for 100% of the Manager at
   March 31, 1999 and December 31, 1998 and for the three months ended March 31,
   1999 and 1998:

<TABLE>
<CAPTION>
                                                      MARCH 31, 1999          DEC. 31, 1998
                                                      --------------          ------------
BALANCE SHEET:                                                  (in thousands)
--------------
<S>                                                   <C>                     <C>
Total assets...................................         $14,898                 $15,326
Total liabilities..............................         $10,691                 $11,119
Owners' equity.................................         $ 4,207                 $ 4,207
</TABLE>

<TABLE> 
<CAPTION>
                                                      THREE MONTHS            THREE MONTHS
                                                         ENDED                   ENDED
                                                      MARCH 31, 1999          MARCH 31, 1998
                                                      --------------          -------------
INCOME STATEMENT:                                               (in thousands)
-----------------
<S>                                                   <C>                     <C>
Fee income....................................          $4,864                  $7,448
Personnel costs, net..........................          $4,253                  $6,141
Net income....................................          $  641                  $1,117
</TABLE>

7.   SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

     During the three months ended March 31, 1999, the Company declared cash
distributions totaling $17.3 million payable to holders of common shares,
Operating Partnership units ("Units") and Series A Convertible Preferred Shares.
The distributions were paid April 16, 1999. In addition, a distribution totaling
$2.0 million was declared in March 1999 payable to holders of the Company's
Series B Perpetual Preferred Units.  The distribution was paid on April 1, 1999.

     On January 21, 1999, pursuant to provisions of a forward stock contract,
the Company reacquired 1,100,000 common shares from UBS. $3.7 million of the
proceeds used to reacquire the common shares were previously escrowed funds
placed as collateral on the forward stock contract.

8.   IMPACT OF THE YEAR 2000 ISSUE
 
     The Year 2000 ("Y2K") compliance problem is the result of computer programs
designed to use two digit rather than four digit years.  Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00.  This could be
interpreted as either 1900 or 2000.  Systems that have Y2K-related issues, may
perceive time to have reverted back 100 years.  Systems, equipment and software
with exposure to Y2K-related problems exist not only in computerized information
systems ("Information Systems") but also in building operating systems such as
elevators, alarm systems, energy management systems, phone systems, and numerous
other systems and equipment (the "Non-Information Technology Systems")
(collectively, the "Systems").  Failure to adequately identify and correct Y2K-
related problems could result in a Systems failure or malfunction with potential
adverse effects including personal injury, property damage, and disruption of
operations.  Any or all of these failures could materially and adversely affect
the Company's business, financial condition, or results of operations.

     Due to the exposure and potential liabilities inherent in both the Systems
used internally by the Company ("Internal Systems") and those Systems used by
third parties to conduct business with the Company ("Third-Party Systems"), in
September 1997, the Company created the Y2K Committee (the "Y2K Committee")
headed by the Vice President of Information Systems and co-chaired by the Vice
President of National Property Operations.  Due 

                                       10
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

to the national presence of the Company, the Y2K Committee appointed
approximately 85 employees (the "Y2K Coordinators") designated as either Y2K
property coordinators or Y2K corporate office coordinators. The purpose of the
Y2K Committee was to develop a plan to assess and mitigate the Company's
exposure to potential Y2K-related problems (the "Company's Y2K Plan"). In order
to implement the Company's Y2K Plan in a timely and uniform manner, during
August 1998 the Y2K Committee held classes to educate the Y2K Coordinators on
the steps to be taken to implement the Y2K Plan. Due to the risks associated
with inadequate assessments and remediations of the Systems, the Company engaged
various independent sources to assist in the review of the Company's Y2K Plan,
including:

 .  An embedded systems specialist to focus on building Systems
 .  A Big 5 Accounting firm to focus on financial Systems
 .  A legal firm specializing in Y2K issues
 .  Computer Sciences Corporation ("CSC") to perform an overall review

Estimate of Financial Impact

     The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations on the financial statements of the Company.
The total costs associated with required modifications to become Y2K compliant
are not expected to be material to the Company's financial position. The Company
currently estimates the total Y2K readiness costs are between $500,000 and
$600,000. Such costs are segregated into three categories, along with the timing
of the estimated expenses as follows:

<TABLE>
<CAPTION>
CATEGORY                               LOW          HIGH        04/98       01/99       02/99       03/99        04/99
                                   ------------  -----------  ----------  ----------  ----------  ----------  -----------
<S>                                <C>           <C>          <C>         <C>         <C>         <C>         <C>
Non-Information Technology
 Systems                               $400,000     $475,000          7%         71%         14%          7%           1%
Information Systems                      40,000       50,000         20%         70%         10%
Y2K Committee                            60,000       75,000         80%         10%          5%          5%
                                       --------     --------
                    Total              $500,000     $600,000
                                       ========     ========
</TABLE>

     These costs are net of the Company's personnel costs that are considered to
be part of normal operating costs.  A significant portion of the Non-Information
Technology Systems costs are expected to be capitalized and recovered from
tenants through building operations, while the balance will be expensed in the
period incurred.  Much of the Information Systems costs are version upgrades
that will be expensed as incurred.  The Y2K Committee costs consist largely of
consulting charges that are expensed as incurred.

     The Company's readiness program is an ongoing process, and the estimates of
costs and completion dates for the various categories described above are
subject to material change.

Contingency Plans

     The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K issues.  The Company has
substantially completed the contingency plans for assets owned as of March 31,
1999.  These contingency plans range from manual overrides, to alternative
processes such as building lock downs in the event of a long-term power failure.
Fortunately, most buildings currently have contingency plans in place for
natural disasters such as earthquakes, floods, ice storms, and the like, which
provide a basis for the Y2K contingency plans.  These plans may also include
short-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel, and the orderly shut down of the
buildings on December 31, 1999 and January 1, 2000 in order to perform tests of
critical Systems.

9.   RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
No. 133"). FAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities.  It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.  FAS 

                                       11
<PAGE>
 
                          PRENTISS PROPERTIES TRUST 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company believes that upon implementation, FAS 133 will not
have a material impact on the financial statements of the Company.

10.  SEGMENT INFORMATION

     The Company's primary business is the ownership and operation of office and
industrial Properties throughout the United States. The Company has determined
that its reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by geographic region. The
Company's reportable segments are the Company's six regions which include (1)
Mid-Atlantic; (2) Midwest; (3) Northeast; (4) Southeast; (5) Southwest; and (6)
West.

     The table below presents information about net income/loss and segment
assets used by the chief operating decision maker of the Company as of and for
the three months ended March 31, 1999:

<TABLE>
<CAPTION>
(in thousands)                                                                                              CORPORATE               
                                                                                                TOTAL     NOT ALLOCABLE CONSOLIDATED
                            MID-ATLANTIC   MIDWEST  NORTHEAST  SOUTHEAST  SOUTHWEST    WEST     SEGMENTS   TO SEGMENTS      TOTAL   
                            ------------   -------  ---------  ---------  ---------  --------  ---------- -------------     -----   
<S>                         <C>           <C>       <C>        <C>        <C>        <C>       <C>        <C>           <C>      
Revenues                        $ 14,121  $ 14,166   $  6,369    $ 3,098   $ 16,517  $ 16,935  $   71,206       $    186  $   71,392
                                ========  ========   ========    =======   ========  ========  ==========       ========  =========
                                                                                                                                   
Income before extraordinary                                                                                                        
    Items                       $  7,527  $  6,680   $  3,158    $   799   $  7,269  $  8,509  $   34,302       $(17,045) $   17,257
                                ========  ========   ========    =======   ========  ========  ==========       ========  ==========

Assets                          $374,703  $355,120   $201,607    $70,641   $425,452  $442,567  $1,870,090       $ 34,350  $1,904,440
                                ========  ========   ========    =======   ========  ========  ==========       ========  ==========
</TABLE>

     The Company has not disclosed prior years' segment data on a comparative
basis, because management found it impracticable to obtain the comparative data
for prior years.

                                       12
<PAGE>
 
                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

11.  EARNINGS PER SHARE

  The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS No. 128").
FAS No. 128 requires a dual presentation of basic and diluted Earnings per Share
on the face of the income statements.  Additionally, FAS No. 128 requires a
reconciliation of the numerator and denominator used in computing basic and
diluted Earnings per Share.

<TABLE>
<CAPTION>
Reconciliation of Earnings per Share                   THREE MONTHS                     THREE MONTHS
 Numerator                                                ENDED                            ENDED
                                                      MARCH 31, 1999                   MARCH 31, 1998
                                                      --------------                   --------------
                                                        (in thousands, except per share data)
<S>                                                   <C>                              <C>
Net income..........................................        $17,257                         $ 9,496
Preferred dividends.................................         (1,509)                         (1,136)
                                                            -------                         -------
Net income available to common shareholders.........        $15,748                         $ 8,360
                                                            =======                         =======

Reconciliation of Earnings per Share Denominator
 
Weighted average common shares outstanding..........         38,101                          36,716
                                                            =======                         =======

Basic Earnings per Share............................        $  0.41                         $  0.23
                                                            =======                         =======

Dilutive Effect of Common Share Equivalents

Dilutive options....................................             16                             389
Dilutive preferred shares...........................          3,774                               -
Weighted average common shares outstanding..........         38,101                          36,716
                                                            -------                         -------
Weighted average common shares and common share     
  equivalents......................................          41,891                          37,105
                                                            =======                         =======

Diluted Earnings per Share..........................        $  0.41                         $  0.23
                                                            =======                         =======
</TABLE>

12.  SUBSEQUENT EVENTS

     On April 16, 1999 the Company closed a $23.5 million, 12-year non-recourse
mortgage with Metropolitan Life Insurance Company. The loan has an interest rate
of 7.00% and is collateralized by the recently completed 3130 Fairview Park
Drive Office Property in the Northern Virginia, area.

                                       13
<PAGE>
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

OVERVIEW

     Prentiss Properties Trust is a Maryland Real Estate Investment Trust (the
"REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The REIT operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager" and together with the REIT and the Operating Partnership, the
"Company"). The Company is self-administered in that it provides its own
administrative services, such as accounting, tax and legal, internally through
its own employees. The Company is self-managed in that it internally provides
all the management and maintenance services that its properties require through
its own employees such as property managers, leasing professionals and
engineers.

     At December 31, 1998, the Company owned 233 properties consisting of 128
office and 105 industrial properties containing in the aggregate 21.0 million
net rentable square feet. During the three months ended March 31, 1999, the
Company acquired a 20% equity interest in Burnett Plaza Associates ("Burnett
Plaza"), a joint venture owning one Class A office property containing
approximately 1.0 million square feet. Inclusive of the Company's proportionate
share of the net rentable square feet of Burnett Plaza, at March 31, 1999, the
Company had 234 properties (the "Properties") containing 21.2 million net
retable square feet. The Company's Properties include 11 Properties containing
1.6 million square feet that are in various stages of development or have been
recently developed by the Company and are in various stages of lease-up.

RESULTS OF OPERATIONS

     The results of operations for the three month periods ended March 31, 1999
and 1998 include the respective operations of the Company. During the period
from January 1, 1998 through March 31, 1999, the Company had significant
property transactions including 85 Property acquisitions and 29 property
dispositions. Consequently, the comparison of the periods provides only limited
information regarding the operations of the Company as currently constituted.

Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
March 31, 1998

     General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the three months
ended March 31, 1999 to the three months ended March 31, 1998, the following
should be considered:

     .    126  Properties that consolidated into the Company's results of
               operations were owned and fully operational at January 1, 1998
               and remained in the Company's portfolio at March 31, 1999;
     .      8  Properties, including the Broadmoor Austin Properties and the
               recently acquired Burnett Plaza Property, are accounted for using
               the equity method of accounting;
     .     85  Properties, including Burnett Plaza, were acquired subsequent to
               January 1, 1998 and remained in the Company's portfolio at March
               31, 1999;
     .     29  properties were sold subsequent to January 1, 1998; 
     .      1  Property, the World Savings Center Property, the economics of
               which were owned during the comparative periods, was converted to
               real estate from a mortgage note receivable in December 1998;
     .      4  Properties that were developed by the Company became operational
               subsequent to January 1, 1998 and remained in the portfolio at
               March 31, 1999; and
     .     11 Properties were in various stages of development or in various
               stages of lease-up at March 31, 1999.

     Rental Revenue. Rental revenues increased by $21.0 million, or 42.0%, to
$71.0 million from $50.0 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Rental income
for the 126 Properties that were owned and fully operational at January 1, 1998
and remained in the Company's portfolio at March 31, 1999 increased by $652,000,
or 1.5%, from $43.3 million for the three months ended March 31, 1998 to $43.9
million for 

                                       14
<PAGE>
 
the three months ended March 31, 1999. The increase for such 126 Properties was
attributable to the Company's six regions as follows:

     .    20   Properties in the Mid-Atlantic Region increased $685,000, or
               7.2%;
     .    22   Properties in the Midwest Region increased $203,000, or 2.4%;
     .    15   Properties in the Northeast Region increased $221,000, or 4.9%;
     .    10   Properties in the Southeast Region decreased $394,000, or 13.2%;
     .    20   Properties in the Southwest Region decreased $228,000, or 2.3%;
               and
     .    39   Properties in the West Region increased $165,000, or 2.2%.


     Property Operating and Maintenance. Property operating and maintenance
increased by $4.6 million, or 39.9%, to $16.1 million from $11.5 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1998, offset by properties that were sold
subsequent to January 1998. Property operating and maintenance for the 126
Properties that were owned and fully operational at January 1, 1998 and remained
in the Company's portfolio at March 31, 1999 increased by $202,000, or 2.0%,
from $10.1 million for the three months ended March 31, 1998 to $10.3 million
for the three months ended March 31, 1999. The increase for such 126 Properties
was attributable to the Company's six regions as follows:

     .    20   Properties in the Mid-Atlantic Region increased $210,000, or
               9.4%;
     .    22   Properties in the Midwest Region increased $341,000, or 22.8%;
     .    15   Properties in the Northeast Region increased $72,000, or 8.3%;
     .    10   Properties in the Southeast Region decreased $149,000, or 12.9%;
     .    20   Properties in the Southwest Region decreased $53,000, or 2.0%;
               and
     .    39   Properties in the West Region decreased $219,000, or 13.1%.


     Real Estate Taxes. Real estate taxes increased by $3.3 million, or 62.8%,
to $8.6 million from $5.3 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Real estate
taxes for the 126 Properties that were owned and fully operational at January 1,
1998, and remained in the Company's portfolio at March 31, 1999 increased by
$564,000, or 12.3%, from $4.6 million for the three months ended March 31, 1998,
to $5.1 million for the three months ended March 31, 1999. The increase for such
126 Properties was attributable to the Company's six regions as follows:
 
     .    20   Properties in the Mid-Atlantic Region increased $90,000, or
               11.9%;
     .    22   Properties in the Midwest Region increased $98,000, or 8.0%;
     .    15   Properties in the Northeast Region decreased $1,000, or .3%;
     .    10   Properties in the Southeast Region increased $13,000, or 7.0%;
     .    20   Properties in the Southwest Region increased $379,000, or 27.9%;
               and
     .    39   Properties in the West Region decreased $15,000, or 2.2%.


     Interest Expense. Interest expense increased by $5.3 million, or 65.7%, to
$13.5 million from $8.2 million primarily as a result of the increase of the
debt on real estate from $420.0 million at January 1, 1998 to $871.8 million at
March 31, 1999. The increase in debt on real estate during the period resulted
primarily from the significant property transactions occurring between January
1, 1998 and March 31, 1999.

     Depreciation and Amortization. Depreciation and amortization increased by
$3.6 million, or 42.6%, to $12.1 million from $8.5 million primarily as a result
of Properties acquired or development Properties becoming operational subsequent
to January 1, 1998, offset by properties that were sold subsequent to January 1,
1998. Depreciation and amortization for the 126 Properties that were owned and
fully operational at January 1, 1998 and remained in the Company's portfolio at
March 31, 1999, increased by $635,000, or 9.1%, from $7.0 million for the three
months ended March 31, 1998, to $7.6 million for the three months ended March
31, 1999. The increase for such 126 Properties was attributable to the Company's
six regions as follows:

                                       15
<PAGE>
 
     .    20   Properties in the Mid-Atlantic Region increased $115,000, or
               7.1%;
     .    22   Properties in the Midwest Region increased $51,000, or 3.7%;
     .    15   Properties in the Northeast Region increased $84,000, or 11.6%;
     .    10   Properties in the Southeast Region decreased $51,000, or 7.8%;
     .    20   Properties in the Southwest Region increased $229,000, or 15.5%;
               and
     .    39   Properties in the West Region increased $206,000, or 18.4%.


     Equity in Income of Joint Venture and Unconsolidated Subsidiary. Equity in
income of joint venture and unconsolidated subsidiary decreased from $1.2
million for the three months ended March 31, 1998 to $1.1 million for the three
months ended March 31, 1999. The net decrease was attributable to a decrease of
$476,000 in the Company's proportionate share of net income from the Manager,
offset by an increase of $372,000 of the Company's proportionate share of the
net income, before extraordinary items, of the Broadmoor Austin Properties.

     Gains on Sale. Gains on sale decreased by $2.5 million, to $96,000, from
$2.6 million. During the three months ended March 31, 1998, the Company sold 1
Property containing 118,000 square feet. During the three months ended March 31,
1999, the Company sold a 12.6 acre parcel of land in the Chicago, Illinois area.
It is the Company's strategy to obtain the maximum value from each of its
Properties, which is occasionally achieved through the sale of a property.

     Minority Interest. Minority interest increased by $1.5 million, or 114.2%,
from $1.3 million for the three months ended March 31, 1998, to $2.7 million for
the three months ended March 31, 1999. The increase was primarily attributable
to the issuance by the Operating Partnership of 1,900,000 Series B Perpetual
Preferred Units (the "Series B Perpetual Preferred Units") in June 1998, offset
by the conversion in February 1998 of 2,432,541 and 113,500 Operating
Partnership units ("Units") into common shares. The increase is also
attributable to the issuance of Units in conjunction with Property acquisitions
subsequent to January 1, 1998.

     Extraordinary Items. During the three months ended March 31, 1998, the
Company had extraordinary items totaling $8.9 million, resulting from two
significant transactions during 1998, including (i) the Company's recognition of
its 50% proportionate share of Broadmoor Austin's $12.9 million, or $6.45
million, of prepayment penalties and unamortized financing during the period;
and (ii) the distribution of 113,500 Operating Partnership Units by an affiliate
of the Company to certain employees of the Company resulting in a non-cash
charge to the Company of $3.1 million. The transactions were recorded net of the
minority interest holders' proportionate share of each charge totaling $406,000
and $193,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents were $17.2 million and $10.4 million at March 31,
1999 and March 31, 1998, respectively. The increase in cash and cash equivalents
is primarily a result of cash flows provided by operating and financing
activities exceeding those used in investing activities. Net cash provided by
operating activities was $18.7 million for the three months ended March 31, 1999
compared to $17.1 million for the three months ended March 31, 1998.

     Net cash used in investing activities decreased from $167.1 million for the
three months ended March 31, 1998 to $35.1 million for the three months ended
March 31, 1999.  This decrease is due primarily to a decrease in the acquisition
of real estate from 1998 to 1999.

     Net cash provided by financing activities of $28.0 million for the three
months ended March 31, 1999 decreased from $153.3 million for the three months
ended March 31, 1998. This decrease is primarily attributable to proceeds from
securities offerings, mortgage loans and other indebtedness incurred to fund the
1998 acquisitions exceeding the proceeds raised from such sources in 1999.

     As of March 31, 1999, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $958.2 million, or approximately 51.34% of total market
capitalization based on a common share price of $18.75 per common share. At May
10, 1999, the Company had outstanding total indebtedness, including its pro rata
share of joint venture debt and construction loans of approximately 972.7
million, or approximately 46.4% of total market capitalization based on a common
share price of $23.69 per common share. As of May 10, 1999, the Company had the
approximate capacity to borrow up to an 

                                       16
<PAGE>
 
additional $150.4 million under its debt limitation policy. The amount of
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's declaration of trust and bylaws, and are solely
within the discretion of the Company's board of trustees. Although it is the
Company's general policy to limit combined indebtedness plus its pro rata share
of joint venture debt and construction loans so that at the time such debt is
incurred, it does not exceed 50% of the Company's total market capitalization,
the Company views ratios such as interest coverage and fixed charge coverage as
more stable and indicative measures of its ability to meet debt obligations. For
the three months ended March 31, 1999, the Company's interest coverage (earnings
before interest, taxes and depreciation and amortization over interest expense)
and fixed charge coverage (earnings before interest, taxes and depreciation and
amortization over interest expense and perpetual preferred distributions)
totaled 3.15 and 2.79 times, respectively.

     The Company has in place a $300 million unsecured line of credit with a
group of 12 banks (the "Line of Credit").  The Line of Credit has an interest
rate on borrowings of LIBOR plus 137.5 basis points.  The Line of Credit is
unsecured and has a term of three years.  Additionally, the Company is required
to pay an average daily unused commitment fee of 20 basis points per annum if
the daily unused portion of the Line of Credit is greater than the related daily
balance outstanding.  The fee is reduced to 15 basis points per annum if the
daily unused portion is less than the daily balance outstanding. The Company had
net borrowings from the Line of Credit during the period of $105.3 million and
an outstanding balance of $227.3 million at March 31, 1999, resulting in an
available balance of $72.7 million.

     In September 1997, the Company entered into a seven-year interest rate swap
locking in cost of funds of 6.25% (before the spread over LIBOR) on $110 million
(the "Interest Rate Swap").  The Interest Rate Swap consists of two separate
agreements intended to manage the relative mix of the Company's debt between
fixed and variable rate instruments.  The Interest Rate Swap agreement modifies
a portion of the interest characteristics of the Company's variable rate debt,
effectively converting variable rate debt to fixed rate debt.  The fixed rates
to be paid, the effective fixed rate and the variable rate to be received by the
Company, are summarized in the following table:

<TABLE> 
<CAPTION> 
                                                                           SWAP RATE RECEIVED
                                                                          (VARIABLE) AT MARCH      
   NOTIONAL AMOUNT     SWAP RATE PAID (FIXED)    EFFECTIVE FIXED RATE           31, 1999              SWAP MATURITY 
   ---------------     ----------------------    --------------------      ------------------         -------------
<S>                    <C>                      <C>                       <C>                      <C>
$50 million                    6.253%                   7.628%                   4.937%            September 30, 2004
$60 million                    6.248%                   7.623%                   4.937%            September 30, 2004
</TABLE>

     The differences to be paid or received by the Company under the terms of
the Interest Rate Swap agreement are accrued as interest rates change and
recognized as an adjustment to interest expense by the Company pursuant to the
terms of the two agreements and will have a corresponding effect on its future
cash flows.  The effect of the Interest Rate Swap was recorded as an adjustment
to interest expense on the Company's Bridge Loan prior to its payoff in January
1999. Subsequent to the payoff of the Bridge Loan, the effects of the Interest
Rate Swap will be recorded as an adjustment to interest expense on the Company's
Bank Term Facility (as described in the table below).  Agreements such as these
contain a credit risk that the counterparties may be unable to meet the terms of
the agreement.  The Company minimizes that risk by evaluating the
creditworthiness of its counterparties, which is limited to major banks and
financial institutions, and does not anticipate non-performance by the
counterparties.

                                       17
<PAGE>
 
     The following table sets forth the Company's mortgage debt as of March 31,
1999:

<TABLE>
<CAPTION>
                                             CURRENT
                                             BALANCE                     INTEREST                                     ANNUAL
DESCRIPTION                                  (000S)      AMORTIZATION      RATE                 MATURITY             INTEREST
-----------                                  ------      ------------      ----                 --------             --------
<S>                                         <C>          <C>           <C>              <C>                          <C>
2500 Cumberland Parkway                       14,335     None           6.44%/(10)/     September 10, 2000/(14)/          923
Line of Credit                               227,300     None           6.32%/(11)/     January 2, 2001                14,365
Executive Center Del Mar                      13,267     None           6.59%/(12)/     December 19, 2001/(15)/           874
Burnett Plaza /(1)/                            9,400     None           7.50%           February 1, 2002                  705
Bank Term Facility                           100,000     None           7.63%/(13)/     October 13, 2002                7,630
Bachman West                                   3,009     25 yr          8.63%           December 1, 2003                  260
Northeast Portfolio Loan /(2)/                60,000     None /(7)/     6.80%           December 10, 2003               4,080
One Westchase Center                          25,241     25 yr          7.84%           February 1, 2004                1,979
Crescent Centre                               12,000     None           7.95%           March 1, 2004                     954
Walnut Glen Tower                             35,000     None /(8)/     6.92%           April 1, 2005                   2,422
Highland Court                                 5,009     25 yr          7.27%           April 1, 2006                     364
Westheimer Central Plaza                       6,037     25 yr          8.38%           August 1, 2006                    506
Oaklands Corporate Center /(3)/                1,348     20 yr          8.65%           August 1, 2006                    117
Creamery Way /(3)/                             3,791     20 yr          8.30%           September 19, 2006                315
PPREFI Portfolio Loan /(4)/                  180,100     None           7.58%           February 26, 2007              13,652
Oaklands Corporate Center /(3)/                6,366     25 yr          8.55%           July 1, 2007                      544
Oaklands Corporate Center /(3)/                2,683     25 yr          8.40%           November 1, 2007                  225
Natomas Corporate Center                      37,953     30 yr          7.02%           February 1, 2009                2,664
Corporetum Office Campus                      25,968     30 yr          7.02%           February 1, 2009                1,823
7101 Wisconsin Avenue                         21,500     30 yr          7.25%           April 1, 2009                   1,559
Park West C2 /(5)/                            35,623     30 yr          7.36%           November 10, 2010               2,622
One O'Hare Centre /(5)/                       42,178     30 yr          7.03%           January 10, 2011                2,965
Broadmoor Austin /(6)/                        77,000     None /(9)/     7.04%           April 10, 2011                  5,421
Southpoint (III) /(3)/                         7,873     20 yr          7.75%           April 14, 2014                    610
Other Corporate Debt                           5,196     None           7.40%           Various                           385
                                            --------                   ------                                         -------
                                                                              
Total Financing/Weighted Average Rate       $958,177                    7.09%                                         $67,964
                                            ========                   ======                                         =======
</TABLE>

     /(1)/   The Company, through the Operating Partnership, owns a 20% non-
             controlling partnership interest in the entity that owns the
             Burnett Plaza Property, which interest is accounted for using the
             equity method of accounting. The amount shown reflects the
             Company's proportionate share of the mortgage indebtedness
             collaterallized by the Property.
     /(2)/   The Northeast Portfolio Loan is collateralized by the following 11
             Properties: Valleybrooke (five Properties), Lake Center (two
             Properties), certain of the Southpoint Properties (two Properties),
             and certain of the Woodland Falls Properties (two Properties).
     /(3)/   The mortgage loan is collateralized by certain of the Properties in
             the respective office Property grouping.
     /(4)/   The PPREFI Portfolio Loan is collateralized by the following 38
             Properties: certain of the Los Angeles Industrial Properties (18
             Properties), certain of the Kansas City Industrial Properties (six
             Properties), certain of the Chicago Industrial Properties (four
             Properties), Park West E1 and E2 (two Properties), One Northwestern
             Plaza, 3141 Fairview Park Drive, O'Hare Plaza II, 1717 Deerfield
             Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court, the WestPoint
             Office Building and the PacifiCare Building.
     /(5)/   Includes the effect of the settlement cost of $4.3 million on the
             $49.25 million treasury lock agreement that was terminated on
             October 6, 1998. The settlement cost related to $35.75 million of
             the treasury lock is being amortized over the 12-year term of the
             Park West C2 loan, with the remaining $13.5 million amortized over
             the 12-year term of the One O'Hare Centre loan.
     /(6)/   The Company, through the Operating Partnership, owns a 50% non-
             controlling partnership 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 the
             Company's proportionate share of the mortgage indebtedness
             collateralized by the Properties.
     /(7)/   The loan, which was entered into in December 1997, has no principal
             amortization during the first 24 months of the loan term. Principal
             and interest are payable for the remaining loan term based on a 25-
             year amortization.
     /(8)/   The loan, which was entered into in March 1998, has no principal
             amortization during the first 24 months of the loan term. Principal
             and interest are payable for the remaining loan term based on a 30-
             year amortization.
     /(9)/   The loan, which was entered into in March 1998, has no principal
             amortization during the first 36 months of the loan term. Principal
             and interest are payable for the remaining loan term based on a
             16.25-year amortization.
     /(10)/  Represents a variable rate equal to LIBOR+ 1.50%; on March 31,
             1999, LIBOR was equal to 4.94%.
     /(11)/  Represents a variable rate equal to LIBOR+ 1.375%; on March 31,
             1999, LIBOR was equal to 4.94%.
     /(12)/  Represents a variable rate equal to LIBOR+ 1.65%; on March 31,
             1999, LIBOR was equal to 4.94%.
     /(13)/  Represents the weighted average interest rate for the Interest Rate
             Swap of $50 million at an effective rate of 7.628% and $50 million
             of the $60 million Interest Rate Swap at an effective rate of
             7.623%.
     /(14)/  The Company has completed an application, which has been approved
             by the lender, to provide for permanent financing which, upon
             closing, will extend the maturity of the mortgage debt on the 2500
             Cumberland Parkway Property to 2009.
     /(15)/  December 19, 2001 represents a maturity date based on the Company's
             anticipated execution of its option to extend the term of the loan
             one year beyond the original maturity date of December 19, 2000.

                                       18
<PAGE>
 
     The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements.  For
the three months ended March 31, 1999, the Company's recurring non-incremental
revenue-generating capital expenditures totaled $2.2 million. The Company's
recurring non-incremental revenue-generating capital expenditures were
attributable to the Company's six regions as follows: (1) Mid-Atlantic-$238,000;
(2) Midwest-$341,000; (3) Northeast-$294,000; (4) Southeast-$29,000; (5)
Southwest-$922,000; and (6) West-$394,000.

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

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

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

FUNDS FROM OPERATIONS

     "Funds from Operations" as defined by NAREIT, means net income, computed in
accordance with GAAP excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures.  The Company believes that Funds
from Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
and investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital expenditures
and to fund other cash needs.  The Company's Funds from Operations is not
comparable to Funds from Operations reported by other REITs that do not define
that term using the current NAREIT definition.  The Company believes that in
order to facilitate a clear understanding of its operating results, Funds from
Operations should be examined in conjunction with net income as presented in the
audited Consolidated Financial Statements of the Company. Funds from Operations
does not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.

<TABLE>
<CAPTION>
(in thousands)                                                   THREE MONTHS ENDED  THREE MONTHS ENDED
                                                                    MARCH 31, 1999      MARCH 31, 1998
                                                                 ------------------  ------------------
<S>                                                              <C>                 <C> 
FUNDS FROM OPERATIONS
Net income................................................                 $17,257             $ 9,496
Add:
 Real estate depreciation and amortization................                  12,135               8,515
 Real estate depreciation and amortization of
  unconsolidated joint venture............................                     532                 573
 Minority interest/(1)/...................................                   2,686               1,239
 Extraordinary items......................................                                       8,908
Less:
 Gains on sale............................................                     (96)             (2,555)
 Dividend on perpetual preferred..........................                  (1,971)
                                                                           -------
Funds from Operations.....................................                 $30,543             $26,176
                                                                           =======             =======
</TABLE>

/(1)/     Represents the minority interest applicable to the common and
          preferred Unit holders of the Operating Partnership.

                                       19
<PAGE>
 
     Funds from Operations increased by $4.4 million for the three months ended
March 31, 1999 from the three months ended March 31, 1998, as a result of the
factors discussed in the analysis of operating results.

IMPACT OF THE YEAR 2000 ISSUE

     The Year 2000 ("Y2K") compliance problem is the result of computer programs
designed to use two-digit rather than four digit years. Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00. This could be
interpreted as either 1900 or 2000. Systems that have Y2K-related issues, may
perceive time to have reverted back 100 years. Systems, equipment and software
with exposure to Y2K-related problems exist not only in computerized Information
Systems but also in building operating systems such as elevators, alarm systems,
energy management systems, phone systems, and numerous other systems and
equipment. Failure to adequately identify and correct Y2K-related problems could
result in a Systems failure or malfunction with potential adverse effects
including personal injury, property damage, and disruption of operations. Any or
all of these failures could materially and adversely affect the Company's
business, financial condition, or results of operations.

     Due to the exposure and potential liabilities inherent in both the Systems
used internally by the Company and those Systems used by third parties to
conduct business with the Company, in September 1997, the Company created the
Y2K Committee (the "Y2K Committee") headed by the Vice President of Information
Systems and co-chaired by the Vice President of National Property Operations.
Due to the national presence of the Company, the Y2K Committee appointed
approximately 85 employees (the "Y2K Coordinators") designated as either Y2K
property coordinators ("Y2K Property Coordinators") or Y2K corporate office
coordinators ("Y2K Corporate Office Coordinators"). The purpose of the Y2K
Committee was to develop a plan to assess and mitigate the Company's exposure to
potential Y2K-related problems (the "Company's Y2K Plan"). In order to implement
the Company's Y2K Plan in a timely and uniform manner, during August 1998 the
Y2K Committee held classes to educate the Y2K Coordinators on the steps to be
taken to implement the Company's Y2K Plan. Due to the risks associated with
inadequate assessment and remediation of the Systems, the Company engaged
various independent sources to assist in the review of the Company's Y2K Plan,
including:

     .  An embedded systems specialist to focus on building Systems
     .  A Big 5 Accounting firm to focus on financial Systems
     .  A legal firm specializing in Y2K issues
     .  Computer Sciences Corporation ("CSC") to perform an overall review

Additional Internal Review

     During April 1999 the Y2K Committee, in cooperation with the Company's
Property Managers, performed internal reviews on each of the Company's
buildings. This effort was to further assure that remediation and progress to
date is on track by reviewing for full compliance with the Company's Y2K Plan.
During the internal reviews, no significant issues were found.

General Approach

     The Company's general approach is the same whether it is for a building or
an office environment.
 
     The steps involved are:

     1)   Communication with clients (owners, tenants, and asset managers)
          regarding the potential for Y2K problems inherent in the Internal
          Systems.
     2)   Communication with vendors regarding the potential for Y2K problems
          inherent in their Third-Party Systems.
     3)   Inventory and prioritization of the Internal Systems.
     4)   Initial assessment of the inventoried Internal Systems.
     5)   Contingency plan for the inventoried Internal Systems.
     6)   Test inventoried Internal Systems.
     7)   Prioritize resolution of any problems discovered with inventoried
          Internal Systems. The resolution will include additional testing of
          the solutions.
     8)   Review and revise, if necessary, contingency plans for inventoried
          Internal Systems.
     9)   Review vendor responses regarding their Third-Party Systems and take
          necessary action accordingly.

                                       20
<PAGE>
 
     With respect to existing assets, the Company has completed its Y2K
inventory and assessment of Internal Systems and has substantially completed the
testing phase of the Y2K effort. The results of these tests minimize the doubt
as to whether or not the inventoried Internal Systems have any Y2K issues. These
findings have enabled the Company to reasonably determine the remaining
financial commitment necessary to remedy the Y2K problems for existing Internal
Systems.
 
     In some cases, Systems that demonstrate Y2K-related problems have
previously been scheduled for replacement or remediation as a normal course of
business irrespective of Y2K-related problems. Alternatively, certain Systems
that may have originally been scheduled for replacement after the January 1,
2000 must have their replacements accelerated due to Y2K-related problems.

Information Systems

     The Company has inventoried its Information Systems according to reasonable
man standards relative to exposure. The majority of the Company's software is
off-the-shelf with a minimum amount of proprietary code. The Company's primary
financial software is from CTI Limited, Inc., which runs on an IBM AS/400
server. Assurances from both vendors accompanied by thorough testing, have
resulted in a minimal amount of remediation necessary on proprietary
modifications made to the software over the years. These modifications have been
completed and will be implemented upon final acceptance testing by the users.
 
     The Company uses a number of personal computers and networks in the course
of its operations. Employees use off-the-shelf software such as Microsoft Word,
Microsoft Excel and Lotus Notes for productivity purposes. Personal computer
hardware is tested using software distributed by the National Software Testing
Laboratory. The desktop software applications require software updates that will
be distributed Company-wide in the second quarter of 1999. Server operating
systems that demonstrate Y2K-related problems are also scheduled to be upgraded
by June 30, 1999.

Non-Information Technology Systems

     Non-Information Technology Systems at Properties owned as of March 31, 1999
have been substantially assessed with respect to date-sensitive operating
controls in order to quantify the Y2K exposure. Assessments will continue as the
Company acquires additional properties. An evaluation of Y2K exposure has been
incorporated into the Company's normal acquisition due diligence process. The
Company's investment committee formally considers the Y2K status of each
investment during the approval process.
 
     The methodology for assessing and testing building Systems will vary by
equipment and is typically dictated by the building type. In 1998 the Company
used an outside embedded systems specialist firm to benchmark and review its
methodology in representative samples of each building type in the Company's
portfolio (i.e., low-rise/industrial, mid-rise office, and high-rise office).
 
     Although building Systems may be similar from building to building within a
given building type, implementations can vary. Therefore, testing for compliance
is necessary where possible. Testing is substantially complete for the known
building Systems on assets owned as of March 31, 1999. The Company's staff,
outside vendors, or a combination of both have performed these tests.
 
Third-Party Systems

     In addition to the Company's Y2K Plan with respect to Internal Systems, it
is also taking proactive steps to determine the impact on the Company of Y2K-
related issues with Third-Party Systems.

     The Company has been identifying and contacting critical suppliers, service
providers, contractors, and clients to determine the extent to which the
Company's operations could be impacted as a result of third parties' failure to
remedy their own Y2K-related problems. The Company substantially completed this
process for assets owned as of March 31, 1999, which coincides with the timing
of the Company's contingency planning milestone. To the extent the Y2K readiness
responses of the critical suppliers, service providers, contractors and clients
are unsatisfactory, the Company will evaluate the impact of this relationship.
Should this relationship prove materially detrimental, the Company will make
every effort to change to a critical supplier, service provider, contractor, or
client that demonstrates Y2K readiness. The Company is not currently aware of
any such situations, but the inability

                                       21
<PAGE>
 
to locate an alternative supplier, service provider, contractor, or client in a
timely manner could materially and adversely affect the Company's business,
financial condition or results of operations.

Estimate of Financial Impact

     The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations on the financial statements of the Company.
The total costs associated with required modifications to become Y2K compliant
are not expected to be material to the Company's financial position. The Company
currently estimates the total Y2K readiness costs are between $500,000 and
$600,000. Such costs are segregated into three categories, along with the timing
of the estimated expenses as follows:

<TABLE>
<CAPTION>
            CATEGORY                   LOW          HIGH        Q4/98       Q1/99       Q2/99       Q3/99        Q4/99
                                   ------------  -----------  ----------  ----------  ----------  ----------  -----------
<S>                                <C>           <C>          <C>         <C>         <C>         <C>         <C>
Non-Information Technology
 Systems                               $400,000     $475,000      7%          71%         14%          7%          1%        
Information Systems                      40,000       50,000     20%          70%         10%                               
Y2K Committee                            60,000       75,000     80%          10%          5%          5%                    
                                       --------     --------
                           Total       $500,000     $600,000
                                       ========     ========
</TABLE>

     These costs are net of the Company's personnel costs that are considered to
be part of normal operating costs. A significant portion of the Non-Information
Technology Systems costs are expected to be capitalized and recovered from
tenants through building operations, while the balance will be expensed in the
period incurred. Much of the Information Systems costs are version upgrades that
will be expensed as incurred. The Y2K Committee costs consist largely of
consulting charges that are expensed as incurred.

     The Company's readiness program is an ongoing process, and the estimates of
costs and completion dates for the various categories described above are
subject to material change.

Potential Risks of Inadequate Remediation

     Failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations that could
materially and adversely affect the Company's results of operations, liquidity,
and financial position. Much of the uncertainty lies with the ability of
critical suppliers, service providers, contractors, and clients to fully remedy
their Y2K problems. The Company's Y2K Plan should significantly reduce the
Company's level of uncertainty regarding the Y2K problem.

     The most reasonable and likely worst case scenario might be the failure of
an energy management system in a building. This could adversely affect the
environmental conditions of the occupied space, thus creating discomfort and
inconvenience to the tenants until the condition could be manually corrected.
Persistence of this problem for a long period of time could result in an
increase in operating costs for the building until the energy management system
is restored to proper operations.

     The Company is making substantial effort to eliminate the exposure to any
Y2K issues; however, no one can accurately predict how many Y2K problem-related
failures will occur or the severity, duration, or financial consequences of
these potential failures, especially with regard to Third-Party Systems. As a
result, a significant number of operational inconveniences and inefficiencies
for the Company and its clients may occur that could divert management's time,
attention, financial, and human resources from its ordinary business activities;
and a lesser number of serious system failures may occur that could require
significant efforts by the Company and its clients to prevent or alleviate
material business disruption.

Contingency Plans

     The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K issues. The Company has substantially
completed the contingency plans for assets owned as of March 31, 1999. These
contingency plans range from manual overrides, as described in the
aforementioned example, to alternative processes such as building lock-downs in
the event of a long-term power failure. Fortunately, most buildings currently
have contingency plans in place for natural disasters such as earthquakes,
floods, ice storms, and the like, which provide a basis for the Y2K contingency
plans. These plans may also include short-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel, and

                                       22
<PAGE>
 
orderly shut-down of the building on December 31, 1999 and January 1, 2000 in
order to perform tests of critical systems.
 
Disclaimer
 
     The Company's Y2K readiness program is an ongoing process and the estimates
of costs and completion dates for various components of the Company's Y2K
readiness program described above are subject to change. The Company's Y2K Plan
will also be applied to assets acquired or developed during 1999 and in future
years. Additionally, the Company's discussion of its Y2K readiness program
contains forward-looking statements that are based on assumptions as to future
events. There can be no guarantee as to the outcome of these future events.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
No. 133"). FAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities.  It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.  FAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.  The Company believes that upon
implementation, FAS 133 will not have a material impact on the financial
statements of the Company.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's primary market risk exposure is to changes in interest rates
as a result of its line of credit and long-term debt.  At March 31, 1999, the
Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans of approximately $958.2 million, or
approximately 51.34% of total market capitalization.  The Company's interest
rate risk objective is to limit the impact of interest rate fluctuations on
earnings and cash flows and to lower its overall borrowing costs.  To achieve
this objective, the Company manages its exposure to fluctuations in market
interest rates for its borrowings through the use of fixed rate debt instruments
to the extent that reasonably favorable rates are obtainable with such
arrangements and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks to mitigate its interest rate risk
on a related financial instrument or to effectively lock the interest rate on a
portion of its variable debt.  The Company does not enter into derivative or
interest rate transactions for speculative purposes.  Approximately 63% of the
Company's outstanding debt was subject to fixed rates with a weighted average
interest rate of 7.27% at March 31, 1999. An additional 11% of the Company's
outstanding debt at March 31, 1999 was effectively locked at an interest rate of
7.63% through an interest rate swap agreement for a notional amount of $110.0
million.  The Company regularly reviews interest rate exposure on its
outstanding borrowings in an effort to minimize the risk of interest rate
fluctuations.

     In addition to the risk of interest rate fluctuations, the Company was
exposed to market risk with respect to a forward stock contract that the Company
entered into in February 1998. On February 2, 1998, the Company closed a direct
placement of 1,100,000 common shares to an affiliate of Union Bank of
Switzerland ("UBS") for a gross consideration of $29.7 million, or $27.00 per
share.  In a related transaction, the Company entered into a forward stock
contract with UBS which provided that during the first year after the closing of
the direct placement, the Company would have the right to consummate a share
settlement with UBS based on the then market price for the common shares. On
January 21, 1999, the Company reacquired all of the 1,100,000 common shares for
approximately $30.0 million with proceeds from borrowings under the Company's
Line of Credit.  The Company does not have any other material market-sensitive
financial instruments.

     The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations.  For debt obligations outstanding at March 31,
1999, the table presents principal cash flows and related weighted average
interest rates by expected maturity dates including the Company's pro rata share
of joint venture debt totaling $86.4 million.  For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
contractual maturity dates.  Notional amounts are used to calculate the
contractual payments to be exchanged under the contract.  Weighted average
variable rates are based on implied forward rates in the yield curve as of March
31, 1999.

                                       23
<PAGE>
 
<TABLE>
<CAPTION>
                                                     EXPECTED MATURITY DATE
                                                          (IN THOUSANDS)
                            -------------------------------------------------------------------------------------
                             1999     2000       2001       2002       2003     THEREAFTER    TOTAL    FAIR VALUE 
                            ------   -------   --------   --------    -------   ----------   --------  ----------
<S>                         <C>      <C>       <C>        <C>        <C>        <C>          <C>       <C> 
LIABILITIES
Long-Term Debt:
   Fixed Rate               $2,141   $ 8,287   $  7,706   $ 17,383    $67,118     $500,640   $603,275    $603,275
      Average Interest        7.27%     7.26%      7.26%      7.26%      7.26%        7.18%
       Rate
   Variable Rate                      14,335    240,567    100,000                            354,902     354,902
      Average Interest        6.33%     6.33%      6.34%      6.31%
       Rate
 
INTEREST RATE DERIVATIVES
Interest Rate Swaps:
   Variable to Fixed       $         $         $          $          $            $110,000   $110,000    $110,000
      Avg. Pay Rate           6.25%     6.25%      6.25%      6.25%      6.25%        6.25%
      Avg. Receive Rate       4.94%     4.94%      4.94%      4.94%      4.94%        4.94%
</TABLE>
                                                                               
     The table incorporates only those exposures that exist as of March 31, 1999
and does not consider exposures or positions which could arise after that date.
In addition, because firm commitments are not represented in the table above,
the information presented therein has limited predictive value.  As a result,
the Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise during the future period,
prevailing interest rates, and the Company's hedging strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates.  The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's financing requirements.

                                       24
<PAGE>
 
                                    PART II
                                    -------
                               OTHER INFORMATION


9)   ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

     EXHIBIT NO.  DESCRIPTION
     -----------  -----------

        3.1    -- Form of Amended and Restated Declaration of Trust of the
               Registrant (filed as Exhibit 3.1 to the Company's Registration
               Statement of Amendment No. 1 of Form S-11, File No. 333-09863,
               and incorporated by reference herein).
        3.2    -- Bylaws of the Registrant (filed as Exhibit 3.2 to the
               Company's Registration Statement on Amendment No. 1 of Form S-11,
               File No. 333-09863, and incorporated by reference herein).
        3.3    -- Articles Supplementary, dated December 18, 1997, Classifying
               and Designating a Series of Preferred Shares of Beneficial
               Interest as Series A Cumulative Convertible Redeemable Preferred
               Shares of Beneficial Interest and Fixing Distribution and Other
               Preferences and Rights of Such Shares (filed as Exhibit 3.1 to
               the Company's Current Report on Form 8-K, filed January 15, 1998,
               SEC File No. 001-14516).
        3.4    -- Articles Supplementary, dated February 17, 1998, Classifying
               and Designating a Series of Preferred Shares of Beneficial
               Interest as Junior Participating Cumulative Convertible
               Redeemable Preferred Shares of Beneficial Interest, Series B, and
               Fixing Distribution and Other Preferences and Rights of Such
               Shares (filed as an Exhibit to the Company's Registration
               Statement on Form 8-A filed on February 17, 1998, SEC File 
               No.000-23813).
        3.5    -- Articles Supplementary, dated June 25, 1998, Classifying and
               Designating a Series of Preferred Shares of Beneficial Interest
               as Series B Cumulative Redeemable Perpetual Preferred Shares of
               Beneficial Interest and Fixing Distribution and Other Preferences
               and Rights of Such Shares (filed as an exhibit to the Company's
               Form 10-Q filed on August 12, 1998)
        4.1    -- Form of Common Share Certificate (filed as Exhibit 4.1 to the
               Company's Registration Statement on Amendment No. 1 of Form S-
               11, File No. 333-09863, and incorporated by reference herein).
        4.2    -- Rights Agreement, dated February 6, 1998, between the Company
               and First Chicago Trust Company of New York, as Rights Agent
               (filed as an Exhibit 4.1 to the Company's Registration Statement
               on Form 8-A filed on February 17, 1998, File No. 000-23813).
        4.3    -- Form of Rights Certificate (included as Exhibit A to the
               Rights Agreement (Exhibit 4.2)).
        4.4    -- Form of Series A Preferred Share Certificate (filed as Exhibit
               4.2 to the Company's Registration Statement on Form S-3, file no.
               333-65793, filed on October 16, 1998)
       27.1*   -- Financial Data Schedule.
       -----   ---------------------------

     * Filed herewith.

                                       25
<PAGE>
 
(b)  Reports on Form 8-K

          On January 25, 1999, the Company filed with the SEC Amendment No. 2
     which amends the Current Report on Form 8-K filed with the SEC on October
     9, 1998 and amended by Amendment No. 1 filed with the SEC on December 24,
     1998. The Current Report relates to the acquisition of a single Class A
     suburban office Property in the Oakland, California, area (the "Ordway
     Property") and two Class A office Properties in the suburban Washington,
     D.C., area (the "Willow Oaks Properties"). Such report also contains
     updated Risk Factors of the Company.

          On February 16, 1999, the Company filed with the SEC a Current Report
     on Form 8-K relating to the acquisitions in 1998 of a single Class A office
     Property in the Chicago, Illinois, area (the "One O'Hare Centre Property")
     and seven Class A office Properties in the Houston, Texas, area (the
     "Fidinam Office Portfolio"). Such report also included information with
     respect to the acquisition in 1997 of four Class A office Properties in the
     suburban Washington, D.C., area (the "Calverton Office Park Properties" and
     the "7101 Wisconsin Avenue Property").

                                       26
<PAGE>
 
                                   SIGNATURE
                                   ---------


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


                           PRENTISS PROPERTIES TRUST



Date:  May 12, 1999        By: /s/ Thomas P. Simon
                           ------------------------------------------------     
                               Thomas P. Simon Senior Vice President and
                                  Chief Accounting Officer
                               (Principal Accounting Officer and Duly
                               Authorized Officer of the Company)

                                       27