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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,
D.C. 20549





FORM 10-Q





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

THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended March 31, 2003



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





Commission File Number 1-14516



PRENTISS PROPERTIES TRUST

(Exact Name of Registrant as Specified in its Charter)



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





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

(Address of Principal Executive Offices)



(214) 654-0886

(Registrants Telephone Number, Including Area Code)





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



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



The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding as of May 12, 2003, was
39,112,833 and the number of outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 3,773,585.



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PRENTISS PROPERTIES TRUST



INDEX



|Part I:        |  | FINANCIAL INFORMATION |  | Page Number                                                                                                                                
|-------------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|              
|               |  | Item 1.               |  | Financial Statements                                                                                                                       
|              
|               |  |                       |  | Consolidated Balance Sheets of Prentiss Properties Trust at March 31, 2003 (unaudited) and December 31, 2002                               
|              
|               |  |                       |  | Consolidated Statements of Income of Prentiss Properties Trust for the three months ended March 31, 2003 and 2002 (unaudited)              
|              
|               |  |                       |  | Consolidated Statements of Comprehensive Income of Prentiss Properties Trust for the three months ended March 31, 2003 and 2002 (unaudited)
|              
|               |  |                       |  | Consolidated Statements of Cash Flows of Prentiss Properties Trust for the three months ended March 31, 2003 and 2002 (unaudited)          
|              
|               |  |                       |  | Notes to Consolidated Financial Statements                                                                                                 
|              
|               |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                      
|              
|               |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                 
|              
|               |  | Item 4.               |  | Controls and Procedures                                                                                                                    
|              
|Part II:       |  | OTHER INFORMATION     |  |                                                                                                                                            
|              
|               |  | Item 1.               |  | Legal Proceedings                                                                                                                          
|               |  | Item 2.               |  | Changes in Securities and Use of Proceeds                                                                                                  
|               |  | Item 3.               |  | Default Upon Senior Securities                                                                                                             
|               |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                                        
|               |  | Item 5.               |  | Other Information                                                                                                                          
|               |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                                           
|              
|SIGNATURE      |  |                       |  | 36                                                                                                                                         
|              
|CERTIFICATIONS |  |                       |  | 37-38                                                                                                                                      





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FORWARD-LOOKING STATEMENTS



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



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



If one
or more of these risks or uncertainties materialize, or if any underlying assumption proves incorrect, actual results may vary materially from those anticipated, expected or projected. Such forward-looking statements reflect our current views with
respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements
attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. A detailed discussion of risks is included, under the caption Risk Factors, in our Form 10-K, filed on March 28, 2003.
You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q or the date of any document incorporated by reference into this Form 10-Q. We do not undertake any obligation to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.





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PART I

FINANCIAL INFORMATION



Item 1. Financial Statements















(this page intentionally left blank)





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PRENTISS PROPERTIES TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|ASSETS                                                                                                                                                                                        |  | March 31, 2003 |             |   | December 31, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|Operating real estate:                                                                                                                                                                        |  |                | (unaudited) |   |                   |  
|Land                                                                                                                                                                                          |  | $              | 312,130     |   |                   | $
|Buildings and improvements                                                                                                                                                                    |  |                | 1,684,276   |   |                   |  
|Less: accumulated depreciation                                                                                                                                                                |  |                | (189,539    | ) |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|                                                                                                                                                                                              |  |                | 1,806,867   |   |                   |  
|                                                                                                                                                                                             
|Construction in progress                                                                                                                                                                      |  |                |            |   |                   |  
|Land held for development                                                                                                                                                                     |  |                | 64,179      |   |                   |  
|Deferred charges and other assets, net                                                                                                                                                        |  |                | 174,613     |   |                   |  
|Notes receivable                                                                                                                                                                              |  |                | 13,354      |   |                   |  
|Accounts receivable, net                                                                                                                                                                      |  |                | 41,414      |   |                   |  
|Cash and cash equivalents                                                                                                                                                                     |  |                | 9,500       |   |                   |  
|Escrowed cash                                                                                                                                                                                 |  |                | 12,510      |   |                   |  
|Investments in securities                                                                                                                                                                     |  |                | 4,379       |   |                   |  
|Investments in joint ventures and unconsolidated subsidiaries                                                                                                                                 |  |                | 14,671      |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|Total assets                                                                                                                                                                                  |  | $              | 2,141,487   |   |                   | $
|                                                                                                                                                                                              |  |                |             |   |                   |  
|                                                                                                                                                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                          |  |                |             |   |                   |  
|Mortgages and notes payable                                                                                                                                                                   |  | $              | 1,056,449   |   |                   | $
|Interest rate hedges                                                                                                                                                                          |  |                | 15,902      |   |                   |  
|Accounts payable and other liabilities                                                                                                                                                        |  |                | 70,090      |   |                   |  
|Other payables (affiliates)                                                                                                                                                                   |  |                |            |   |                   |  
|Distributions payable                                                                                                                                                                         |  |                | 27,008      |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|Total liabilities                                                                                                                                                                             |  |                | 1,169,449   |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|                                                                                                                                                                                             
|Minority interest in operating partnership                                                                                                                                                    |  |                | 133,191     |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|Minority interest in real estate partnerships                                                                                                                                                 |  |                | 1,593       |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|                                                                                                                                                                                             
|Commitments and contingencies                                                                                                                                                                 |  |                |             |   |                   |  
|                                                                                                                                                                                             
|Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585 shares issued
and outstanding                                                                                        |  |                | 100,000     |   |                   |  
|Common shares $.01 par value, 100,000,000 shares authorized, 44,078,528 and 43,965,756
(includes 4,984,401 in treasury) shares issued and outstanding at March 31, 2003 and December 31, 2002 |  |                | 441         |   |                   |  
|Additional paid-in capital                                                                                                                                                                    |  |                | 885,761     |   |                   |  
|Common shares in treasury at cost, 4,984,401 shares at March 31, 2003 and December 31,
2002                                                                                                   |  |                | (118,476    | ) |                   |  
|Unearned compensation                                                                                                                                                                         |  |                | (3,475      | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                        |  |                | (15,122     | ) |                   |  
|Distributions in excess of earnings                                                                                                                                                           |  |                | (11,875     | ) |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|Total shareholders equity                                                                                                                                                                    |  |                | 837,254     |   |                   |  
|                                                                                                                                                                                              |  |                |             |   |                   |  
|Total liabilities and shareholders equity                                                                                                                                                    |  | $              | 2,141,487   |   |                   | $
|                                                                                                                                                                                              |  |                |             |   |                   |  



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



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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)



|                                                                                                                                   |  | Three Months Ended March 31, |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                                                                   |  | 2003                         |       
|Revenues:                                                                                                                          |  |                              |       
|Rental income                                                                                                                      |  | $                            | 86,841
|Service business and other income                                                                                                  |  |                              | 4,355 
|                                                                                                                                   |  |                              |       
|                                                                                                                                   |  |                              | 91,196
|                                                                                                                                   |  |                              |       
|Expenses:                                                                                                                          |  |                              |       
|Property operating and maintenance                                                                                                 |  |                              | 22,678
|Real estate taxes                                                                                                                  |  |                              | 10,277
|General and administrative and personnel costs                                                                                     |  |                              | 2,396 
|Operating expenses of service business                                                                                             |  |                              | 2,219 
|Interest expense                                                                                                                   |  |                              | 17,068
|Amortization of deferred financing costs                                                                                           |  |                              | 509   
|Depreciation and amortization                                                                                                      |  |                              | 19,626
|                                                                                                                                   |  |                              |       
|                                                                                                                                   |  |                              | 74,773
|                                                                                                                                   |  |                              |       
|Income from continuing operations before minority interests and equity in income of
joint ventures and unconsolidated subsidiaries |  |                              | 16,423
|                                                                                                                                  
|Minority interests                                                                                                                 |  |                              | (2,671
|Equity in income of joint ventures and unconsolidated subsidiaries                                                                 |  |                              | 626   
|                                                                                                                                   |  |                              |       
|Income from continuing operations                                                                                                  |  |                              | 14,378
|                                                                                                                                   |  |                              |       
|Discontinued operations:                                                                                                           |  |                              |       
|Income from discontinued operations                                                                                                |  |                              |      
|Minority interests related to discontinued operations                                                                              |  |                              |      
|                                                                                                                                   |  |                              |       
|                                                                                                                                   |  |                              |      
|                                                                                                                                   |  |                              |       
|Income before gain on sale of properties                                                                                           |  |                              | 14,378
|                                                                                                                                  
|Gain on sale of properties                                                                                                         |  |                              | 1,132 
|                                                                                                                                  
|Net income                                                                                                                         |  |                              | 15,510
|Preferred dividends                                                                                                                |  |                              | (2,113
|                                                                                                                                   |  |                              |       
|Net income applicable to common shareholders                                                                                       |  | $                            | 13,397
|                                                                                                                                   |  |                              |       
|Basic earnings per common share:                                                                                                   |  |                              |       
|Income from continuing operations applicable to common shareholders                                                                |  | $                            | 0.34  
|Discontinued operations                                                                                                            |  |                              |      
|                                                                                                                                   |  |                              |       
|Net income applicable to common shareholders  basic                                                                               |  | $                            | 0.34  
|                                                                                                                                   |  |                              |       
|Weighted average number of common shares outstanding  basic                                                                       |  |                              | 38,949
|                                                                                                                                   |  |                              |       
|Diluted earnings per common share:                                                                                                 |  |                              |       
|Income from continuing operations applicable to common shareholders                                                                |  | $                            | 0.34  
|Discontinued operations                                                                                                            |  |                              |      
|                                                                                                                                   |  |                              |       
|Net income applicable to common shareholders  diluted                                                                             |  | $                            | 0.34  
|                                                                                                                                   |  |                              |       
|Weighted average number of common shares and common share equivalents outstanding 
diluted                                        |  |                              | 39,060
|                                                                                                                                   |  |                              |       



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



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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)



|                                                            |  | Three Months Ended March 31,
|----------------------------------------------------------- |  | ----------------------------
|                                                            |  | 2003                        
|Net income                                                  |  | $                           
|                                                            |  |                             
|Unrealized gains and losses on securities:                  |  |                             
|Unrealized (losses)/gains arising during the period         |  |                             
|Unrealized gains on interest rate hedges:                   |  |                             
|Unrealized gains arising during the period                  |  |                             
|Reclassification adjustment for losses included in earnings |  |                             
|                                                            |  |                             
|Other comprehensive income                                  |  |                             
|                                                            |  |                             
|Comprehensive income                                        |  | $                           
|                                                            |  |                             



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





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PRENTISS PROPERTIES TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)



|                                                                                        |  | Three Months Ended March 31, |        
|--------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                        |  | 2003                         |        
|Cash Flows from Operating Activities:                                                   |  |                              |        
|Net income                                                                              |  | $                            | 15,510 
|                                                                                       
|Adjustments to reconcile net income to net cash provided by operating
activities:       |  |                              |        
|Minority interests                                                                      |  |                              | 2,671  
|Gain on sale of properties                                                              |  |                              | (1,132 
|Provision for doubtful accounts                                                         |  |                              | 670    
|Depreciation and amortization                                                           |  |                              | 19,626 
|Amortization of deferred financing costs                                                |  |                              | 509    
|Earnings in excess of distributions from joint ventures and unconsolidated
subsidiaries |  |                              |       
|Non-cash compensation                                                                   |  |                              | 474    
|Reclassification of accumulated other comprehensive income                              |  |                              | 143    
|Gain on derivative financial instrument                                                 |  |                              | (73    
|Changes in assets and liabilities:                                                      |  |                              |        
|Deferred charges and other assets                                                       |  |                              | (1,939 
|Accounts receivable                                                                     |  |                              | (1,027 
|Escrowed cash                                                                           |  |                              | (2,027 
|Other payables/receivables (affiliates)                                                 |  |                              |       
|Accounts payable and other liabilities                                                  |  |                              | (15,778
|                                                                                        |  |                              |        
|Net cash provided by operating activities                                               |  |                              | 17,627 
|                                                                                        |  |                              |        
|Cash Flows from Investing Activities:                                                   |  |                              |        
|Development/redevelopment of real estate                                                |  |                              | (2,561 
|Purchase of real estate                                                                 |  |                              | (27,768
|Purchase of mortgage loan                                                               |  |                              |       
|Capital expenditures for in-service properties                                          |  |                              | (4,300 
|Distributions in excess of earnings of joint ventures and unconsolidated
subsidiaries   |  |                              | 49     
|Purchase of interest in Prentiss Properties Resources                                   |  |                              | (67    
|Cash from consolidation of Prentiss Properties Resources                                |  |                              | 461    
|Investment in securities                                                                |  |                              | (327   
|Proceeds from the sale of real estate                                                   |  |                              | 2,386  
|                                                                                        |  |                              |        
|Net cash used in investing activities                                                   |  |                              | (32,127
|                                                                                        |  |                              |        
|Cash Flows from Financing Activities:                                                   |  |                              |        
|Net proceeds from sale of common shares                                                 |  |                              | 262    
|Redemption of preferred units                                                           |  |                              |       
|Capital contribution from consolidated joint ventures                                   |  |                              | 176    
|Distributions paid to limited partners                                                  |  |                              | (841   
|Distributions paid to common shareholders                                               |  |                              | (21,828
|Distributions paid to preferred shareholders                                            |  |                              | (2,113 
|Distributions paid to preferred unitholders                                             |  |                              | (2,158 
|Proceeds from mortgages and notes payable                                               |  |                              | 100,185
|Repayments of mortgages and notes payable                                               |  |                              | (54,763
|                                                                                        |  |                              |        
|Net cash provided by financing activities                                               |  |                              | 18,920 
|                                                                                        |  |                              |        
|Net change in cash and cash equivalents                                                 |  |                              | 4,420  
|Cash and cash equivalents, beginning of period                                          |  |                              | 5,080  
|                                                                                        |  |                              |        
|Cash and cash equivalents, end of period                                                |  | $                            | 9,500  
|                                                                                        |  |                              |        
|Supplemental Cash Flow Information:                                                     |  |                              |        
|Cash paid for interest                                                                  |  | $                            | 17,185 
|                                                                                        |  |                              |        



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





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PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



1.     The Organization



Organization



We are a self-administered and self-managed Maryland REIT that acquires, owns, manages, leases, develops and builds primarily office
properties throughout the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, through our own employees. We are self-managed in that we provide all the management and
maintenance services that our properties require through our own employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P.,
and its subsidiaries, and a management company, Prentiss Properties Resources and its subsidiaries. The ownership of the operating partnership was as follows at March 31, 2003:



|(units in thousands)      |  | Common Units |  | %      |   |  | Series D Convertible Preferred Units |  | %      |   |  | Series B Preferred Units |  | %      |   |  | Series E Preferred Units |  | %      |  
|------------------------- |  | ------------ |  | ------ | - |  | ------------------------------------ |  | ------ | - |  | ------------------------ |  | ------ | - |  | ------------------------ |  | ------ | -
|Prentiss Properties Trust |  | 39,094       |  | 96.32  | % |  | 3,774                                |  | 100.00 | % |  |                         |  | 0.00   | % |  |                         |  | 0.00   | %
|Third parties             |  | 1,495        |  | 3.68   | % |  |                                     |  | 0.00   | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  
|Total                     |  | 40,589       |  | 100.00 | % |  | 3,774                                |  | 100.00 | % |  | 1,900                    |  | 100.00 | % |  | 200                      |  | 100.00 | %
|                          |  |              |  |        |   |  |                                      |  |        |   |  |                          |  |        |   |  |                          |  |        |  



As of
March 31, 2003, we owned interests in a diversified portfolio of 138 primarily suburban Class A office and suburban industrial properties as follows:



|                      |  | Number of Buildings |  | Net Rentable Square Feet
|--------------------- |  | ------------------- |  | ------------------------
|                      |  |                     |  | (in thousands)          
|Office properties     |  | 107                 |  | 15,672                  
|Industrial properties |  | 31                  |  | 2,294                   
|                      |  |                     |  |                         
|Total                 |  | 138                 |  | 17,966                  
|                      |  |                     |  |                         



As of
March 31, 2003, our properties, were 90% leased to approximately 1,000 tenants. In addition to managing properties that we own, we manage approximately 13.1 million net rentable square feet in office, industrial and other properties for third
parties.



We have determined that our reportable
segments are those that are based on our method of internal reporting, which disaggregates our business by geographic region. As of March 31, 2003, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4)
Northern California; and (5) Southern California.



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



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



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##### Table of Contents

PRENTISS PROPERTIES TRUST

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS



Transactions



On January 30, 2003, we completed a loan modification with
Farm Bureau Life Insurance Company for the purpose of swapping the collateral underlying the loan. The purpose of the modification was to provide us flexibility with respect to hold/sell decisions for the underlying collateral. At the time of the
modification, the in-place loan had an outstanding balance of approximately $5.6 million, an interest rate of 8.38% and a maturity of August 1, 2006. Per the modification, we received an additional $1.6 million of cash borrowings resulting in a
modified principal balance of $7.2 million. The loan as modified has an annual interest rate of 7.75% and a maturity date of January 1, 2007.



On February 4, 2003, we acquired from an unrelated third party the Park West C3 building, a 339,000 net rentable square foot office
property located in the Dallas, Texas area for gross proceeds of approximately $28.0 million. The acquisition was funded with proceeds from our revolving credit facility. The purchase price was allocated $6.0 million to land, $19.4 million to
building and improvements and $2.6 million to deferred leasing costs and tenant improvements.



On March 28, 2003, we sold to an unrelated third party a 9.2 acre parcel of land located in the Sacramento, California area. The land which was classified as land held for development on our
consolidated balance sheet resulted in net proceeds of approximately $2.4 million, and a gain on sale of $1.1 million. The proceeds from the sale have been placed in an escrow account pending a possible 1031 exchange for tax purposes.



In addition to the real estate transactions described above,
during the three months ended March 31, 2003, we transitioned two office properties containing in the aggregate 222,000 net rentable square feet from development into operations. The properties include one office property containing 40,000 net
rentable square feet in Carlsbad, California and one office property containing 182,000 net rentable square feet in the Northern Virginia area. The December 31, 2002 carrying amount of these development projects which totaled $41.4 million was
reclassified on our consolidated balance sheet to land, building and improvements and deferred leasing costs and tenant improvements in the amounts $5.7 million, $31.5 million and $4.2 million, respectively.



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



As of February 12, 2003, we adopted deferred compensation plans for our executive officers and independent trustees. The Executive Choice
Share Deferral Plan for our executives allows our executive officers to elect to defer the receipt of shares issued upon the exercise of options pursuant to our 1996 Share Incentive Plan. In addition, the Executive Choice Share Deferral Plan allows
our officers to defer receipt of restricted securities issued pursuant to our 1996 Share Incentive Plan and to defer receipt of our common shares received pursuant to our Key Employee Share Option Plan and Share Purchase Plan. The Executive Choice
Deferred Compensation Plan provides a means for our executives to defer receipt of salary and bonus and property received under the Key Employee Share Option Plan, other than our common shares.



We also adopted two deferred compensation plans for our
trustees, similar to those adopted for our executives. Under the Executive Choice Share Deferral Plan for Trustees, the independent members of our board of trustees may defer receipt of shares issued upon the exercise of options received under the
Amended and Restated Trustees Share Incentive Plan. Under the Executive Choice Deferred Compensation Plan for Trustees, our independent trustees may defer other compensation received pursuant to service on our board of trustees.



For each of the deferred compensation plans described above,
the executives or the trustees receipt of shares and other compensation is deferred by placing such shares or other compensation in an account, which is treated as an unfunded deferred compensation obligation of the company, and the
employee or trustee does not receive the shares or other compensation until he elects to receive the shares or other compensation at a future date. Each of the plans described above is intended solely as a means of deferring gain that would
otherwise be realized by our officers and trustees and is not intended to amend any other plan or program.



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FINANCIAL STATEMENTS



2.     Basis of Presentation



The accompanying financial statements are
unaudited; however, our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting solely
of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the three month period ended March 31, 2003 are not necessarily indicative of the results to be
obtained for the full fiscal year. These financial statements should be read in conjunction with our audited financial statements, and notes thereto, included in our annual report on Form 10-K for the fiscal year ended December 31, 2002.



3.     Deferred Charges and Other Assets,
Net



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



|                                               |  | (in thousands) |        
|---------------------------------------------- |  | -------------- | -------
|                                               |  | March 31, 2003 |        
|Deferred leasing costs and tenant improvements |  | $              | 240,082
|Deferred financing costs                       |  |                | 14,506 
|Prepaids and other assets                      |  |                | 9,572  
|                                               |  |                |        
|                                               |  |                | 264,160
|Less: accumulated amortization                 |  |                | (89,547
|                                               |  |                |        
|                                               |  | $              | 174,613
|                                               |  |                |        



4.
    Accounts Receivable, Net



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



|                                      |  | (in thousands) |       
|------------------------------------- |  | -------------- | ------
|                                      |  | March 31, 2003 |       
|Rents and services                    |  | $              | 10,210
|Accruable rental income               |  |                | 38,293
|Other                                 |  |                | 1,293 
|                                      |  |                |       
|                                      |  |                | 49,796
|Less: allowance for doubtful accounts |  |                | (8,382
|                                      |  |                |       
|                                      |  | $              | 41,414
|                                      |  |                |       



5.
    Investments in Joint Ventures and Unconsolidated Subsidiaries



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



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FINANCIAL STATEMENTS



|Summary of Financial Position:   |  | Total Assets  |         | Total Debt (5) |   | Total Equity  |  |               | Companys Investment
|-------------------------------- |  | ------------- | ------- | -------------- | - | ------------- |  | ------------- | --------------------
|(in thousands)                   |  | Mar. 31, 2003 |         | Dec. 31, 2002  |   | Mar. 31, 2003 |  | Dec. 31, 2002 |                     
|Broadmoor Austin Associates(1)   |  | $             | 107,575 |                | $ | 108,929       |  | $             | 143,168             
|Prentiss Properties Resources(2) |  |               |        |                |   | 12,406        |  |               |                    
|Tysons International Partners(3) |  |               | 95,816  |                |   | 94,873        |  |               | 60,455              
|Other Investments(4)             |  |               |        |                |   |              |  |               |                    
|                                 |  |               |         |                |   |               |  |               |                     
|                                 |  |               |         |                |   |               |  |               |                     
|                                 |  |               |         |                |   |               |  |               |                     





For the Three Months Ended March 31, 2003 and 2002



|Summary of Operations:              |  | Total Revenue |       | Net Income |   |       | Companys Share of Net Income/(Loss) |     
|----------------------------------- |  | ------------- | ----- | ---------- | - | ----- | ------------------------------------ | ----
|(in thousands)                      |  | 2003          |       | 2002       |   | 2003  |                                      | 2002
|Broadmoor Austin Associates         |  | $             | 5,056 |            | $ | 4,972 |                                      | $   
|Burnett Plaza Associates(6)         |  |               |      |            |   | 4,302 |                                      |     
|PPS Partners LLC(7)                 |  |               |      |            |   | 35    |                                      |     
|Prentiss Properties Resources, Inc. |  |               |      |            |   | 3,845 |                                      |     
|Tysons International Partners       |  |               | 3,244 |            |   | 3,252 |                                      |     
|                                    |  |               |       |            |   |       |                                      |     
|Total                               |  |               |       |            |   |       |                                      |     
|                                    |  |               |       |            |   |       |                                      |     



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

|(2) |  | On March 28, 2001, Prentiss Properties Resources was incorporated under the General
Corporation Law of the State of Delaware to serve as a Taxable REIT Subsidiary and provide services to our operating partnership. On March 29, 2001, Prentiss Properties Resources acquired our interest in Prentiss Properties Limited, Inc., valued at
$3.9 million, along with certain other assets with a carrying amount of approximately $2.5 million. At December 31, 2002, our operating partnership held a 98% non-voting interest in Prentiss Properties Resources. Effective January 1, 2003, our
operating partnership acquired the remaining 2% interest in Prentiss Properties Resources for total consideration of approximately $67.000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|(6) |  | Prior to March 2002, we owned a 20% non-controlling interest in Burnett Plaza Associates, an
entity, which owns a 1.0 million net rentable square foot office building in downtown Fort Worth, Texas. On March 7, 2002, we acquired the remaining 80% interest in Burnett Plaza Associates. The summary of operations above includes the results of
operations for the periods prior to our acquisition of a controlling interest on March 7, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | PPS Partners LLC was a joint venture between our operating partnership and a third-party
property owner. The third-party property owner contributed property management contracts to PPS Partners LLC. Our operating partnership through a sub-management contract managed the properties and participated in the net income of the joint venture.
Effective October 2001, our operating partnership resigned the management duties of the properties.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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FINANCIAL STATEMENTS



6.     Mortgages and Notes Payable



At March 31, 2003, we had mortgages and
notes payable of $1.06 billion, excluding our proportionate share of debt from our investments in joint ventures.



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



|                          |  | (in thousands) |           |                   |   |              |  |                   | 
|------------------------- |  | -------------- | --------- | ----------------- | - | ------------ |  | ----------------- | 
|Description               |  | March 31, 2003 |           | December 31, 2002 |   | Amortization |  | Interest Rate (3) | 
|Collateralized term loan  |  | $              | 71,375    |                   | $ | 71,563       |  | 25 yr             | 
|Revolving credit facility |  |                | 201,500   |                   |   | 156,000      |  | None              | 
|Unsecured term loan       |  |                | 75,000    |                   |   | 75,000       |  | None              | 
|PPREFI portfolio loan     |  |                | 180,100   |                   |   | 180,100      |  | None              | 
|Mortgage notes payable    |  |                | 528,474   |                   |   | 528,364      |  | (1)               | 
|                          |  |                |           |                   |   |              |  |                   | 
|                          |  | $              | 1,056,449 |                   | $ | 1,011,027    |  |                   | 
|                          |  |                |           |                   |   |              |  |                   | 



|(1) |  | Excluding the $72.1 million financing of our Burnett Plaza property, which requires interest
only payments until maturity, our mortgage notes have debt service requirements based on amortization terms ranging from 18 to 30 years.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excluding the Burnett Plaza financing, which has an interest rate equal to LIBOR plus 215
basis points, the interest rates range from 6.63% to 8.63% with a weighted average interest rate of 7.39% at March 31, 2003. Maturity dates range from December 2003 through June 2013 with a weighted average maturity of 6.1 years from March 31, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 30-day LIBOR was 1.30% at March 31, 2003.
|--- |  | -----------------------------------------



Our mortgages and notes payable at March 31, 2003 consisted of $636.5 million of fixed rate, non-recourse, long-term mortgages and $420.0
million of floating rate debt, $250.0 million of which was hedged at March 31, 2003 with variable to fixed rate hedges.



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



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



7.
    Interest Rate Hedges



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



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



On the date we enter into a derivative contract,
we designate the derivative as a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (cash flow hedge). Currently, we have only entered into
derivative contracts designated as cash flow hedges. These agreements involve the exchange of amounts based on a variable interest rate for amounts based on fixed interest rates over the life of the agreement based upon a notional amount. The
difference to be paid or received as the interest rates change is recognized as an adjustment to interest expense. The related



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FINANCIAL STATEMENTS



amount payable to or receivable from counterparties is
included in accounts payable and other liabilities. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g. until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which
represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of non-hedging instruments are
reported in current-period earnings.



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



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



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



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



Over time, the
unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with when the hedged items are recognized in earnings. Within the next twelve months, we expect to
reclassify to earnings approximately $8.1 million of the current balance held in accumulated other comprehensive income.



The following table summarizes the notional values and fair values of our derivative financial instruments at March 31, 2003. The notional
value provides an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.



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FINANCIAL STATEMENTS



|Notional Amount |  | Swap Rate Paid (Fixed) |   |  | Effective Fixed Rate |   |  | Swap Rate Received (Variable) at March 31, 2003 |   |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | ---------------------- | - |  | -------------------- | - |  | ----------------------------------------------- | - |  | -------------- |  | -------------- | -------
|                |  |                        |   |  |                      |   |  |                                                 |   |  |                |  | (in thousands) |        
|$ 50 million    |  | 1.990                  | % |  | 3.365                | % |  | 1.30                                            | % |  | August 2003    |  | $              | (136   
|$ 50 million    |  | 6.253                  | % |  | 7.628                | % |  | 1.30                                            | % |  | September 2004 |  |                | (3,642 
|$ 60 million    |  | 6.248                  | % |  | 7.623                | % |  | 1.30                                            | % |  | September 2004 |  |                | (4,366 
|$ 15 million    |  | 4.345                  | % |  | 6.495                | % |  | 1.30                                            | % |  | July 2005      |  |                | (852   
|$ 25 million    |  | 4.345                  | % |  | 6.495                | % |  | 1.30                                            | % |  | July 2005      |  |                | (1,419 
|$ 20 million    |  | 5.985                  | % |  | 7.610                | % |  | 1.30                                            | % |  | March 2006     |  |                | (2,193 
|$ 30 million    |  | 5.990                  | % |  | 7.615                | % |  | 1.30                                            | % |  | March 2006     |  |                | (3,294 
|                |  |                        |   |  |                      |   |  |                                                 |   |  |                |  |                |        
|Total           |  |                        |   |  |                      |   |  |                                                 |   |  |                |  | $              | (15,902
|                |  |                        |   |  |                      |   |  |                                                 |   |  |                |  |                |        



Cash
payments made under our interest rate hedges exceeded cash receipts from our interest rate hedges by $2.3 million and $2.1 million for the three months ended March 31, 2003 and 2002, respectively.



8.     Accounts Payable and Other Liabilities



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



|                              |  | (in thousands)
|----------------------------- |  | --------------
|                              |  | March 31, 2003
|Accrued interest expense      |  | $             
|Accrued real estate taxes     |  |               
|Advance rents and deposits    |  |               
|Deferred compensation payable |  |               
|Other liabilities             |  |               
|                              |  |               
|                              |  | $             
|                              |  |               



9.
    Distributions



On
March 12, 2003, we declared a cash distribution for the first quarter of 2003 in the amount of $0.56 per share, payable on April 11, 2003 to common shareholders of record on March 31, 2003. Additionally, we determined that a distribution of $0.56
per common unit would be made to the partners of the operating partnership and the holders of our Series D Convertible Preferred Shares. The distributions totaled $24.8 million and were paid April 11, 2003. In addition, quarterly distributions
totaling $2.2 million in the aggregate were declared in March 2003, payable to the holders of our Series B Perpetual Preferred Units and our Series E Preferred Units. The distributions, which equate to an annualized 8.3% of the face amount of the
Series B Perpetual Preferred Units and an annualized 7.5% of the face amount of the Series E Preferred Units, were paid on April 3, 2003 and April 15, 2003, respectively.



10.     Supplemental Disclosure of Non-Cash Activities



During the three months ended March 31, 2003, we declared cash
distributions totaling $24.8 million payable to holders of common shares, operating partnership units and Series D Convertible Preferred Shares. The distributions were paid April 11, 2003. In addition, distributions totaling $2.2 million were
declared in March 2003, payable to holders of our Series B Perpetual Preferred Units and Series E Preferred Units. The distributions were paid on April 3, 2003 and April 15, 2003 to our holders of our Series B Perpetual Preferred Units and our
Series E Preferred Units, respectively.



Pursuant
to our long-term incentive plan, during the three months ended March 31, 2003, we issued 93,250 restricted common shares to various key employees. The shares, which had a market value of approximately $2.4 million based upon the per share price on
the date of grant, were classified as unearned compensation and recorded in the shareholders equity section of the consolidated balance sheet. The unearned compensation is amortized quarterly as compensation expense over the three-year vesting
period.



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FINANCIAL STATEMENTS



During the three months ended March 31,
2003, 5,693 common shares were issued pursuant to the conversion of 5,693 common units of our operating partnership. The common shares had a market value of approximately $159,000 on the conversion date. We marked-to-market our investments in
securities and our interest rate hedges. We recorded an unrealized loss of $298,000 and an unrealized gain of $800,000 on our investments in securities and interest rate hedges, respectively.



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



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



Additionally, in connection with the acquisition of the Park West C3 building, we assumed liabilities of approximately $145,000.



11.     Segment Information



For the Three Months Ended March 31, 2003

(in thousands)



|                                          |  | Mid-Atlantic |         | Midwest |   | Southwest |  | Northern California |         | Southern California |   | Total Segments |  | Corporate Not Allocable To Segments |         |  | Consolidated Total
|----------------------------------------- |  | ------------ | ------- | ------- | - | --------- |  | ------------------- | ------- | ------------------- | - | -------------- |  | ----------------------------------- | ------- |  | ------------------
|Revenues                                  |  | $            | 24,507  |         | $ | 14,601    |  | $                   | 30,225  |                     | $ | 12,322         |  | $                                   | 7,942   |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   
|Income from continuing operations         |  | $            | 11,318  |         | $ | 4,179     |  | $                   | 9,835   |                     | $ | 5,577          |  | $                                   | 3,478   |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   
|Assets                                    |  | $            | 613,112 |         | $ | 380,857   |  | $                   | 662,259 |                     | $ | 268,216        |  | $                                   | 179,101 |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   
|                                         
|For the Three Months Ended March 31, 2002 |  |              |         |         |   |           |  |                     |         |                     |   |                | 
|(in thousands)                            |  |              |         |         |   |           |  |                     |         |                     |   |                | 
|                                         
|                                          |  | Mid-Atlantic |         | Midwest |   | Southwest |  | Northern California |         | Southern California |   | Total Segments |  | Corporate Not Allocable To Segments |         |  | Consolidated Total
|Revenues                                  |  | $            | 22,827  |         | $ | 15,297    |  | $                   | 27,060  |                     | $ | 11,332         |  | $                                   | 7,369   |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   
|Income from continuing operations         |  | $            | 11,274  |         | $ | 6,712     |  | $                   | 11,301  |                     | $ | 5,123          |  | $                                   | 3,380   |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   
|Assets                                    |  | $            | 590,318 |         | $ | 384,554   |  | $                   | 647,448 |                     | $ | 267,473        |  | $                                   | 206,320 |  | $                 
|                                          |  |              |         |         |   |           |  |                     |         |                     |   |                |  |                                     |         |  |                   





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FINANCIAL STATEMENTS



12.     Earnings per Share



We calculate earnings per share in
accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share which requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Additionally, the statement requires
a reconciliation of the numerator and denominator used in computing basic and diluted earnings per share. The table below presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share for the three
months ended March 31, 2003 and 2002:



|(in thousands, except per share data)                                   |  | Three Months Ended March 31, |       
|----------------------------------------------------------------------- |  | ---------------------------- | ------
|Reconciliation of the numerator used for basic earnings per
share       |  |                              | 2003  
|Income from continuing operations                                       |  | $                            | 14,378
|Preferred dividends                                                     |  |                              | (2,113
|Gain on sale of properties                                              |  |                              | 1,132 
|                                                                        |  |                              |       
|Income from continuing operations applicable to common shareholders     |  | $                            | 13,397
|                                                                       
|Discontinued operations                                                 |  |                              |      
|Extraordinary items                                                     |  |                              |      
|                                                                        |  |                              |       
|Net income applicable to common shareholders                            |  | $                            | 13,397
|                                                                       
|Reconciliation of the denominator used for basic earnings per
share     |  |                              |       
|Weighted average common shares outstanding                              |  |                              | 38,949
|                                                                        |  |                              |       
|Basic earnings per share                                                |  | $                            | 0.34  
|                                                                        |  |                              |       
|                                                                       
|Reconciliation of the numerator used for dilutive earnings per
share    |  |                              |       
|Income from continuing operations                                       |  | $                            | 14,378
|Preferred dividends                                                     |  |                              | (2,113
|Gain on sale of properties                                              |  |                              | 1,132 
|                                                                        |  |                              |       
|Income from continuing operations applicable to common shareholders     |  | $                            | 13,397
|                                                                       
|Discontinued operations                                                 |  |                              |      
|Extraordinary items                                                     |  |                              |      
|                                                                        |  |                              |       
|                                                                        |  | $                            | 13,397
|                                                                       
|Reconciliation of the denominator used for dilutive earnings per
share  |  |                              |       
|Weighted average common shares outstanding                              |  |                              | 38,949
|Preferred shares(1)                                                     |  |                              |      
|Options                                                                 |  |                              | 111   
|                                                                        |  |                              |       
|Weighted average common shares and common share equivalents outstanding |  |                              | 39,060
|                                                                        |  |                              |       
|Diluted earnings per share                                              |  | $                            | 0.34  
|                                                                        |  |                              |       



|(1) |  | Preferred shares for the three months ended March 31, 2003 and 2002 are excluded from the
denominator in calculating dilutive earnings per share as such shares were anti-dilutive for the periods; therefore, the numerator used in the calculation of dilutive earnings per share is income applicable to common shareholders for the three
months ended March 31, 2003 and 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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FINANCIAL STATEMENTS



13.       Share-Based
Compensation



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



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



Historically, we applied the intrinsic value based method of
accounting as prescribed by APB Opinion 25 and related Interpretations in accounting for our share-based awards. Had we fully adopted Statements of Financial Accounting Standards No. 123, for awards issued prior to January 1, 2003, it would have
changed our method for recognizing the cost of our plans. Had the compensation cost for our share-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, our net income and net income per common
share for the three months ended March 31, 2003 and 2002 would approximate the pro forma amounts below:



|                                             |  | (amounts in thousands, except per share data)
|-------------------------------------------- |  | ---------------------------------------------
|                                             |  | As reported 3/31/03                          
|SFAS No. 123 charge                          |  | $                                            
|APB 25 charge                                |  | $                                            
|Net income applicable to common shareholders |  | $                                            
|Net income per common share-basic            |  | $                                            
|Net income per common share-diluted          |  | $                                            



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



14.     Recently Issued Accounting Pronouncements



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



15.     Subsequent Events



On May 8, 2003, we acquired from an unrelated third party the 410 Warrenville Road building, a 60,434 net rentable square foot office
property located in the Chicago, Illinois area for gross proceeds of approximately $8.8 million. The acquisition was funded with proceeds from our revolving credit facility.



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



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



Overview



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



As of March 31, 2003, we owned interests in a diversified portfolio of 138 primarily suburban Class A office and suburban industrial
properties as follows:



|                      |  | Number of Buildings |  | Net Rentable Square Feet
|--------------------- |  | ------------------- |  | ------------------------
|                      |  |                     |  | (in millions)           
|Office properties     |  | 107                 |  | 15.7                    
|Industrial properties |  | 31                  |  | 2.3                     
|                      |  |                     |  |                         
|Total                 |  | 138                 |  | 18.0                    
|                      |  |                     |  |                         



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



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



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



|Region              |  | Revenues |        | Market
|------------------- |  | -------- | ------ | ------
|Mid-Atlantic        |  | $        | 24,507 |       
|Midwest             |  |          | 14,601 |       
|Southwest           |  |          | 30,225 |       
|Northern California |  |          | 12,322 |       
|Southern California |  |          | 7,942  |       
|                    |  |          |        |       
|Total               |  | $        | 89,597 |       
|                    |  |          |        |       



In
addition to the $89.6 million of regional revenues, during the three months ended March 31, 2003, we recognized $1.6 million of revenue which was not allocated to our regions.



At March 31, 2003, we had 16.2 million square feet of in-place leases representing 90% of the net rentable
square feet of our properties. Our leases range in term from 1 month to 20 years with an average term of 5 to 7 years. The 16.2 million square feet of in-place leases expire as follows:



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|(square feet in thousands) |  | Square Feet |  |       |  
|-------------------------- |  | ----------- |  | ----- | -
|2003                       |  | 1,220       |  | 7.5   | %
|2004                       |  | 2,658       |  | 16.4  | %
|2005                       |  | 1,998       |  | 12.3  | %
|2006                       |  | 1,948       |  | 12.0  | %
|2007                       |  | 2,062       |  | 12.8  | %
|Thereafter                 |  | 6,314       |  | 39.0  | %
|                           |  |             |  |       |  
|Total                      |  | 16,200      |  | 100.0 | %
|                           |  |             |  |       |  



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



On July 21, 2002, WorldCom, Inc. announced that WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Code in the United States Bankruptcy Court. At the time of the announcement, WorldCom subsidiaries had operating leases totaling 271,000 square feet in six of our properties. To date, we have received
formal notice of rejection of approximately 96,000 square feet of WorldCom related leases.



At March 31, 2003, we have five remaining office lease agreements with WorldCom subsidiaries representing approximately 175,000 square feet in four of our office properties. Annualized base rental
revenue from these leases equates to approximately $4.0 million, or approximately 1.3% of our annualized base rental revenue. All rent due as of March 31, 2003 under the office lease agreements, with the exception of approximately $19,000, has been
collected. Accruable rental income related to these leases totaled approximately $367,000 at March 31, 2003, all of which was reserved at March 31, 2003. Our WorldCom related office leases expire as follows: 17,118 square feet expire in April 2003;
18,039 square feet expire in July 2003; 106,576 square feet expire in April 2005; and 33,338 square feet expire at various times in 2006. Base rental rates under these leases range from $20.69 per square foot to $27.05 per square foot. In addition
to the office lease agreements, we have rooftop antenna lease agreements with WorldCom subsidiaries. These leases expire at various dates through June 30, 2008. Annualized rent from these leases equates to approximately $244,000.



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



First Quarter 2003 Transactions



On January 30, 2003, we completed a loan modification with Farm Bureau Life Insurance Company for the purpose
of swapping the collateral underlying the loan. The purpose of the modification was to provide us flexibility with respect to hold/sell decisions for the underlying collateral. At the time of the modification, the in-place loan had an outstanding
balance of approximately $5.6 million, an interest rate of 8.38% and a maturity of August 1, 2006. Per the modification, we received an additional $1.6 million of cash borrowings resulting in a modified principal balance of $7.2 million. The loan as
modified has an annual interest rate of 7.75% and a maturity date of January 1, 2007.



On February 4, 2003, we acquired from an unrelated third party the Park West C3 building, a 339,000 net rentable square foot office property located in the Dallas, Texas area for gross proceeds of
approximately $28.0 million. The acquisition was funded with proceeds from our revolving credit facility. The purchase price was allocated $6.0 million to land, $19.4 million to building and improvements and $2.6 million to deferred leasing costs
and tenant improvements.



On March 28, 2003, we
sold to an unrelated third party a 9.2 acre parcel of land located in the Sacramento, California area. The land which was classified as land held for development on our consolidated balance sheet resulted in net proceeds of approximately $2.4
million, and a gain on sale of $1.1 million. The proceeds from the sale have been placed in an escrow account pending a possible 1031 exchange for tax purposes.



In addition to the real estate transactions described above, during the three months ended March 31, 2003, we
transitioned two office properties containing in the aggregate 222,000 net rentable square feet from development into operations. The properties include one office property containing 40,000 net rentable square feet in Carlsbad, California and one
office property containing 182,000 net rentable square feet in the Northern Virginia area. The December 31, 2002 carrying amount of these development projects which totaled $41.4 million was reclassified on our consolidated balance sheet to land,
building and improvements and deferred leasing costs and tenant improvements in the amounts $5.7 million, $31.5 million and $4.2 million, respectively.



At December 31, 2002, the operating partnership held a 98% non-voting interest in Prentiss Properties Resources, which we



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



Critical Accounting Policies and Estimates



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



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



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

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

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

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

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



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



Real estate, leasehold improvements and land holdings are classified as long-lived assets held for sale or
long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying
amount or fair value, less cost to sell. With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered. All of our long-lived assets were classified as held and
used at March 31, 2003. Our operating real estate, which comprises the majority of our long-lived assets, had a carrying amount of $1.8 billion at March 31, 2003. A long-lived asset is considered impaired if its carrying amount exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Upon impairment, we would recognize an impairment loss to reduce the carrying value of the long-lived asset to our estimate of its fair value. Our
estimate of fair value and cash flows to be generated from our properties requires us to make assumptions related to future occupancy of our properties, future rental rates, tenant concessions, operating expenditures, property taxes, capital
improvements, the ability of our tenants to perform pursuant to their lease obligations, the holding period of our properties and the proceeds to be generated from the eventual sale of our properties. If one or more of our assumptions proves
incorrect or if our assumptions change, the recognition of an impairment loss on one or more properties may be necessary in the future. We did not recognize any impairment during the three months ended March 31, 2003.



Allowance for doubtful accounts



Accounts receivable are reduced by an allowance for amounts
that we estimate to be uncollectible. Our receivable balance is comprised primarily of accrued rental rate increases to be received over the life of in-place leases as well as rents and operating cost recoveries due from tenants. We regularly
evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. At March 31, 2003, we had total receivables of $49.8
million and an allowance for doubtful accounts of $8.4 million, resulting in a net receivable balance of $41.4 million. Of the $49.8 million in total receivables, $38.3 million represents accrued rental rate increases to be received over the life of
in-place leases. It is our policy to reserve all outstanding receivables that are 90-days past due along with a portion of the remaining receivable balance that we feel is uncollectible based on our evaluation of the outstanding receivable balance.
In addition, we increase our allowance for doubtful accounts for accrued rental rate increases, if we determine such future rent is uncollectible. Actual results may differ from these estimates under different assumptions or conditions. If our
assumptions, regarding the collectibility of accounts receivable, prove incorrect, we may experience write-offs in excess of our allowance for doubtful accounts. The table below presents



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bad debt expense recognized during the three months ended March 31, 2003, which includes increases or
decreases to our allowance for doubtful accounts. The table also presents our allowance for doubtful accounts at March 31, 2003.



|Three Months Ended and as of March 31, 2003            |  |  
|------------------------------------------------------ |  | -
|(in thousands)                                         |  |  
|Bad debt expense                                       |  | $
|Less: Bad debts realized during the period             |  |  
|                                                       |  |  
|Increase/(decrease) in allowance for doubtful accounts |  | $
|                                                       |  |  
|Allowance for doubtful accounts at period end          |  | $
|                                                       |  |  



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



Depreciation on buildings and improvements is provided under the straight-line method over an estimated useful life of 30 to 40 years for office buildings and 25 to 30 years for industrial buildings. Significant betterments
made to our real estate assets are capitalized and depreciated over the estimated useful life of the betterment. If our estimate of useful lives proves to be materially incorrect, the depreciation and amortization expense that we currently recognize
would also prove to be materially incorrect. A change in our estimate of useful lives would therefore, result in either an increase or decrease in depreciation and amortization expense and thus, an increase or decrease in earnings. The table below
presents real estate related depreciation and amortization expense recognized during the three months ended March 31, 2003:



|Three Months Ended March 31, 2003                 |  |  
|------------------------------------------------- |  | -
|(in thousands)                                    |  |  
|Real estate depreciation and amortization expense |  | $



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



In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, which includes, within its scope, real estate acquisitions, we estimate at the date of acquisition the fair value of
the various components of each real estate asset acquired and allocate the purchase price to each component accordingly. Generally this includes an allocation of the purchase price to land, building, leasing costs, leasehold improvements and to an
intangible asset or liability representing the difference between the contractual in-place leases and the fair value of such in-place leases. We determine the fair value of the components using a variety of methods and assumptions all of which
result in a general approximation of fair value. Differing assumptions and methods could result in different estimates of fair value and thus, a different purchase price allocation. Financial Accounting Standards No. 141 is effective for business
combinations for which the date of acquisition is July 1, 2001, or later. During the three months ended March 31, 2003, we acquired one office property in our Southwest Region. Based on our estimate of the fair value of each component of the real
estate property acquired, we allocated the purchase price as follows:



|(in thousands)                           |  |  
|---------------------------------------- |  | -
|Land                                     |  | $
|Buildings and improvements               |  | $
|Leasing costs and leasehold improvements |  | $
|Intangible asset/(liability)             |  | $



Fair value of
derivative instruments



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



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



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hedges, changes in fair value are recognized in earnings.



Our objective in using derivatives is to add stability to
interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. During the three months ended March 31, 2003, such derivatives were used to hedge the variable cash flows
associated with a portion of our variable-rate debt.



As of March 31, 2003, we did not have any derivatives designated as fair value hedges. Additionally, we do not use derivatives for trading or speculative purposes and currently, we do not have any derivatives that are not designated
as hedges.



To determine the fair value of our
derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, standard market conventions
and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may
never actually be realized. Future cash inflows or outflows from our derivative instruments depend upon future borrowing rates. If assumptions about future borrowing rates prove to be materially incorrect, the recorded value of these agreements
could also prove to be materially incorrect. Because we use the derivative instruments to hedge our exposure to variable interest rates, thus effectively fixing a portion of our variable interest rates, the impact of changes in future borrowing
rates could result in our interest expense being either higher or lower than might otherwise have been incurred on our variable-rate borrowings had the rates not been fixed. The table below presents the amount by which cash payments made under our
interest rate swap agreements exceeded cash receipts from our agreements during the three months ended March 31, 2003. The table also presents the estimated fair value of our in-place swap agreements as of March 31, 2003.



|Three Months Ended and as of March 31, 2003           |  |   |        
|----------------------------------------------------- |  | - | -------
|(in thousands)                                        |  |   |        
|Net cash paid under our interest rate swap agreements |  | $ | 2,318  
|                                                     
|Fair value of interest rate swaps                     |  | $ | (15,902

|
|

|
|



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Results of Operations



Comparison of the three months ended March 31, 2003 to
the three months ended March 31, 2002



The
table below presents our consolidated statements of income for the three months ended March 31, 2003 and 2002:



|Consolidated Statements of Income                                                |  | Three Months Ended March 31, |       
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------
|(in thousands)                                                                   |  | 2003                         |       
|Revenues:                                                                        |  |                              |       
|Rental income                                                                    |  | $                            | 86,841
|Service business and other income                                                |  |                              | 4,355 
|                                                                                 |  |                              |       
|                                                                                 |  |                              | 91,196
|                                                                                 |  |                              |       
|Expenses:                                                                        |  |                              |       
|Property operating and maintenance                                               |  |                              | 22,678
|Real estate taxes                                                                |  |                              | 10,277
|General and administrative and personnel cost                                    |  |                              | 2,396 
|Operating expenses of service business                                           |  |                              | 2,219 
|Interest expense                                                                 |  |                              | 17,068
|Amortization of deferred financing costs                                         |  |                              | 509   
|Depreciation and amortization                                                    |  |                              | 19,626
|                                                                                 |  |                              |       
|                                                                                 |  |                              | 74,773
|                                                                                 |  |                              |       
|                                                                                
|Income from continuing operations before minority interests and equity in
income |  |                              | 16,423
|                                                                                
|Minority interests                                                               |  |                              | (2,671
|Equity in income of joint ventures and unconsolidated subsidiaries               |  |                              | 626   
|                                                                                 |  |                              |       
|                                                                                
|Income from continuing operations                                                |  |                              | 14,378
|                                                                                
|Discontinued operations:                                                         |  |                              |       
|Income from discontinued operations                                              |  |                              |      
|Minority interests related to discontinued operations                            |  |                              |      
|                                                                                 |  |                              |       
|                                                                                 |  |                              |      
|                                                                                
|Income before gain on sale of properties                                         |  |                              | 14,378
|                                                                                
|Gain on sale of properties                                                       |  |                              | 1,132 
|                                                                                 |  |                              |       
|                                                                                
|Net income                                                                       |  | $                            | 15,510
|Preferred dividends                                                              |  |                              | (2,113
|                                                                                 |  |                              |       
|Net income applicable to common shareholders                                     |  | $                            | 13,397
|                                                                                 |  |                              |       



Included
below is a discussion of the significant events or transactions that have impacted our results of operations when comparing the three months ended March 31, 2003 to the three months ended March 31, 2002.



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



In addition to the acquisition of the Burnett Plaza property, during the period January 1, 2002 through March 31, 2003, we acquired two
office properties containing in the aggregate approximately 603,000 net rentable square feet. The properties include the 12601 Fair Lakes Circle building in our Mid-Atlantic Region and the Park West C3 building in our Southwest Region. The 12601
Fair Lakes Circle building was acquired on November 18, 2002 for gross proceeds of approximately $55.0 million and contains approximately 264,000 net rentable square feet. The Park West C3 building was acquired on February 4, 2003 for gross proceeds
of approximately $28.0 million and contains approximately 339,000 net rentable square feet.



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Leasing of Development
Projects.Our results of operations, for the three months ended March 31, 2003, have been bolstered by the contribution of several development projects. The projects include approximately 182,000 net rentable square feet in our Mid-Atlantic
Region, 223,000 net rentable square feet in our Southwest Region and 40,000 net rentable square feet in our Southern California Region. The projects were approximately 58.0% leased and rent paying for the three month period ended March 31, 2003
compared to approximately 36.0% for the three month period ended March 31, 2002.



Real Estate Dispositions. During the period January 1, 2002 through March 31, 2003, we disposed of seven industrial properties containing 875,000 net rentable square feet and three office properties containing 194,000
net rentable square feet. The industrial properties were sold on September 10, 2002 and included all of the industrial properties within our Mid-Atlantic Region. The office properties were sold on October 17, 2002 and represented our only office
holdings within the Los Angeles area, a market within our Southern California Region. The sales resulted in aggregate gross proceeds of $56.0 million which were used to repay a portion of the outstanding borrowings under our revolving credit
facility.



Other Significant Real Estate Transactions.On
November 22, 1999, we acquired 123 North Wacker, a 537,000 net rentable square foot office property located in our Midwest Region for a purchase price of approximately $87.3 million. The property was primarily leased to a single tenant whose
intention was to vacate the property in September 2001 upon the expiration of the in-place lease. Our intention was to convert and market the building for lease as a multi-tenant property. The property, which was vacated as intended, is currently
approximately 81% leased as compared to 59% leased at March 31, 2002.



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



The following is a
discussion of the material changes in our consolidated statements of income and a discussion of the impact that the significant events or transactions, as described above, had on one or more line items of our consolidated statements of income when
comparing the three months ended March 31, 2003 to the three months ended March 31, 2002.



Rental Income. Rental income increased by $3.5 million, or 4.3%, from $83.3 million to $86.8 million. The real estate acquisitions and development properties coming on-line resulted in increases
of $6.6 million and $657,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $895,000. These increases were partially offset by a decrease of $4.6 million from our other properties relating primarily to
occupancy declines in our portfolio.



Property Operating and
Maintenance. Property operating and maintenance costs increased by $2.9 million, or 14.6%, from $19.8 million to $22.7 million. The real estate acquisitions and development properties coming on-line resulted in increases of $1.8 million and
$517,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $407,000 and property operating and maintenance expenses related to our other properties increased by $159,000 relating primarily to increases in
property related insurance offset by a decrease in bad debt expense during the period. The increase in property related insurance resulted primarily from the premiums paid for terrorism insurance.



Real Estate Taxes. Real estate taxes in total remained relatively
unchanged. However, real estate acquisitions and development properties coming on-line resulted in increases of $460,000 and $33,000, respectively. The leasing of our 123 North Wacker property resulted in an increase of $363,000. The increases were
partially offset by a decrease in our other properties of $872,000 primarily as a result of the reassessment of property values across our portfolio by the various taxing authorities.



Service Business and Other Income/Operating Expenses of Service Business.Service business and other income and the
operating expenses of service business increased as a result of the acquisition of the remaining interest in Prentiss Properties Resources and the resulting consolidation of the accounts with and into the accounts of the operating partnership.
During the three months ended March 31, 2002, our proportionate share of the results of operations of Prentiss Properties Resources were included in the line item equity in income of joint ventures and unconsolidated subsidiaries on
our consolidated statement of income.



Interest Expense.
Interest expense increased by $932,000, or 5.8%, from $16.1 million to $17.0 million, primarily as a result of an increase in weighted average borrowings outstanding for the three months ended March 31, 2003 compared to the three months ended March
31, 2002, accompanied by a decrease in capitalized interest from $1.8 million for the three months ended March 31, 2002 to $416,000 for the three months ended March 31, 2003. The increase was partially offset by a decrease in the weighted average
interest rate paid on outstanding borrowings from 6.83% to 6.60% for the respective periods.



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Depreciation and
Amortization. Depreciation and amortization increased by $3.5 million, or 22.0%, from $16.1 million to $19.6 million. The real estate acquisitions and development properties coming on-line resulted in increases of $1.4 million and $925,000,
respectively. The leasing of our 123 North Wacker property resulted in an increase of $512,000. Our other properties increased by $590,000 which is attributable to increases in depreciation and amortization of leasehold improvements which results
from leasing activity incurred subsequent to our acquisition of these properties.



Minority Interests. Minority interests decreased by $192,000, or 6.7 %, from $2.9 million to $2.7 million, primarily due to the minority interest holders proportionate share of the decrease in net income before
discontinued operations and minority interests from $20.5 million for the three months ended March 31, 2002 to $18.2 million for the three months ended March 31, 2003.



Discontinued Operations. Discontinued operations decreased by $618,000, or 100% due to the disposition of the seven
industrial properties containing 875,000 net rentable square feet and three office properties containing 194,000 net rentable square feet during 2002, representing all of the assets classified as discontinued operations during the three months ended
March 31, 2002. There were no assets classified as discontinued operations during the three months ended March 31, 2003.



Gain on Sale of Properties. The gain on sale of properties of $1.1 million resulted from the sale in March 2003 of a 9.2 acre parcel of land in our
Northern California Region.



Liquidity and Capital Resources



Cash and cash equivalents were $9.5 million
and $5.1 million at March 31, 2003 and December 31, 2002, respectively. The increase in cash and cash equivalents is a result of net cash provided by operating and financing activities exceeding net cash used in investing activities. Cash flows
provided by operating activities totaled $17.6 million for the three months ended March 31, 2003, compared to $28.0 million for the three months ended March 31, 2002.



Net cash used in investing activities totaled $32.1 million for the three months ended March 31, 2003
compared to $120.8 million for the three months ended March 31, 2002. The decrease in net cash used in investing activities of $88.7 million is due primarily to a decrease in cash used to purchase real estate and mortgage loans as well as a decrease
in cash used in the development and redevelopment of real estate.



Net cash provided by financing activities totaled $18.9 million for the three months ended March 31, 2003 compared to $94.0 million for the three months ended March 31, 2002. The decrease in net cash provided by financing
activities of $75.1 million is due primarily to net borrowings of $148.4 million for the three months ended March 31, 2002 compared to net borrowings of $45.4 million for the three months ended March 31, 2003, a decrease in cash generated from the
sale of common shares of $20.5 million, offset by cash used of $50.5 million during the three months ended March 31, 2002 for the repurchase of our outstanding Series C Cumulative Redeemable Perpetual Preferred Units.



Net cash flow from operations represents the primary source of
liquidity to fund distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. We expect that our revolving credit facility will provide for funding of working capital and revenue enhancing tenant improvements,
unanticipated cash needs as well as acquisitions and development costs. Our principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements and the minimum distributions required to maintain our REIT
qualification under the Internal Revenue Code.



Our net cash flow from operations is generally derived from rental revenues and operating expense reimbursements from tenants and, to a limited extent, from fees generated by our office and industrial real estate management service
business. Our net cash flow from operations is therefore dependent upon the occupancy level of our properties, the collectibility of rent from our tenants, the level of operating and other expenses, and other factors. Material changes in these
factors may adversely affect our net cash flow from operations. Such changes, in turn, would adversely affect our ability to fund distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. In addition, a
material adverse change in our net cash flow from operations may affect the financial performance covenants under our revolving credit facility. If we fail to meet any of our financial performance covenants, our revolving credit facility may become
unavailable to us, or the interest charged on the revolving credit facility may increase. Either of these circumstances could adversely affect our ability to fund working capital and revenue enhancing tenant improvements, unanticipated cash needs,
acquisitions and development costs.



In order to
qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income, excluding capital gains. We expect to make distributions to our shareholders primarily based on our cash flow from operations distributed by
our operating partnership. We anticipate that our short-term liquidity needs will be fully funded from cash flows provided by operating activities and, when necessary to fund shortfalls resulting from the timing of collections of accounts receivable
in the ordinary course of business, from our revolving credit facility. In the event that our cash flow needs exceed cash flows provided



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by operating activities, we may be forced to incur additional debt or sell real estate properties to fund
such cash flow needs.



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



Debt Financing



As of March 31, 2003, we had outstanding
total indebtedness, including our pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 46.7% of total market capitalization based on a common share price of $27.10 per common share. The amount of indebtedness that we
may incur, and the policies with respect thereto, are not limited by our declaration of trust and bylaws, and are solely within the discretion of our board of trustees, limited only by various financial covenants in our credit agreements. Our credit
agreements limit total indebtedness to 55% of total assets and require an interest coverage ratio of at least 2 to 1.



We have in place a $300 million unsecured revolving credit facility with a group of 12 banks. The facility, which was renewed in May 2002,
matures in May 2005. The facility has an initial interest rate of LIBOR plus 137.5 basis points. Additionally, we are required to pay an average unused commitment fee of 25 basis points per annum if the unused portion of the credit facility is
greater than $200 million. The fee is reduced to 20 basis points per annum if the unused portion is less than or equal to $200 million, but greater than $100 million. The fee is further reduced to 15 basis points per annum if the unused portion is
less than or equal to $100 million. During the three months ended March 31, 2003, we had net borrowings under our credit facility of $45.5 million and an outstanding balance of $201.5 million at March 31, 2003 resulting in an available balance of
$98.5 million.



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The following
table sets forth our mortgages and notes payable, including our pro rata share of joint venture debt as of March 31, 2003:



|Borrower/Description                           |  | Current Balance |           | Amortization |       | Interest Rate |                | Maturity
|---------------------------------------------- |  | --------------- | --------- | ------------ | ----- | ------------- | -------------- | --------
|                                               |  | (in thousands)  |           |              |       |               |                |         
|Broadmoor Austin Associates                    |  |                 |           |              |       |               |                |         
|Broadmoor Austin(1)                            |  | $               | 71,584    |              | 16 yr |               | 7.04%          |         
|Burnett Plaza Associates                       |  |                 |           |              |       |               |                |         
|Burnett Plaza                                  |  |                 | 72,100    |              | None  |               | LIBOR + 2.150% |         
|PL Properties Associates, L.P.                 |  |                 |           |              |       |               |                |         
|Park West C2                                   |  |                 | 33,858    |              | 30 yr |               | 6.63%          |         
|Prentiss Properties Acquisition Partners, L.P. |  |                 |           |              |       |               |                |         
|Bachman West                                   |  |                 | 2,804     |              | 25 yr |               | 8.63%          |         
|One Westchase Center                           |  |                 | 23,386    |              | 25 yr |               | 7.84%          |         
|Collateralized Term Loan(2)                    |  |                 | 71,375    |              | 25 yr |               | LIBOR + 1.625% |         
|Walnut Glen Tower                              |  |                 | 33,873    |              | 30 yr |               | 6.92%          |         
|Revolving Credit Facility                      |  |                 | 201,500   |              | None  |               | LIBOR + 1.375% |         
|Unsecured Term Loan                            |  |                 | 75,000    |              | None  |               | LIBOR + 1.375% |         
|Highland Court                                 |  |                 | 4,583     |              | 25 yr |               | 7.27%          |         
|Plaza I & II                                   |  |                 | 7,186     |              | 18 yr |               | 7.75%          |         
|7101 Wisconsin Avenue                          |  |                 | 20,591    |              | 30 yr |               | 7.25%          |         
|2500 Cumberland Parkway                        |  |                 | 14,150    |              | 30 yr |               | 7.46%          |         
|Ordway                                         |  |                 | 48,349    |              | 30 yr |               | 7.95%          |         
|World Savings Center                           |  |                 | 28,699    |              | 30 yr |               | 7.91%          |         
|One OHare Centre                              |  |                 | 40,175    |              | 30 yr |               | 6.80%          |         
|3130 Fairview Park Drive                       |  |                 | 22,487    |              | 30 yr |               | 7.00%          |         
|Research Office Center                         |  |                 | 44,340    |              | 28 yr |               | 7.64%          |         
|Bannockburn Centre                             |  |                 | 26,340    |              | 30 yr |               | 8.05%          |         
|Del Mar Loan                                   |  |                 | 44,240    |              | 30 yr |               | 7.41%          |         
|Prentiss Properties Corporetum, L.P.           |  |                 |           |              |       |               |                |         
|Corporetum Office Campus                       |  |                 | 24,908    |              | 30 yr |               | 7.02%          |         
|Prentiss Properties Natomas, L.P.              |  |                 |           |              |       |               |                |         
|Natomas Corporate Center                       |  |                 | 36,405    |              | 30 yr |               | 7.02%          |         
|Prentiss Properties Real Estate Fund I, L.P.   |  |                 |           |              |       |               |                |         
|PPREFI Portfolio Loan(3)                       |  |                 | 180,100   |              | None  |               | 7.58%          |         
|Tysons International Partners                  |  |                 |           |              |       |               |                |         
|1676 International(4)                          |  |                 | 11,131    |              | 28 yr |               | 7.68%          |         
|8260 Greensboro(4)                             |  |                 | 3,983     |              | 28 yr |               | 7.83%          |         
|                                               |  |                 |           |              |      
|Total                                          |  | $               | 1,143,147 |              |       |               |                |         
|                                               |  |                 |           |              |      

---

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

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

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

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



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



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Under our loan
agreements, we are required to satisfy various affirmative and negative covenants, including limitations on total indebtedness, total collateralized indebtedness and cash distributions, as well as obligations to maintain certain minimum tangible net
worth and certain minimum interest coverage ratios. Our credit agreements limit total indebtedness to 55% of total assets and require a debt service coverage ratio of at least 2 to 1. Our credit agreements provide for a 30-day period to cure a
default caused by our failure to punctually and properly perform, observe and comply with the covenants contained therein. The agreements also provide for an additional 75-day period if such failure is not capable of being cured within 30-days and
we are diligently pursuing the cure thereof. We were in compliance with these covenants at March 31, 2003.



Hedging Activities



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



We may employ forwards or purchased options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in
net income in the same period that the anticipated transaction occurs, expires or is otherwise terminated. The following table summarizes the notional amounts and fair values of our derivative financial instruments at March 31, 2003. The notional
amount provides an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.



|Notional Amount |  | Swap Rate Paid (Fixed) |  | Effective Fixed Rate |  | Swap Rate Received (Variable) at March 31,
2003 |  | Swap Maturity  |  | Fair Value     |        
|--------------- |  | ---------------------- |  | -------------------- |  | ----------------------------------------------- |  | -------------- |  | -------------- | -------
|                |  |                        |  |                      |  |                                                 |  |                |  | (in thousands) |        
|$ 50 million    |  | 1.990%                 |  | 3.365%               |  | 1.30%                                           |  | August 2003    |  | $              | (136   
|$ 50 million    |  | 6.253%                 |  | 7.628%               |  | 1.30%                                           |  | September 2004 |  |                | (3,642 
|$ 60 million    |  | 6.248%                 |  | 7.623%               |  | 1.30%                                           |  | September 2004 |  |                | (4,366 
|$ 15 million    |  | 4.345%                 |  | 6.495%               |  | 1.30%                                           |  | July 2005      |  |                | (852   
|$ 25 million    |  | 4.345%                 |  | 6.495%               |  | 1.30%                                           |  | July 2005      |  |                | (1,419 
|$ 20 million    |  | 5.985%                 |  | 7.610%               |  | 1.30%                                           |  | March 2006     |  |                | (2,193 
|$ 30 million    |  | 5.990%                 |  | 7.615%               |  | 1.30%                                           |  | March 2006     |  |                | (3,294 
|                |  |                        |  |                      |  |                                                
|Total           |  |                        |  |                      |  |                                                 |  |                |  | $              | (15,902
|                |  |                        |  |                      |  |                                                



Capital Improvements



Our properties require periodic investments
of capital for tenant-related capital expenditures and for general capital improvements. The majority of capital required relates to tenant-related capital expenditures and is dependent upon our leasing activity. Our leasing activity is a function
of the percentage of our in-place leases expiring in current and future periods accompanied by our exposure to tenant defaults and our ability to increase the average occupancy of our portfolio. For the three months ended March 31, 2003 capital
expenditures related to our in-service properties totaled $4.3 million. We classify capital expenditures for in-service properties as non-incremental and incremental revenue-enhancing capital expenditures representing our estimate of recurring
versus non-recurring capital requirements, respectively. Our non-incremental and incremental capital expenditures for the three months ended March 31, 2003 totaled approximately $4.2 million and $148,000, respectively.



Equity Financing



During the three months ended March 31, 2003, we issued 722
common shares of beneficial interest pursuant to our dividend reinvestment plan and 12,002 common shares as a result of option exercises. The cash proceeds totaling approximately $262,000 were used to repay a portion of the outstanding borrowings
under our revolving credit facility.



Off-Balance Sheet
Arrangements



Effective January 1, 2003, our
operating partnership acquired for approximately $67,000, the voting stock of Prentiss Properties Resources, all of which was held by Ampulla, LLC, a single member limited liability company owned by Michael V. Prentiss, Chairman of the Board of
Prentiss Properties Trust. Prentiss Properties Resources was incorporated in March 2001 to serve as a Taxable REIT Subsidiary and provide management and other services to our operating partnership and third-party clients. The management services
business serves a broad base of clients, including major financial institutions and pension funds, large corporate



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users, real estate advisory firms and real estate investment groups. Through Prentiss Properties
Resources, we offer a full range of fee-based services, including property management, leasing, tenant construction, insurance, accounting, tax, acquisition, disposition, facilities management, and corporate and asset management services. Prior to
this transaction, we accounted for our interest in Prentiss Properties Resources, using the equity method of accounting. Subsequent to this transaction, the operating partnership owns 100% of Prentiss Properties Resources and we consolidate the
accounts of Prentiss Properties Resources with and into the accounts of the operating partnership.



At March 31, 2003 we had the following off-balance sheet arrangements: (1) a non-controlling 50% interest in Broadmoor Austin Associates,
a real estate joint venture; (2) a 25% non-controlling interest in Tysons International Partners, a real estate joint venture; and (3) a 1% non-controlling interest in certain real estate assets.



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



The
following information summarizes the financial position at March 31, 2003 for the investments in which we held an unconsolidated interest at March 31, 2003:



|Summary of Financial Position: |  |              |         |               |   |              |  |   |                     
|------------------------------ |  | ------------ | ------- | ------------- | - | ------------ |  | - | --------------------
|(in thousands)                 |  | Total Assets |         | Total Debt(1) |   | Total Equity |  |   | Companys Investment
|Broadmoor Austin Associates    |  | $            | 107,575 |               | $ | 143,168      |  | $ | (36,259             
|Tysons International Partners  |  |              | 95,816  |               |   | 60,455       |  |   | 33,415              
|Other Investments              |  |              |        |               |   |             |  |   |                    
|                               |  |              |         |               |   |              |  |   |                     
|                               |  |              |         |               |   |              |  |   |                     
|                               |  |              |         |               |   |             

---

|(1) |  | The mortgage debt, all of which is non-recourse, is collateralized by the individual real
estate property or properties within each venture, the net book value of which totaled $177.3 million at March 31, 2003. Our proportionate share of the non-recourse mortgage debt totaled $86.7 million at March 31, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following information summarizes the results of operations
for the three months ended March 31, 2003 for unconsolidated investments which impacted our first quarter 2003 results of operations:



|Summary of Operations:        |  |               |       |            |   |                                     
|----------------------------- |  | ------------- | ----- | ---------- | - | ------------------------------------
|(in thousands)                |  | Total Revenue |       | Net Income |   | Companys Share of Net Income/(Loss)
|Broadmoor Austin Associates   |  | $             | 5,056 |            | $ | 1,128                               
|Tysons International Partners |  |               | 3,244 |            |   | 248                                 
|                              |  |               |       |            |   |                                     
|                              |  |               |       |            |   |                                     
|                              |  |               |       |            |  



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



Contractual Obligations and Commercial Commitments



We have contractual obligations including mortgages and notes payable and ground lease obligations. The table below presents, as of March 31, 2003, our future scheduled principal repayments of
mortgages and notes payable and ground lease obligations, including our pro rata share of debt and ground lease obligations of our of joint venture properties:



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



As a
condition of the purchase and sale and as security for our guarantee, as discussed under the Off-Balance Sheet Arrangements section above, we provided to the title company at closing, irrevocable letters of credit, totaling $1.4 million, drawn on a
financial institution and identifying the purchaser as beneficiary. The balance of the letters of credit which total $1.3 million at March 31, 2003, expires as follows:



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



Funds from Operations



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



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|Funds from operations                                                      |  | Three Months Ended March 31,
|-------------------------------------------------------------------------- |  | ----------------------------
|(in thousands)                                                             |  | 2003                        
|Net income                                                                 |  | $                           
|Add:                                                                       |  |                             
|Real estate depreciation and amortization(1)                               |  |                             
|Real estate depreciation and amortization of unconsolidated joint
ventures |  |                             
|Minority interests(2)                                                      |  |                             
|Less:                                                                      |  |                             
|Gain on sales                                                              |  |                             
|                                                                           |  |                             
|Funds from operations                                                      |  | $                           
|                                                                           |  |                             

---

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

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



Funds from operations decreased by $1.2 million for the three
months ended March 31, 2003 from the three months ended March 31, 2002 as a result of the factors discussed in the analysis of operating results.



Recently Issued Accounting Pronouncements



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



Inflation



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



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



Our primary market risk is exposure to changes in interest rates as a result of our revolving credit facility and long-term debt. At March 31, 2003, we had outstanding total indebtedness, including our
pro rata share of joint venture debt, of approximately $1.1 billion, or approximately 46.7% of total market capitalization. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower
our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable
with such arrangement. In addition, we may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps and floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes. Approximately 63.3% of our outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.44% at March 31, 2003. Of the remaining $420.0 million, or 36.7%, representing our variable rate debt, $250.0 million was effectively locked at an interest rate (before the spread over LIBOR) of 5.32% through our interest rate swap
agreements. We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.



|(dollars in thousands)    |  | 2003 |        |   | 2004 |   |         | 2005 |  |   | 2006    |   |  | 2007 |        |   | Thereafter |   |         | Total |  | Fair Value |        
|------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---------- | - | ------- | ----- |  | ---------- | -------
|Liabilities               |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Long-Term Debt:           |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Fixed Rate                |  | $    | 9,563  |   |      | $ | 32,130  |      |  | $ | 42,336  |   |  | $    | 13,987 |   |            | $ | 196,757 |       |  | $          | 428,399
|Average Interest Rate     |  |      | 7.44   | % |      |   | 7.43    | %    |  |   | 7.45    | % |  |      | 7.46   | % |            |   | 7.39    | %     |  |            | 7.41   
|Variable Rate             |  | $    | 562    |   |      | $ | 70,813  |      |  | $ | 273,600 |   |  | $    | 75,000 |   |            |   |        |       |  |            |       
|Average Interest Rate     |  |      | 2.89   | % |      |   | 2.89    | %    |  |   | 2.87    | % |  |      | 2.71   | % |            |   |        |       |  |            |       
|                         
|Interest Rate Derivatives |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Interest Rate Swaps:      |  |      |        |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |         |       |  |            |        
|Variable to Fixed         |  | $    | 50,000 |   |      | $ | 110,000 |      |  | $ | 40,000  |   |  | $    | 50,000 |   |            |   |        |       |  |            |       
|Average Pay Rate          |  |      | 5.32   | % |      |   | 5.73    | %    |  |   | 5.52    | % |  |      | 5.99   | % |            |   |        |       |  |            |       
|Average Receive Rate      |  |      | 1.30   | % |      |   | 1.30    | %    |  |   | 1.30    | % |  |      | 1.30   | % |            |   |        |       |  |            |       



Item 4. Controls and Procedures



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



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





33



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##### Table of Contents



PART II

OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 2. Changes in Securities and Use of Proceeds



None



Item 3. Defaults Upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



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



|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to our Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by reference herein).                                                                                                                                                                                                                                                                
|           
|3.2         |  | Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to our Form 10-Q, filed on May 15, 2002, File No.
001-14516).                                                                                                                                                                                                                                                                                                                                          
|           
|3.3         |  | Amendment No. 1 to the Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.3 to our Form 10-Q, filed on
May 15, 2002, File No. 001-14516).                                                                                                                                                                                                                                                                                                                   
|           
|3.4         |  | Articles Supplementary, dated February 17, 1998, Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Junior Participating Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, Series B, and Fixing Distribution and Other Preferences and Rights of Such Shares (filed as an Exhibit to our Registration
Statement on Form 8-A, filed on February 17, 1998, File No. 000-23813 and incorporated by reference herein).
|           
|3.5         |  | Articles Supplementary, dated June 25, 1998, Classifying and Designating a Series of Preferred Shares of Beneficial
Interest as Series B Cumulative Redeemable Perpetual Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Shares (included as Exhibit 3.5 to our Form 10-Q, filed on August 12, 1998, File No.
001-14516).                                                                                         
|           
|3.6         |  | Articles Supplementary, dated March 20, 2001 (filed as Exhibit 3.6 to our Report on Form 10-K, filed March 27, 2001,
File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                                                                                            
|           
|3.7         |  | Articles Supplementary Classifying and Designating a Series of Preferred Shares of Beneficial Interest as Series D
Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of such Shares, dated March 20, 2001 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2001, File No.
001-14516, and incorporated by reference herein).                                              
|           
|3.8         |  | Articles Supplementary, dated January 4, 2002 (filed as Exhibit 3.7 to our Report on Form 10-K, filed March 27, 2002,
File No. 001-14516, and incorporated by reference herein).                                                                                                                                                                                                                                                                                           
|           
|4.1         |  | Form of Common Share Certificate (filed as Exhibit 4.1 to our Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).                                                                                                                                                                                                                                                                                           
|           
|4.2         |  | Amended and Restated Rights Agreement, dated January 22, 2002, between Prentiss Properties Trust and EquiServe Trust
Company, N.A., as Rights Agent (filed as Exhibit 1 to Amendment No. 2 to our Registration Statement on Form 8-A, filed on February 6, 2002, File No. 000-014516).                                                                                                                                                                                     
|           
|4.3         |  | First Amendment dated June 26, 2002 to the Amended and Restated Rights Agreement between Prentiss Properties Trust and
Equiserve Trust Company, N.A. as Rights Agent (filed as Exhibit 2 to Amendment No. 3 to our Registration Statement on Form 8-A, filed on June 27, 2002, File No. 001-014516).                                                                                                                                                                       



34



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##### Table of Contents

|     
|-----
|4.4  
|     
|4.5  
|     
|*10.1
|     
|*10.2
|     
|*10.3
|     
|*10.4
|     
|*99.1
|     
|*99.2

---

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



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



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



35



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##### Table of Contents



SIGNATURE



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





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





36



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##### Table of Contents



CERTIFICATIONS



I, Thomas F.
August, certify that:



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



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



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



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



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



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



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



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



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



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



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



Date: May 12, 2003



/s/    THOMAS F.
AUGUSTThomas F. August Chief Executive Officer




37



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##### Table of Contents



I, Michael A. Ernst, certify
that:



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



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



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



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



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



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



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



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



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



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



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



Date: May 12, 2003





/s/    Michael A. ErnstMichael A. Ernst Chief Financial Officer




38