<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                   FORM 10-Q




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



For the Quarter Ended September 30, 1999         Commission File Number  1-14516


                           PRENTISS PROPERTIES TRUST
            (Exact Name of Registrant as Specified in its Charter)



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



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


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



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

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding
as of November 10, 1999, was 37,608,439 and the number of outstanding
Participating Cumulative Redeemable Preferred Shares of Beneficial Interest,
Series A, was 3,773,585.
<PAGE>

PRENTISS PROPERIES TRUST

<TABLE>
<CAPTION>

                                     INDEX
                                     -----

<S>          <C>                                                                                <C>
Part I:      FINANCIAL INFORMATION                                                              Page Number
                                                                                                -----------
             Item 1.  Financial Statements

                      Consolidated Balance Sheets of Prentiss Properties Trust at
                      September 30, 1999 (unaudited) and December 31, 1998                             4

                      Consolidated Statements of Income of Prentiss Properties Trust
                      for the three month periods and the nine month periods ended
                      September 30, 1999 and 1998 (unaudited)                                          5

                      Consolidated Statements of Cash Flows of Prentiss Properties
                      Trust for the nine month periods ended September 30, 1999 and
                      1998 (unaudited)                                                                  6

                      Notes to Consolidated Financial Statements                                     7-14

             Item 2.  Management's Discussion and Analysis of Financial Condition and
                      Results of Operations                                                         15-26

             Item 3.  Quantitative and Qualitative Disclosures about Market Risk                       27

Part II:     OTHER INFORMATION

             Item 1.  Legal Proceedings                                                                28
             Item 2.  Changes in Securities                                                            28
             Item 3.  Defaults Upon Mortgages and Notes Payable                                        28
             Item 4.  Submission of Matters to a Vote of Security Holders                              28
             Item 5.  Other Information                                                                28
             Item 6.  Exhibits and Reports on Form 8-K                                              28-30

SIGNATURE                                                                                              31
</TABLE>

                                       2
<PAGE>

                           FORWARD-LOOKING STATEMENTS

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

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

 .  The Company's real estate acquisition,                .  Change in our investment, financing and borrowing
   redevelopment, development and construction              policies without shareholder approval;
   activities;

 .  Operating performance of properties;                  .  The Company's dependence on key personnel;

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

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

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

     Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the Company's current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to the
Company's operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. A detailed
discussion of risks is included in the Company's Form 10-K, filed on March 29,
1999, under the caption "Risk Factors."


                                     PART I
                             FINANCIAL INFORMATION

Item 1.  Financial Statements

                                       3
<PAGE>

                           PRENTISS PROPERTIES TRUST
                          CONSOLIDATED BALANCE SHEETS

                   (dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                               September 30,          December 31,
                                                                                    1999                  1998
                                                                            --------------------  --------------------
                                                                                (Unaudited)
                                               ASSETS
<S>                                                                         <C>                   <C>
Real estate.....................................................                     $1,852,779            $1,810,735
   Less: accumulated depreciation...............................                        (89,333)              (61,232)
                                                                                     ----------            ----------
                                                                                      1,763,446             1,749,503

Deferred charges and other assets, net..........................                        108,311                74,560
Receivables, net................................................                         24,363                20,484
Cash and cash equivalents.......................................                         12,647                 5,523
Escrowed cash...................................................                          6,621                 8,172
Other receivables (affiliates)..................................                          4,688                 2,245
Investments in joint ventures and unconsolidated subsidiary.....                         19,802                10,658
                                                                                     ----------            ----------
 Total assets...................................................                     $1,939,878            $1,871,145
                                                                                     ==========            ==========
                        LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
 Debt on real estate............................................                     $  854,842            $  800,263
 Accounts payable and other liabilities.........................                         57,561                62,410
 Distributions payable..........................................                         21,205                17,774
                                                                                     ----------            ----------
    Total liabilities...........................................                        933,608               880,447
                                                                                     ----------            ----------

Minority interest in operating partnership......................                        177,460               128,775
                                                                                     ----------            ----------
Minority interest in real estate partnerships...................                          1,458                 1,345
                                                                                     ----------            ----------

Commitments and contingencies

Shareholders' equity:
  Preferred shares $.01 par value, 20,000,000
  shares authorized, 3,773,585 shares issued and
  outstanding...................................................                        100,000               100,000
     Common shares $.01 par value, 100,000,000 shares
     authorized, 40,047,719 (includes 2,215,100 in treasury)
     and 39,930,288 (includes 998,800 in treasury)
     shares issued and outstanding at September 30, 1999
     and December 31, 1998, respectively........................                            400                   399
 Additional paid-in capital.....................................                        788,927               787,193
 Distributions in excess of accumulated earnings................                         (6,149)               (3,700)
 Common shares in treasury, at cost, 2,215,100
   and 998,800 at September 30, 1999 and
   December 31, 1998, respectively..............................                        (55,826)              (23,314)
                                                                                     ----------            ----------
   Total shareholders' equity...................................                        827,352               860,578
                                                                                     ----------            ----------
   Total liabilities and shareholders' equity...................                     $1,939,878            $1,871,145
                                                                                     ==========            ==========
</TABLE>

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

                                       4
<PAGE>

                           PRENTISS PROPERTIES TRUST
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                    Three Months     Three Months      Nine Months      Nine Months
                                                                        Ended            Ended            Ended            Ended
                                                                   Sept. 30, 1999   Sept. 30, 1998   Sept. 30, 1999   Sept. 30, 1998
                                                                   --------------  ---------------  ---------------  ---------------
<S>                                                                <C>              <C>              <C>              <C>
Revenues:
 Rental income.................................................           $76,119          $63,531         $220,179      $167,470
 Mortgage interest.............................................                 -              960                          2,880
 Management and other fees, net................................               609              580            1,804         1,543
                                                                          -------          -------         --------      --------
  Total revenues...............................................            76,728           65,071          221,983       171,893
                                                                          -------          -------         --------      --------
Expenses:
 Property operating and maintenance............................            18,218           15,874           51,037        39,455
 Real estate taxes.............................................             8,699            6,828           26,116        18,096
 General and administrative and personnel costs, net...........             2,122            1,889            6,532         5,768
 Interest expense..............................................            15,442           11,566           43,530        28,245
 Amortization of deferred financing costs......................               276              200              795           596
 Depreciation and amortization.................................            14,216           11,221           39,700        29,380
                                                                          -------          -------         --------      --------
  Total expenses...............................................            58,973           47,578          167,710       121,540
                                                                          -------          -------         --------      --------
Equity in income of joint ventures and unconsolidated
 subsidiary....................................................               973            2,222            3,217         5,172
                                                                          -------          -------         --------      --------

Income before gains on sale, minority interests, and
 extraordinary items...........................................            18,728           19,715           57,490        55,525
Gains on sale..................................................             1,354            4,379            1,643         8,203
Minority interests.............................................            (2,886)          (2,862)          (8,281)       (5,041)
                                                                          -------          -------         --------      --------

Income before extraordinary items..............................            17,196           21,232           50,852        58,687
Extraordinary items............................................                 -                -                -        (8,908)
                                                                          -------          -------         --------      --------
Net income.....................................................            17,196           21,232           50,852        49,779
Preferred dividends............................................            (1,660)          (1,505)          (4,830)       (4,146)
                                                                          -------          -------         --------      --------
Net income applicable to common shareholders...................           $15,536          $19,727         $ 46,022      $ 45,633
                                                                          =======          =======         ========      ========
Net income per common share before extraordinary items  basic..           $  0.41          $  0.50         $   1.21      $   1.41
                                                                          -------          -------         --------      --------
Extraordinary items............................................                 -                -                -         (0.21)
                                                                          -------          -------         --------      --------
Net income per common share  basic.............................           $  0.41          $  0.50         $   1.21      $   1.18
                                                                          -------          -------         --------      --------
Weighted average number of common shares outstanding  basic....            37,930           39,349           37,973        38,680
                                                                          =======          =======         ========      ========
Net income per common share before
   extraordinary items  diluted................................           $  0.41          $  0.49         $   1.21      $   1.38
Extraordinary items............................................                 -                -                -         (0.21)
                                                                          -------          -------         --------      --------
Net income per common share  diluted...........................           $  0.41          $  0.49         $   1.21      $   1.17
                                                                          =======          =======         ========      ========
Weighted average number of common shares and
 common share equivalents outstanding  diluted.................            38,063           43,280           38,068        42,425
                                                                          =======          =======         ========      ========
</TABLE>

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

                                       5
<PAGE>

                           PRENTISS PROPERTIES TRUST
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                       Nine Months               Nine Months
                                                                                          Ended                     Ended
                                                                                     Sept. 30, 1999             Sept. 30, 1998
                                                                                 -----------------------  --------------------------
<S>                                                                              <C>                      <C>
Cash Flows from Operating Activities:
   Net income.............................................................                    $  50,852                   $  49,779

   Adjustments to reconcile net income to net cash provided by operating
    activities:
       Minority interests.................................................                        8,281                       5,041
       Extraordinary items................................................                            -                       8,908
       Gains on sale......................................................                       (1,643)                     (8,203)
       Provision for doubtful accounts....................................                        1,076                         827
       Depreciation and amortization......................................                       39,700                      29,380
       Amortization of deferred financing costs...........................                          795                         596
   Equity in income of joint ventures and unconsolidated subsidiary.......                       (3,217)                     (5,172)
       Non-cash compensation..............................................                           75                          75
  Changes in assets and liabilities:
   Deferred charges and other assets......................................                       (2,593)                     (2,989)
   Receivables............................................................                       (4,955)                     (8,129)
   Escrowed cash..........................................................                       (2,113)                       (599)
   Other receivables (affiliates).........................................                       (2,443)                      4,401
   Accounts payable and other liabilities.................................                       (5,216)                      8,916
                                                                                              ---------                   ---------
   Net cash provided by operating activities..............................                       78,599                      82,831
                                                                                              ---------                   ---------
Cash Flows from Investing Activities:
   Purchase and development of real estate................................                      (69,692)                   (594,263)
   Investment in real estate..............................................                      (43,370)                    (35,723)
   Investment in joint ventures...........................................                       (9,918)                          -
   Investment in mortgage note receivable.................................                            -                         230
   Proceeds from sale of real estate......................................                       29,291                      42,905
 Distributions received from joint ventures and unconsolidated subsidiary.                        3,800                       7,194
                                                                                              ---------                   ---------
   Net cash used in investing activities..................................                      (89,889)                   (579,657)
                                                                                              ---------                   ---------
Cash Flows from Financing Activities:
   Net proceeds from sale of common shares................................                          829                     106,841
   Net proceeds from sale of preferred shares.............................                            -                      25,000
   Net proceeds from sale of preferred units..............................                       50,000                      95,000
   Purchase of treasury shares............................................                      (28,847)                    (23,314)
   Distributions paid to limited partners.................................                       (2,126)                     (3,061)
   Distributions paid to common shareholders..............................                      (47,399)                    (44,799)
   Distributions paid to preferred shareholders...........................                       (4,679)                     (2,671)
   Distributions paid to preferred unitholders............................                       (3,943)                       (131)
   Proceeds from debt on real estate......................................                      355,844                     617,441
   Repayments of debt on real estate......................................                     (301,265)                   (277,025)
                                                                                              ---------                   ---------
   Net cash provided by financing activities..............................                       18,414                     493,281
                                                                                              ---------                   ---------
   Net change in cash and cash equivalents................................                        7,124                      (3,545)
   Cash and cash equivalents, beginning of period.........................                        5,523                       7,075
                                                                                              ---------                   ---------
   Cash and cash equivalents, end of period...............................                    $  12,647                   $   3,530
                                                                                              =========                   =========
Supplemental Cash Flow Information:
   Cash paid for interest.................................................                    $  45,932                   $  29,492
                                                                                              =========                   =========
</TABLE>

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

                                       6
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


1.   The Organization

     Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The Company is self-
administered in that it provides its own administrative services, such as
accounting, tax and legal, internally through its own employees. The Company is
self-managed in that it internally provides all the management and maintenance
services that its properties require through its own employees, such as property
managers, leasing professionals and engineers. The Company operates principally
through Prentiss Properties Acquisition Partners, L.P. and its subsidiaries (the
"Operating Partnership") and Prentiss Properties Limited, Inc. (the "Manager")
(collectively referred to herein as the "Company").  As of September 30, 1999,
the Company owned interests in a diversified portfolio of 225 primarily suburban
Class A office and suburban industrial properties containing approximately 20.9
million net rentable square feet. The properties consist of 133 office buildings
(the "Office Properties") containing approximately 14.3 million net rentable
square feet and 92 industrial buildings (the "Industrial Properties" and
together with the Office Properties, the "Properties") containing approximately
6.6 million net rentable square feet. The Properties include 11 Properties
containing 1.3 million square feet that are in various stages of development or
have been recently developed by the Company and are in various stages of lease-
up (the "Development Properties"). The Development Properties, upon completion,
will include 989,000 square feet of office space and 262,000 square feet of
industrial space. As of September 30, 1999, the Office Properties and Industrial
Properties, exclusive of the Development Properties, were approximately 95%
leased to 1,230 tenants and approximately 98% leased to 246 tenants,
respectively. In addition to managing the Properties that the Company owns or
has ownership interests in, the Company manages approximately 25.4 million net
rentable square feet in office, industrial and other properties that are owned
by third parties.

     The Share Repurchase Program, Preferred Shares and Unit Registration

     On September 9, 1999, the Company filed, with the Securities and Exchange
Commission ("SEC"), a Registration Statement on Form S-3 relating to the
registration of 20,126 common shares of beneficial interest that may be issued
to the holders of 20,126 units of limited partnership interest in Prentiss
Properties Acquisition Partners, L.P., upon redemption of such units.

     During 1998, the Company's board of trustees (the "Board of Trustees")
authorized the repurchase of up to 2.0 million common shares in the open market
or negotiated private transactions. In fiscal 1998, the Company repurchased
998,800 common shares at an average price of $23.30 per share. Beginning
September 14, 1999, the Company's repurchase program resumed and, as of November
10, 1999, the Company has purchased an additional 341,600 common shares at an
average purchase price of $21.84 per share.  Since the inception of the share
repurchase program, the Company has repurchased 1,340,400 common shares of the
2,000,000 common shares authorized by the Board of Trustees.

     On September 17, 1999, the Company privately placed 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") with an institutional investor. The issue resulted
in gross consideration of $50 million. Such proceeds were used to repay
borrowings under the Company's line of credit (as defined in Note 4). The Series
C Perpetual Preferred Units are callable by the Company in five years at par
value and have a coupon rate of 9.45% per annum. The Series C Perpetual
Preferred Units are accounted for at their $50 million redemption value in the
line item "Minority interest in operating partnership" on the Company's balance
sheet.

2.   Basis of Presentation

     The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the rules and regulations of the SEC.  Accordingly, they do not include all of
the disclosures required by GAAP for complete financial statements.  In the
opinion of management, all adjustments (consisting solely of normal recurring
matters) necessary for a fair presentation of the financial statements for these
interim periods have been included.  The results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
to be obtained for the full fiscal year.  These financial statements should be
read

                                       7
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


in conjunction with the December 31, 1998 audited financial statements and notes
thereto of the Company, included in its annual report on Form 10-K for the
fiscal year ended December 31, 1998.

3.   Real Estate

     During the three months ended September 30, 1999, the Company completed the
following real estate transactions:

     On July 1, 1999, the Company disposed of the Regents Centre office
buildings, located in the Phoenix, Arizona, area, which contained 101,000 square
feet. In connection with the sale, the Company received gross proceeds of
approximately $11.2 million and recorded a gain on sale of $744,000.

     On July 2, 1999, the Company disposed of the six industrial buildings
comprising Shadowridge Plaza in San Diego, California for gross proceeds of
approximately $5.0 million, resulting in a gain on sale of $152,000. Shadowridge
Plaza contained 32,000 square feet of industrial space.

     On July 20, 1999 the Company acquired two office buildings for a purchase
price of $9.8 million. The two buildings ("Orchard Place I and II") contain
approximately 105,000 square feet and are located in the Denver, Colorado, area.

     On August 23, 1999, the Company sold the Simpson Business Park industrial
buildings in the San Diego, California, area, for gross proceeds of
approximately $3.3 million, resulting in a gain on sale of $458,000.  Simpson
Business Park contained 56,000 square feet of industrial space.

4.   Debt on Real Estate

     At September 30, 1999, the Company had debt on real estate of $854.8
million, excluding the Company's proportionate share of debt on its 50% and 20%
equity investments in the joint ventures owning the Broadmoor Austin Properties
(as defined herein) and the Burnett Plaza Property, respectively.

     The Company's debt transactions for the three months ended September 30,
1999 are summarized in the table below:

<TABLE>
<CAPTION>
                                                                  (in thousands)
<S>                                                                <C>
Debt on real estate at June 30, 1999.............................     $883,576
 Net payments under the line of credit...........................      (28,000)
 Net payment on mortgage loans...................................         (734)
                                                                      --------
Debt on real estate at September 30, 1999........................     $854,842
                                                                      ========
</TABLE>

     During the period, the Company made net payments against its $300.0 million
line of credit (the "Line of Credit") of $28.0 million resulting in an
outstanding balance of $188.1 million at September 30, 1999. The Company's Line
of Credit bears interest at LIBOR plus 137.5 basis points and matures on January
2, 2001. At September 30, 1999, LIBOR was equal to 5.40%.

     Of the Company's debt balance at September 30, 1999, $548.2 million is
fixed rate, non-recourse, long-term mortgages.  The remaining $306.6 million is
floating rate debt, of which $50.0 million is hedged through interest rate swaps
until September 2003 and $110.0 million is hedged through interest rate swaps
until September 2004.  Future scheduled principal repayments of debt on real
estate are as follows:

<TABLE>
<CAPTION>
                                                                  (in thousands)
<S>                                                         <C>
1999......................................................           $    864
2000......................................................              8,751
2001......................................................            207,722
2002......................................................            105,539
2003......................................................             64,397
Thereafter................................................            467,569
                                                                     --------
  Total                                                              $854,842
                                                                     ========
</TABLE>

                                       8
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

5.  Distribution

    On September 9, 1999, the Company declared a cash distribution for the third
quarter of 1999 in the amount of $.44 per share, payable on October 15, 1999 to
common shareholders of record on September 30, 1999. Additionally, it was
determined that a distribution of $.44 per unit would be made to the partners of
the Operating Partnership, and the holders of the Company's Series A Convertible
Preferred Shares (the "Series A Convertible Preferred Shares"). The total
distributions were paid on October 15, 1999, totaling approximately $19.0
million.

    In addition, quarterly distributions were declared on September 30, 1999 to
the holders of the Series B Perpetual Preferred Units (the "Series B Perpetual
Preferred Units") and the Series C Perpetual Preferred Units. The quarterly
distributions equal to an annualized 8.3% of the face amount of the Series B
Perpetual Preferred Units and an annualized, pro-rated 9.45% of the face amount
of the Series C Perpetual Preferred Units totaling, in the aggregate,
approximately $2.2 million were paid on October 1, 1999.

6.  Investment in Joint Ventures and Unconsolidated Subsidiary

    Included in Investments in Joint Ventures and Unconsolidated Subsidiary are
the Company's investment in Broadmoor Austin Associates ("Broadmoor Austin"),
the Company's investment in the Oaklands 21 and 27 development projects, the
Company's investment in the Burnett Plaza Property and the Company's investment
in the Manager. The Company accounts for its 50%, 60%, 20% and 95% investments
in Broadmoor Austin, Oaklands 21 and 27, Burnett Plaza and the Manager,
respectively, using the equity method of accounting, and thus reports its share
of income and losses based on its ownership interest in the respective entities.
At September 30, 1999, the carrying value of the Company's interest in Broadmoor
Austin, Oaklands 21 and 27, Burnett Plaza and the Manager totaled $5.9 million,
$1.2 million, $8.7 million and $4.0 million, respectively.

    The following is summarized financial information for 100% of Broadmoor
    Austin at September 30, 1999 and December 31, 1998 and for the three and
    nine months ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                     Sept. 30, 1999        Dec. 31, 1998
                                                  --------------------  -------------------
<S>                                             <C>                   <C>
Balance sheets:                                              (in thousands)
---------------
Real estate and deferred charges, net.........             $104,761             $108,013
Total assets..................................             $120,583             $123,255
Mortgage note payable.........................             $154,000             $154,000
Venturers' deficit............................             $(34,132)            $(32,915)
</TABLE>

<TABLE>
<CAPTION>
                                                   Three Months        Three Months        Nine Months        Nine Months
                                                       Ended               Ended               Ended             Ended
                                                   Sept. 30, 1999       Sept. 30, 1998     Sept. 30, 1999    Sept. 30, 1998
                                                   --------------     ----------------    ----------------   --------------
                                                                                (in thousands)
Income statements:
------------------
<S>                                              <C>             <C>                 <C>               <C>
Rental and other income........................          $4,950              $4,950           $14,845          $ 14,846
Interest expense...............................          $2,771              $2,771           $ 8,222          $  8,840
Depreciation and amortization..................          $1,084              $1,085           $ 3,252          $  3,251
Extraordinary items............................                                                                $ 12,900
Net income (loss)..............................          $  948              $  942           $ 2,923          $(10,620)
</TABLE>

   The Company acquired a 20% equity interest in the joint venture owning the
   Burnett Plaza Property on March 25, 1999. The following is summarized
   financial information for 100% of Burnett Plaza at September 30, 1999, for
   the three months ended September 30, 1999 and the period from acquisition
   through September 30, 1999:

                                       9
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                    Sept. 30, 1999
                                                 --------------------
Balance sheet:                                      (in thousands)
--------------
<S>                                              <C>
Real estate and deferred charges, net..........          $88,757
Total assets...................................          $92,606
Mortgage note payable..........................          $47,000
Venturers' equity..............................          $43,379
</TABLE>

<TABLE>
<CAPTION>
                                                   Three Months         March 25, 1999
                                                       Ended                Through
                                                   Sept. 30, 1999       Sept. 30, 1999
                                                 -------------------  -------------------
Income statements:                                            (in thousands)
------------------
<S>                                              <C>                  <C>
Rental and other income........................           $3,384               $6,723
Interest expense...............................           $  881               $1,829
Depreciation and amortization..................           $  596               $1,103
Extraordinary item.............................                -                    -
Net income (loss)..............................           $  233               $  507
</TABLE>

   The following is summarized financial information for 100% of the Manager at
   September 30, 1999 and December 31, 1998 and for the three and nine months
   ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                   Sept. 30, 1999       Dec. 31, 1998
                                                 -------------------  ------------------
Balance sheets:                                              (in thousands)
---------------
<S>                                              <C>                  <C>
Total assets...................................           $15,366             $15,326
Total liabilities..............................           $11,159             $11,119
Owners' equity.................................           $ 4,207             $ 4,207
</TABLE>

<TABLE>
<CAPTION>
                                                   Three Months         Three Months        Nine Months         Nine Months
                                                       Ended                Ended               Ended              Ended
                                                   Sept. 30, 1999       Sept. 30, 1998      Sept. 30, 1999      Sept. 30, 1998
                                                 -------------------  ------------------  ------------------  ------------------
Income statements:                                                               (in thousands)
------------------
<S>                                              <C>                  <C>                 <C>                 <C>
Fee income.....................................               $5,498              $7,887             $15,939             $22,736
General and administrative and personnel
 costs, net....................................               $4,618              $6,009             $13,772             $18,685
Net income.....................................               $  452              $1,784             $ 1,654             $ 4,070
</TABLE>

     The Oaklands 21 and 27 development projects had no operations for the
periods ended September 30, 1999. The projects' assets totaled $2.6 million at
September 30, 1999.

7.   Supplemental Disclosure of Non-Cash Activities

     During the three months ended September 30, 1999, the Company declared cash
distributions totaling $19.0 million payable to holders of common shares,
Operating Partnership units ("Units") and Series A Convertible Preferred Shares.
The distributions were paid on October 15, 1999. In addition, distributions
totaling $2.2 million were declared in September 1999 payable to holders of the
Company's Series B and Series C Perpetual Preferred Units. Such distributions
were paid on October 1, 1999.

     On January 21, 1999, pursuant to provisions of a forward stock contract,
the Company reacquired 1,100,000 common shares from the Union Bank of
Switzerland. $3.7 million of the proceeds used to reacquire the common shares
were previously escrowed funds placed as collateral, in 1998, on the forward
stock contract.

8.   Impact of the Year 2000 Issue

     The Year 2000 ("Y2K") compliance problem is the result of computer programs
designed to use two-digit rather than four-digit years.  Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00.  This could be
interpreted as either 1900 or 2000. Systems that have Y2K-related issues may
perceive time to have reverted back 100 years.   Systems, equipment and software
with exposure to Y2K-related problems exist not only in

                                       10
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


computerized information systems ("Information Systems") but also in building
operating systems such as elevators, alarm systems, energy management systems,
phone systems, and numerous other systems and equipment ("Non-Information
Technology Systems" and collectively, "Systems"). Failure to adequately identify
and correct Y2K-related problems could result in a Systems failure or
malfunction with potential adverse effects including personal injury, property
damage, and disruption of operations. Any or all of these failures could
materially and adversely affect the Company's business, financial condition, or
results of operations.

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

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

Estimate of Financial Impact

     The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations. The total costs associated with required
modifications to become Y2K compliant are not expected to be material to the
Company's financial position. The Company currently estimates the total Y2K
readiness costs are between $500,000 and $600,000. The costs incurred to date
are consistent with the various stages of completion of the three categories as
follows:

<TABLE>
<CAPTION>
Category                          Low            High         Q4/98        Q1/99        Q2/99        Q3/99        Q4/99
                               -----------    -----------  -----------  -----------  -----------  ------------  ----------
<S>                            <C>            <C>          <C>          <C>          <C>          <C>           <C>
Non-Information Technology           $400,000     $475,000         8%         61%           4%           14%         13%
Information Systems                    40,000       50,000        20%         70%          10%
Y2K Committee                          60,000       75,000        80%         10%           5%            5%
                                --------------------------
Total                                $500,000     $600,000
</TABLE>

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

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

Contingency Plans

     The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K-related issues. The Company has
substantially completed the contingency plans for assets owned as of September
30, 1999. These contingency plans range from manual overrides to alternative
processes such as building lock-downs in the event of a long-term power failure.
Fortunately, most buildings currently have contingency plans in place for
natural disasters such as earthquakes, floods, ice storms, and the like, which
provide a basis for the Y2K contingency plans.  These plans may also include
short-term use of backup equipment and software, increased work

                                       11
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


hours for Company personnel or use of contract personnel, and orderly shut-down
of buildings on December 31, 1999 and January 1, 2000 in order to perform tests
of critical systems.

9.   Recently Issued Accounting Standards

     In September 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.  In September 1999, the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities  Deferral of the Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133 was originally effective for all
fiscal quarters of fiscal years beginning after September 15, 1999.  FAS No. 137
deferred the effective date of FAS No. 133 to all fiscal quarters of all fiscal
years beginning after September 15, 2000. The Company believes that upon
implementation, FAS No. 133 will not have a material impact on the financial
statements of the Company.

10.  Segment Information

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

     The tables below present information about net income/(loss) and segment
assets used by the chief operating decision maker of the Company as of and for
the three and nine months ended September 30, 1999:

<TABLE>
<CAPTION>
                                          For the Three Months Ended September 30, 1999
                                                          (in thousands)
                                                                                                   Corporate
                       Mid-                                                             Total     Not Allocable      Consolidated
                     Atlantic     Midwest   Northeast  Southeast  Southwest    West    Segments    to Segments          Total
                     --------    --------  ---------  ---------  ---------  --------  --------    -------------      ------------
<S>                  <C>         <C>        <C>       <C>        <C>        <C>       <C>         <C>                <C>
Revenues                $14,212   $14,789     $7,043     $3,523    $19,734   $17,386   $76,687         $     41            $76,728
                        =======   =======     ======     ======    =======   =======   =======         ========            =======
Income before
 extraordinary item     $ 7,309   $ 6,568     $3,752     $1,268    $ 8,599   $10,321   $37,817         $(20,621)           $17,196
                        =======   =======     ======     ======    =======   =======   =======         ========            =======
</TABLE>

<TABLE>
<CAPTION>
                                            For the Nine Months Ended September 30, 1999
                                                           (in thousands)

                                                                                                    Corporate
                         Mid-                                                          Total      Not Allocable      Consolidated
                       Atlantic  Midwest   Northeast  Southeast  Southwest    West    Segments     to Segments          Total
                       --------  --------  ---------  ---------  ---------  --------  --------    -------------      ------------
<S>                <C>           <C>       <C>        <C>        <C>        <C>       <C>         <C>               <C>
Revenues               $ 43,225  $ 43,172   $ 20,150    $ 9,963   $ 54,112  $ 51,281  $  221,903       $     80       $  221,983
                       ========  ========   ========    =======   ========  ========  ==========       ========       ==========

Income before
 extraordinary
 Item                  $ 22,847  $ 20,607   $ 10,768    $ 3,237   $ 23,018  $ 28,162  $  108,639       $(57,787)      $   50,852
                       ========  ========   ========    =======   ========  ========  ==========       ========       ==========

                                                     As of September 30, 1999
                                                          (in thousands)

Assets                 $374,851  $367,871   $207,706    $71,614   $454,090  $428,025  $1,904,157       $ 35,721       $1,939,878
                       ========  ========   ========    =======   ========  ========  ==========       ========       ==========
</TABLE>

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

                                       12
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

11.  Earnings per Share


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

<TABLE>
<CAPTION>
Reconciliation of Earnings per Share Numerator          Three Months     Three Months      Nine Months      Nine Months
                                                            Ended            Ended            Ended            Ended
                                                       Sept. 30, 1999   Sept. 30, 1998   Sept. 30, 1999   Sept. 30, 1998
                                                       ---------------  ---------------  ---------------  ---------------
                                                                     (in thousands, except per share data)
<S>                                                    <C>              <C>              <C>              <C>
Net income...........................................         $17,196          $21,232          $50,852          $49,779
Preferred dividends..................................          (1,660)          (1,505)          (4,830)          (4,146)
                                                              -------          -------          -------          -------
Net income available to common shareholders..........         $15,536          $19,727          $46,022          $45,633
                                                              =======          =======          =======          =======
Reconciliation of Earnings per Share Denominator

Weighted average common shares outstanding...........          37,930           39,349           37,973           38,680
                                                              =======          =======          =======          =======

Basic Earnings per Share.............................         $  0.41          $  0.50          $  1.21          $  1.18
                                                              =======          =======          =======          =======

Dilutive Effect of Common Share Equivalents

Dilutive options.....................................             133              157               95              279
Dilutive preferred shares............................             (A)            3,774              (A)            3,466
Weighted average common shares outstanding...........          37,930           39,349           37,973           38,680
                                                              -------          -------          -------          -------
Weighted average common shares and common share
   equivalents.......................................          38,063           43,280           38,068           42,425
                                                              =======          =======          =======          =======

Diluted Earnings per Share...........................         $  0.41          $  0.49          $  1.21          $  1.17
                                                              =======          =======          =======          =======
</TABLE>

(A) Preferred shares for the three and nine months ended September 30, 1999 are
    excluded from the calculation of Dilutive Earnings per Share as such shares
    are anti-dilutive for the respective periods.

12.  Subsequent Events

     On October 1, 1999, the Company disposed of the two office and seven
industrial buildings in the Kansas City area, (the "Kansas City portfolio"). The
Kansas City portfolio contained 148,000 square feet of office and approximately
1.5 million square feet of industrial space. In connection with the sale, the
Company received gross proceeds of approximately $58.0 million and recorded a
gain on sale of approximately $10.5 million.

     On October 1, 1999, the Company closed a collateral substitution whereby
certain of the Kansas City Industrial Properties were released as collateral for
the Company's $180.1 million mortgage loan (the "PPREFI Portfolio Loan"). In
exchange, the Company provided new collateral which includes the Horsepen Road
and Cottonwood Office Center Properties. The Horsepen Road Property consists of
a 104,000 square feet, Class A office building located in the Metropolitan
Washington, D.C., area. Cottonwood Office Center is comprised of three Class A
office buildings, totaling 164,000 square feet, and is located in Suburban
Dallas/Fort Worth.

     On October 4, 1999, the Company closed a $72.5 million five-year floating
rate bank term loan priced at LIBOR plus 162.5 basis points. The loan is
collateralized by the following four Properties: Willow Oaks I and II and 8521
Leesburg Pike in Metropolitan Washington, D.C., and Croton Road Corporate Center
in Suburban Philadelphia, Pennsylvania. The proceeds from this loan were used to
pay down the Company's outstanding balance on the Line of Credit.

                                       13
<PAGE>

                           PRENTISS PROPERTIES TRUST
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

     On October 5, 1999, the Company closed a $29.5 million, 11-year term loan
with a fixed interest rate of 7.91%. The loan is collateralized by the World
Savings Center Property in Oakland, California. The proceeds from this loan were
used to pay down the Company's outstanding balance on the Line of Credit.

     On October 22, 1999, the Company acquired a single industrial building for
gross proceeds of approximately $5.2 million. The property ("935 First Avenue")
contains approximately 118,000 square feet and is located in Suburban
Philadelphia.

     On October 29, 1999, the Company disposed of eight industrial buildings in
the San Diego, California, area, (the "Copperwood Center"). Copperwood Center
contained 126,000 square feet of industrial space. In connection with the sale,
the Company received gross proceeds of approximately $6.05 million and recorded
a gain on sale of approximately $784,000.

     On November 4, 1999, the Company acquired a single Class A office building
for gross proceeds of approximately $21.6 million. The property (the "Fairmont
Building") contains approximately 122,500 square feet and is located in
Metropolitan Washington, D.C.

                                       14
<PAGE>

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

Overview

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

     At December 31, 1998, the Company owned 233 properties consisting of 128
office and 105 industrial properties containing in the aggregate 21.0 million
net rentable square feet. During the nine months ended September 30, 1999, the
Company acquired three office Properties totaling approximately 1.1 million
square feet including a 20% equity interest in Burnett Plaza Associates
("Burnett Plaza"), a joint venture owning one Class A office property containing
approximately 1.0 million square feet. Additionally, the Company sold 14
properties, transitioned six properties to operations, and acquired a 60% equity
interest in two land parcels in Suburban Philadelphia, Pennsylvania (the
"Oaklands 21 and 27 Development Projects"). The Company also began development
of various projects containing 244,000 square feet. Inclusive of the Company's
proportionate share of the net rentable square feet of Burnett Plaza and the
development projects, at September 30, 1999, the Company had 225 properties (the
"Properties") containing 21.0 million net rentable square feet. The Company's
Properties include 11 Properties containing 1.3 million square feet that are in
various stages of development or have been recently developed by the Company and
are in various stages of lease-up. As of September 30, 1999, the 11 development
Properties had incurred total costs of approximately $116.7 million and were 86%
leased or committed.

Results of Operations

     The results of operations for the three month periods ended September 30,
1999 and 1998 include the respective operations of the Company. During the
period from July 1, 1998 through September 30, 1999, the Company had significant
property transactions including 14 Property acquisitions and 36 property
dispositions. Consequently, the comparison of the periods provides only limited
information regarding the operations of the Company as currently constituted.

Comparison of the Three Months Ended September 30, 1999 to the Three Months
Ended September 30, 1998

     General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the three months
ended September 30, 1999 to the three months ended September 30, 1998, the
following should be considered:

     .  183  Properties that consolidated into the Company's results of
             operations were owned and fully operational at July 1, 1998 and
             remained in the Company's portfolio at September 30, 1999;
     .    8  Properties, including the Broadmoor Austin Properties and the
             recently acquired Burnett Plaza Property, are accounted for using
             the equity method of accounting;
     .   14  Properties, which are wholly-owned by the Company, were acquired
             subsequent to July 1, 1998 and remained in the Company's portfolio
             at September 30, 1999;
     .   36  properties were sold subsequent to July 1, 1998;
     .    1  Property, the World Savings Center Property, the economics of which
             were owned during the comparative periods, was converted to real
             estate from a mortgage note receivable in December 1998;
     .    8  Properties that were developed by the Company became operational
             subsequent to July 1, 1998 and remained in the portfolio at
             September 30, 1999; and
     .   11  Properties were in various stages of development or in various
             stages of lease-up at September 30, 1999.

                                       15
<PAGE>

     Rental Revenue. Rental revenues increased by $12.6 million, or 19.8%, to
$76.1 million from $63.5 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1998, offset
by properties that were sold subsequent to July 1, 1998. Rental income for the
183 Properties that were owned and fully operational at July 1, 1998 and
remained in the Company's portfolio at September 30, 1999 increased by $4.6
million, or 8.3%, from $55.3 million for the three months ended September 30,
1998 to $59.9 million for the three months ended September 30, 1999. The
increase for such 183 Properties was attributable to the Company's six regions
as follows:

     .    21  Properties in the Mid-Atlantic Region increased $556,000, or 5.1%;
     .    24  Properties in the Midwest Region decreased $44,000, or .44%;
     .    20  Properties in the Northeast Region increased $157,000, or 2.9%;
     .    10  Properties in the Southeast Region increased $348,000, or 14.0%;
     .    28  Properties in the Southwest Region increased $2.1 million, or
              15.4%; and
     .    80  Properties in the West Region increased $1.4 million, or 10.9%.

     Property Operating and Maintenance. Property operating and maintenance
increased by $2.3 million, or 14.7%, to $18.2 million from $15.9 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to July 1, 1998, offset by properties that were sold
subsequent to July 1, 1998. Property operating and maintenance for the 183
Properties that were owned and fully operational at July 1, 1998 and remained in
the Company's portfolio at September 30, 1999 increased by $1.3 million, or
8.2%, from $15.3 million for the three months ended September 30, 1998 to $16.6
million for the three months ended September 30, 1999. The increase for such 183
Properties was attributable to the Company's six regions as follows:

     .    21  Properties in the Mid-Atlantic Region increased $111,000, or 3.6%;
     .    24  Properties in the Midwest Region increased $199,000, or 9.5%;
     .    20  Properties in the Northeast Region decreased $103,000, or 7.6%;
     .    10  Properties in the Southeast Region increased $219,000, or 21.8%;
     .    28  Properties in the Southwest Region increased $445,000, or 10.2%;
              and
     .    80  Properties in the West Region increased $374,000, or 11.0%.

     Real Estate Taxes. Real estate taxes increased by $1.9 million, or 27.4%,
to $8.7 million from $6.8 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to July 1, 1998,
offset by properties that were sold subsequent to July 1, 1998. Real estate
taxes for the 183 Properties that were owned and fully operational at July 1,
1998, and remained in the Company's portfolio at September 30, 1999 increased by
$757,000, or 13.3%, from $5.7 million for the three months ended September 30,
1998, to $6.4 million for the three months ended September 30, 1999. The
increase for such 183 Properties was attributable to the Company's six regions
as follows:

     .    21  Properties in the Mid-Atlantic Region increased $46,000, or 5.8%;
     .    24  Properties in the Midwest Region increased $182,000, or 15.5%;
     .    20  Properties in the Northeast Region increased $65,000, or 15.3%;
     .    10  Properties in the Southeast Region increased $57,000, or 30.7%;
     .    28  Properties in the Southwest Region increased $435,000, or 21.5%;
              and
     .    80  Properties in the West Region decreased $28,000, or 2.6%.

       General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $233,000, or 12.3%, to $2.1
million from $1.9 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1998, offset
by properties that were sold subsequent to July 1, 1998.

     Interest Expense. Interest expense increased by $3.9 million, or 33.5%, to
$15.4 million from $11.6 million primarily as a result of the increase of the
debt on real estate from $593.9 million at July 1, 1998 to $854.8 million at
September 30, 1999. The increase in debt on real estate during the period
resulted primarily from the significant property transactions occurring between
July 1, 1998 and September 30, 1999.

                                       16
<PAGE>

       Depreciation and Amortization. Depreciation and amortization increased by
$3.0 million, or 26.7%, to $14.2 million from $11.2 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to July 1, 1998, offset by properties that were sold subsequent to
July 1, 1998. Depreciation and amortization for the 183 Properties that were
owned and fully operational at July 1, 1998 and remained in the Company's
portfolio at September 30, 1999, increased by $920,000, or 10.0%, from $9.2
million for the three months ended September 30, 1998, to $10.1 million for the
three months ended September 30, 1999. The increase for such 183 Properties was
attributable to the Company's six regions as follows:

     .    21  Properties in the Mid-Atlantic Region increased $90,000, or 4.7%;
     .    24  Properties in the Midwest Region increased $130,000, or 8.0%;
     .    20  Properties in the Northeast Region increased $55,000, or 6.2%;
     .    10  Properties in the Southeast Region increased $8,000, or 1.2%;
     .    28  Properties in the Southwest Region increased $452,000, or 20.8%;
              and
     .    80  Properties in the West Region increased $186,000, or 9.4%.

       Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity
in income of joint ventures and unconsolidated subsidiary decreased from $2.2
million for the three months ended September 30, 1998 to $1.0 million for the
three months ended September 30, 1999. The net decrease was primarily
attributable to a decrease of $1.3 million in the Company's proportionate share
of net income from the Manager, offset by $47,000 which represents the Company's
proportionate share of the operations of Burnett Plaza. The management of
certain third party properties were transferred from the Manager to Prentiss
Properties Trust which decreased management fees for the Manager.

       Gains on Sale. Gains on sale decreased by $3.0 million, to $1.4 million,
from $4.4 million. During the three months ended September 30, 1998, the Company
sold two properties containing 197,000 square feet. During the three months
ended September 30, 1999, the Company sold 12 properties comprising 189,000
square feet. It is the Company's strategy to obtain the maximum value from each
of its Properties, which is occasionally achieved through the sale of
properties.

       Minority Interests. Minority interests increased by $24,000, or 1.0%. The
increase in minority interests is primarily attributable to an increase in the
minority interests holdings resulting from the issuance of 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") on September 17, 1999, offset by minority interests
effect of lower net income before minority interests for the three month period
ended September 30, 1999 from the three month period ended September 30, 1998.

Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended
September 30, 1998

     General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the nine months
ended September 30, 1999 to the nine months ended September 30, 1998, the
following should be considered:

     .   120  Properties that consolidated into the Company's results of
              operations were owned and fully operational at January 1, 1998 and
              remained in the Company's portfolio at September 30, 1999;
     .     8  Properties, including the Broadmoor Austin Properties and the
              recently acquired Burnett Plaza Property, are accounted for using
              the equity method of accounting;
     .    76  Properties, which are wholly-owned by the Company, were acquired
              subsequent to January 1, 1998 and remained in the Company's
              portfolio at September 30, 1999;
     .    43  properties were sold subsequent to January 1, 1998;
     .     1  Property, the World Savings Center Property, the economics of
              which were owned during the comparative periods, was converted to
              real estate from a mortgage note receivable in December 1998;
     .     9  Properties that were developed by the Company became operational
              subsequent to January 1, 1998 and remained in the portfolio at
              September 30, 1999; and
     .    11  Properties were in various stages of development or in various
              stages of lease-up at September 30, 1999.

                                       17
<PAGE>

     Rental Revenue. Rental revenues increased by $52.7 million, or 31.5%, to
$220.2 million from $167.5 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Rental income
for the 120 Properties that were owned and fully operational at January 1, 1998
and remained in the Company's portfolio at September 30, 1999 increased by $4.9
million, or 3.9%, from $126.2 million for the nine months ended September 30,
1998 to $131.0 million for the nine months ended September 30, 1999. The
increase for such 120 Properties was attributable to the Company's six regions
as follows:

     .    20  Properties in the Mid-Atlantic Region increased $1.5 million, or
              5.1%;
     .    21  Properties in the Midwest Region decreased $137,000, or .52%;
     .    15  Properties in the Northeast Region increased $599,000, or 4.3%;
     .    10  Properties in the Southeast Region increased $214,000, or 2.7%;
     .    20  Properties in the Southwest Region increased $1.6 million, or
              5.5%; and
     .    34  Properties in the West Region increased $1.1 million, or 5.4%.

     Property Operating and Maintenance. Property operating and maintenance
increased by $11.6 million, or 29.4%, to $51.0 million from $39.4 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1998, offset by properties that were sold
subsequent to January 1, 1998. Property operating and maintenance for the 120
Properties that were owned and fully operational at January 1, 1998 and remained
in the Company's portfolio at September 30, 1999 increased by $1.5 million, or
4.5%, from $33.3 million for the nine months ended September 30, 1998 to $34.8
million for the nine months ended September 30, 1999. The increase for such 120
Properties was attributable to the Company's six regions as follows:

     .    20  Properties in the Mid-Atlantic Region increased $507,000, or 6.4%;
     .    21  Properties in the Midwest Region increased $878,000, or 16.7%;
     .    15  Properties in the Northeast Region decreased $20,000, or .59%;
     .    10  Properties in the Southeast Region increased $38,000, or 1.1%;
     .    20  Properties in the Southwest Region increased $245,000, or 2.9%;
              and
     .    34  Properties in the West Region decreased $144,000, or 2.9%.

     Real Estate Taxes. Real estate taxes increased by $8.0 million, or 44.3%,
to $26.1 million from $18.1 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Real estate
taxes for the 120 Properties that were owned and fully operational at January 1,
1998, and remained in the Company's portfolio at September 30, 1999 increased by
$1.4 million, or 10.3%, from $13.6 million for the nine months ended September
30, 1998, to $15.0 million for the nine months ended September 30, 1999. The
increase for such 120 Properties was attributable to the Company's six regions
as follows:

     .    20  Properties in the Mid-Atlantic Region increased $199,000, or 8.9%;
     .    21  Properties in the Midwest Region increased $294,000, or 8.1%;
     .    15  Properties in the Northeast Region decreased $7,000, or .58%;
     .    10  Properties in the Southeast Region increased $44,000, or 7.6%;
     .    20  Properties in the Southwest Region increased $1.1 million, or
              26.4%; and
     .    34  Properties in the West Region decreased $221,000, or 12.4%.

       General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $764,000, or 13.2%, from $5.8
million to $6.5 million primarily due to one-time severance and travel costs and
cash bonuses paid during the second quarter of 1999.

     Interest Expense. Interest expense increased by $15.3 million, or 54.1%, to
$43.5 million from $28.2 million primarily as a result of the increase of the
debt on real estate from $420.0 million at January 1, 1998 to $854.8 million at
September 30, 1999. The increase in debt on real estate during the period
resulted primarily from the significant property transactions occurring between
January 1, 1998 and September 30, 1999.

                                       18
<PAGE>

       Depreciation and Amortization. Depreciation and amortization increased by
$10.3 million, or 35.1%, to $39.7 million from $29.4 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to January 1, 1998, offset by properties that were sold subsequent to
January 1, 1998. Depreciation and amortization for the 120 Properties that were
owned and fully operational at January 1, 1998 and remained in the Company's
portfolio at September 30, 1999 increased by $1.7 million, or 8.1%, from $21.1
million for the nine months ended September 30, 1998 to $22.9 million for the
nine months ended September 30, 1999. The increase for such 120 Properties was
attributable to the Company's six regions as follows:

     .    20  Properties in the Mid-Atlantic Region increased $289,000, or 5.7%;
     .    21  Properties in the Midwest Region increased $230,000, or 5.5%;
     .    15  Properties in the Northeast Region increased $220,000, or 9.8%;
     .    10  Properties in the Southeast Region decreased $62,000, or 3.2%;
     .    20  Properties in the Southwest Region increased $656,000, or 13.9%;
              and
     .    34  Properties in the West Region increased $366,000, or 12.1%.

       Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity
in income of joint ventures and unconsolidated subsidiary decreased from $5.2
million for the nine months ended September 30, 1998 to $3.2 million for the
nine months ended September 30, 1999. The net decrease was attributable to a
decrease of $2.4 million in the Company's proportionate share of net income from
the Manager, offset by an increase of $375,000 of the Company's proportionate
share of the net income, before extraordinary items, of the Broadmoor Austin
Properties. The decrease in the income of the Manager is due to the gain on sale
recorded in connection with the Oceanside Distribution Center property in the
second quarter of 1998. Additionally, certain third-party properties were
transferred from the Manager to Prentiss Properties Trust which decreased
management fees for the Manager. Such fees are the primary reason for the
comparative period increase in consolidated management and other fees.

       Gains on Sale. Gains on sale decreased by $6.6 million, to $1.6 million,
from $8.2 million. During the nine months ended September 30, 1998, the Company
sold nine properties containing 533,000 square feet. During the nine months
ended September 30, 1999, the Company sold a 12.6 acre parcel of land and 14
properties, containing 417,000 square feet. It is the Company's strategy to
obtain the maximum value from each of its Properties, which is occasionally
achieved through the sale of a property.

       Minority Interests. Minority interests increased by $3.2 million, or
64.3%, from $5.0 million for the nine months ended September 30, 1998, to $8.3
million for the nine months ended September 30, 1999. The increase was primarily
attributable to the increase in minority interests holdings resulting from the
issuance of 1,900,000, $50 par value. Series B Perpetual Preferred Units (the
"Series B Perpetual Preferred Units") in September 1998, and the issuance of
2,000,000, $25 par value, Series C Perpetual Preferred Units in September 1999,
offset by the conversion in February 1998 of 2,432,541 and 113,500 Operating
Partnership units ("Units") into common shares. The increase is also
attributable to the issuance of Units in conjunction with Property acquisitions
subsequent to January 1, 1998.

       Extraordinary Items. During the nine months ended September 30, 1998, the
Company had extraordinary items totaling $8.9 million, resulting from two
significant transactions during 1998, including (i) the Company's recognition of
its 50% proportionate share of Broadmoor Austin's $12.9 million, or $6.45
million, of prepayment penalties paid and recognition of unamortized financing
during the period; and (ii) the distribution of 113,500 Operating Partnership
Units by an affiliate of the Company to certain employees of the Company
resulting in a non-cash charge to the Company of $3.1 million. The transactions
were recorded net of the minority interest holders' proportionate share of each
charge totaling $406,000 and $193,000, respectively.

Liquidity and Capital Resources

     Cash and cash equivalents were $12.6 million and $3.5 million at September
30, 1999 and September 30, 1998, respectively. The increase in cash and cash
equivalents is primarily a result of cash flows provided by operating and
financing activities exceeding those used in investing activities. Net cash
provided by operating activities was $78.6 million for the nine months ended
September 30, 1999 compared to $82.8 million for the nine months ended September
30, 1998.

                                       19
<PAGE>

     Net cash used in investing activities decreased from $579.7 million for the
nine months ended September 30, 1998 to $89.9 million for the nine months ended
September 30, 1999.  This decrease is due primarily to fewer acquisitions of
real estate in 1999 than 1998.

     Net cash provided by financing activities of $18.4 million for the nine
months ended September 30, 1999 decreased from $493.3 million for the nine
months ended September 30, 1998. This decrease is primarily attributable to
proceeds from securities offerings, mortgage loans and other indebtedness
incurred to fund the 1998 acquisitions exceeding the proceeds raised from such
sources in 1999, including the net proceeds from the sale of the Series C
Cumulative Redeemable Perpetual Preferred Units (the "Series C Perpetual
Preferred Units").

     As of September 30, 1999, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $941.2 million, or approximately 45.98% of total market
capitalization based on a common share price of $22.19 per common share. As of
November 10, 1999, the Company had the approximate capacity to borrow up to an
additional $121.0 million under its debt limitation policy. The amount of
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's declaration of trust and bylaws, and are solely
within the discretion of the Company's board of trustees (the "Board of
Trustees"). Although it is the Company's general policy to limit combined
indebtedness plus its pro rata share of joint venture debt and construction
loans so that, at the time such debt is incurred, it does not exceed 50% of the
Company's total market capitalization, the Company views ratios such as interest
coverage and fixed charge coverage as more stable and indicative measures of its
ability to meet debt obligations. For the three months ended September 30, 1999,
the Company's interest coverage (earnings before interest, taxes and
depreciation and amortization over interest expense) and fixed charge coverage
(earnings before interest, taxes and depreciation and amortization over interest
expense and perpetual preferred distributions) totaled 2.96 and 2.63 times,
respectively.

     The Company has in place a $300 million unsecured line of credit with a
group of 12 banks (the "Line of Credit").  The Line of Credit has an interest
rate on borrowings of LIBOR plus 137.5 basis points.  The Line of Credit is
unsecured and matures on January 2, 2001.  Additionally, the Company is required
to pay an average daily unused commitment fee of 20 basis points per annum if
the daily unused portion of the Line of Credit is greater than the related daily
balance outstanding.  The fee is reduced to 15 basis points per annum if the
daily unused portion is less than the daily balance outstanding. The Company
made net payments to the Line of Credit during the three months ended September
30, 1999 of $28.0 million and had an outstanding balance of $188.1 million at
September 30, 1999, resulting in an available balance of $111.9 million.

     In September 1997, the Company entered into a seven-year interest rate swap
locking in cost of funds of 6.25% (before the spread over LIBOR) on $110
million. In June 1999, the Company entered into a four-year interest rate swap
locking in cost of funds of 6.16% (before the spread over LIBOR) on $50 million
(collectively, the "Interest Rate Swaps"). The Interest Rate Swaps consist of
three separate agreements intended to manage the relative mix of the Company's
debt between fixed and variable rate instruments.  The Interest Rate Swaps
modify a portion of the interest characteristics of the Company's variable rate
debt, effectively converting variable rate debt to fixed rate debt.  The fixed
rates to be paid, the effective fixed rate and the variable rate to be received
by the Company, are summarized in the following table:

<TABLE>
<CAPTION>
                                                                  Swap Rate
                       Swap Rate Paid     Effective Fixed     Received (Variable)
Notional Amount            (Fixed)              Rate           at Sept. 30, 1999          Swap Maturity
---------------            -------             -----           -----------------          -------------
<S>                    <C>                   <C>                <C>                     <C>
$50 million                 6.155%             7.530%              5.40%                September 30, 2003
$50 million                 6.253%             7.628%              5.40%                September 30, 2004
$60 million                 6.248%             7.623%              5.40%                September 30, 2004
</TABLE>

     The differences to be paid or received by the Company under the terms of
the Interest Rate Swaps are accrued as interest rates change and recognized as
an adjustment to interest expense by the Company pursuant to the terms of the
three agreements and will have a corresponding effect on its future cash flows.
Agreements such as these contain a credit risk that the counterparties may be
unable to meet the terms of the agreement. The Company minimizes that risk by
evaluating the creditworthiness of its counterparties, which is limited to major
banks and financial institutions, and does not anticipate non-performance by the
counterparties.

                                       20
<PAGE>

     The following table sets forth the Company's debt as of September 30, 1999:

<TABLE>
<CAPTION>
                                       Current
                                       Balance                     Interest                                                Annual
Description                             (000s)    Amortization       Rate                     Maturity                   Interest
-----------                             ------    ------------       ----                     --------                   --------
<S>                                   <C>         <C>              <C>               <C>                                 <C>
Line of Credit                        $188,100       None            6.94%(10)              January 2, 2001               $13,054
Executive Center Del Mar                13,267       None            6.75%(11)            December 19, 2001 (14)              896
Burnett Plaza /(1)/                      9,400       None            7.50%                 February 1, 2002                   705
Bank Term Facility                     100,000       None            7.63%(12)             October 13, 2002                 7,630
Bachman West                             2,987       25 yr           8.63%                 December 1, 2003                   258
Northeast Portfolio Loan /(2)/          60,000       None (6)        6.80%                December 10, 2003                 4,080
One Westchase Center                    25,039       25 yr           7.84%                 February 1, 2004                 1,963
Crescent Centre                         12,000       None            7.95%                    March 1, 2004                   954
Walnut Glen Tower                       35,000       None (7)        6.92%                    April 1, 2005                 2,422
Highland Court                           4,962       25 yr           7.27%                    April 1, 2006                   361
Westheimer Central Plaza                 5,990       25 yr           8.38%                   August 1, 2006                   502
Oaklands Corporate Center /(3)/          1,331       20 yr           8.65%                   August 1, 2006                   115
Creamery Way /(3)/                       3,742       20 yr           8.30%               September 19, 2006                   311
PPREFI Portfolio Loan /(4)/            180,100       None            7.58%                February 26, 2007                13,652
Oaklands Corporate Center /(3)/          6,322       25 yr           8.55%                     July 1, 2007                   541
Oaklands Corporate Center /(3)/          2,665       25 yr           8.40%                 November 1, 2007                   224
Natomas Corporate Center                37,794       30 yr           7.02%                 February 1, 2009                 2,653
Corporetum Office Campus                25,859       30 yr           7.02%                 February 1, 2009                 1,815
7101 Wisconsin Avenue                   21,415       30 yr           7.25%                    April 1, 2009                 1,553
2500 Cumberland Parkway                 14,500       None(8)         7.46%                    July 15, 2009                 1,082
Park West C2                            35,427       30 yr           7.36%(13)            November 10, 2010                 2,349
One O'Hare Centre                       41,956       30 yr           7.03%(13)             January 10, 2011                 2,853
Broadmoor Austin /(5)/                  77,000       None (9)        7.04%                   April 10, 2011                 5,421
3130 Fairview Park Drive                23,422       30 yr           7.00%                   April 11, 2001                 1,640
Southpoint (III) /(3)/                   7,732       20 yr           7.75%                   April 14, 2014                   599
Other Corporate Debt                     5,232       None            7.40%                          Various                   387
                                      --------                       -----                                                -------
Total Fiancing/Weighted Average Rate  $941,242                       7.22%                                                $68,020
                                      ========                       =====                                                =======
</TABLE>

(1)  The Company, through the Operating Partnership, owns a 20% non-controlling
     partnership interest in the entity that owns the Burnett Plaza Property,
     which interest is accounted for using the equity method of accounting. The
     amount shown reflects the Company's proportionate share of the mortgage
     indebtedness collateralized by the Property.
(2)  The Northeast Portfolio Loan is collateralized by the following 11
     Properties: Valleybrooke (five Properties), Lake Center (two Properties),
     certain of the Southpoint Properties (two Properties), and certain of the
     Woodland Falls Properties (two Properties).
(3)  The mortgage loan is collateralized by certain of the Properties in the
     respective office Property grouping.
(4)  The PPREFI Portfolio Loan is collateralized by the following 38 Properties:
     certain of the Los Angeles Industrial Properties (18 Properties), certain
     of the Kansas City Industrial Properties (six Properties), certain of the
     Chicago Industrial Properties (four Properties), Park West E1 and E2 (two
     Properties), One Northwestern Plaza, 3141 Fairview Park Drive, O'Hare Plaza
     II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court,
     the WestPoint Office Building and the PacifiCare Building.
(5)  The Company, through the Operating Partnership, owns a 50% non-controlling
     partnership interest in the entity that owns the Broadmoor Austin
     Properties, which interest is accounted for using the equity method of
     accounting. The amount shown reflects the Company's proportionate share of
     the mortgage indebtedness collateralized by the Properties.
(6)  The loan, which was entered into in December 1997, has no principal
     amortization during the first 24 months of the loan term. Principal and
     interest are payable for the remaining loan term based on a 25-year
     amortization.
(7)  The loan, which was entered into in March 1998, has no principal
     amortization during the first 24 months of the loan term. Principal and
     interest are payable for the remaining loan term based on a 30-year
     amortization.
(8)  The loan, which was entered into in May 1999, has no principal amortization
     during the first 58 months of the loan term. Principal and interest are
     payable for the remaining loan term. All repayments are based on a 30-year
     amortization.
(9)  The loan, which was entered into in March 1998, has no principal
     amortization during the first 36 months of the loan term. Principal and
     interest are payable for the remaining loan term based on a 16.25-year
     amortization.
(10) Represents the weighted average interest rate for $10 million of the $60
     million Interest Rate Swap at an effective rate of 7.623% and the $50
     million Interest Rate Swap at an effective interest rate of 7.530%.
     Interest on the remaining, unhedged balance of $128.1 million is at a
     variable rate equal to LIBOR + 1.375%; on September 30, 1999, LIBOR was
     equal to 5.40%.
(11) Represents a variable rate equal to LIBOR + 1.35%; on September 30, 1999,
     LIBOR was equal to 5.40%.
(12) Represents the weighted average interest rate for the Interest Rate Swap of
     $50 million at an effective rate of 7.628% and $50 million of the $60
     million Interest Rate Swap at an effective rate of 7.623%.
(13) Includes the effect of the settlement cost of $4.3 million on the $49.25
     million treasury lock agreement that was terminated on October 6, 1998. The
     settlement cost related to $35.75 million of the treasury lock is being
     amortized over the 12-year term of the Park West C2 loan, with the
     remaining $13.5 million amortized over the 12-year term of the One O'Hare
     Centre loan.
(14) December 19, 2001 represents a maturity date based on the Company's
     anticipated execution of its option to extend the term of the loan one year
     beyond the original maturity date of December 19, 2000.

                                       21
<PAGE>

     The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three months ended September 30, 1999, the Company's recurring non-
incremental revenue-generating capital expenditures totaled $4.8 million. The
Company's recurring non-incremental revenue-generating capital expenditures were
attributable to the Company's six regions as follows: (1) Mid-Atlantic-$475,000;
(2) Midwest-$1,037,000; (3) Northeast-$524,000; (4) Southeast-$428,000; (5)
Southwest-$1,166,000; and (6) West-$1,126,000.

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

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

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

Funds from Operations

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

                                       22
<PAGE>

<TABLE>
<CAPTION>
        (in thousands)                             Three Months       Three Months       Nine Months         Nine Months
                                                       Ended              Ended             Ended               Ended
                                                   Sept 30, 1999      Sept. 30, 1998    Sept. 30, 1999      Sept. 30, 1998
                                                   -------------      --------------    --------------      --------------
<S>                                                <C>                <C>               <C>                 <C>
Funds from Operations
Net income.........................................   $17,196            $21,232            $50,852             $49,779
Add:
 Real estate depreciation and amortization.........    14,203             11,221             39,663              29,380
 Real estate depreciation and amortization of
  unconsolidated joint ventures....................       651                532              1,816               1,664
 Minority interests(1).............................     2,846              2,832              8,168               4,948
 Extraordinary items...............................                            -                                  8,908
Less:
 Gains on sale.....................................    (1,354)            (4,379)            (1,643)             (8,203)
 Dividend on perpetual preferred units.............    (2,155)            (1,971)            (6,098)             (2,102)
                                                      -------            -------            -------             -------
Funds from Operations..............................   $31,387            $29,467            $92,758             $84,374
                                                      =======            =======            =======             =======
</TABLE>

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

     Funds from Operations increased by $1.9 million and $8.4 million for the
three and nine months ended September 30, 1999 from the three and nine months
ended September 30, 1998, respectively, as a result of the factors discussed in
the analysis of operating results.

Impact of the Year 2000 Issue

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

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

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

Additional Internal Reviews

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

                                       23
<PAGE>

     In October the Y2K Committee conducted a second round of internal reviews
on each of the Company's buildings. Emphasis was placed on:

          -  Finalizing building readiness
          -  Updating contingency plans
          -  Establishing detailed building checklists for managing the
             transition
          -  Perpetuating awareness through the last quarter of 1999

Once again during this second round of  internal reviews no significant issues
were found.

General Approach

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

     The steps involved are:

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

     With respect to assets existing at September 30, 1999, the Company has
completed its Y2K inventory and assessment of Internal Systems and has
substantially completed the testing phase of the Y2K effort. The results of
these tests minimize the doubt as to whether or not the inventoried Internal
Systems have any Y2K issues.  These findings have enabled the Company to
reasonably determine the remaining financial commitment necessary to remedy the
Y2K problems for existing Internal Systems.

     In some cases, Systems that demonstrate Y2K-related problems have
previously been scheduled for replacement or remediation as a normal course of
business irrespective of Y2K-related problems.  Alternatively, certain Systems
that may have originally been scheduled for replacement after the January 1,
2000 must have their replacements accelerated due to Y2K-related problems.

Information Systems

     The Company has inventoried its Information Systems according to reasonable
man standards relative to exposure.  The majority of the Company's software is
off-the-shelf with a minimum amount of proprietary code. The Company's primary
financial software is from CTI Limited, Inc., which runs on an IBM AS/400
server. Assurances from both vendors, accompanied by thorough testing, have
resulted in a minimal amount of remediation necessary on proprietary
modifications made to the software over the years.  These modifications have
been completed and will be implemented upon final acceptance testing by the
users.

     The Company uses a number of personal computers and networks in the course
of its operations.  Employees use off-the-shelf software such as Microsoft Word,
Microsoft Excel and Lotus Notes for productivity purposes. Personal computer
hardware is tested using software distributed by the National Software Testing
Laboratory. The desktop software applications require software updates that were
to be distributed Company-wide in the second quarter of 1999.  While preparing
CD's for distribution in June, the Company received word from Microsoft
regarding an upcoming update to the Microsoft Year 2000 Resource CD.  As a
result, the Company deferred shipping the updates.  The Company received the new
Microsoft Year 2000 Resource CD on August 1, 1999.  The Company prepared and
shipped the new CD's August 31, 1999.  Server operating systems that
demonstrated Y2K-related problems were upgraded as scheduled by June 30, 1999.

                                       24
<PAGE>

Non-Information Technology Systems

     Non-Information Technology Systems at Properties owned as of September 30,
1999 have been substantially assessed with respect to date-sensitive operating
controls in order to quantify the Y2K exposure.  Assessments will continue as
the Company acquires additional properties.  An evaluation of Y2K exposure has
been incorporated into the Company's normal acquisition due diligence process.
The Company's investment committee formally considers the Y2K status of each
investment during the approval process.

     The methodology for assessing and testing building Systems will vary by
equipment and is typically dictated by the building type.  In 1998 the Company
used an outside embedded systems specialist firm  to benchmark and review its
methodology in representative samples of each building type in the Company's
portfolio (i.e., low-rise/industrial, mid-rise office, and high-rise office).

     Although building Systems may be similar from building to building within a
given building type, implementations can vary.  Therefore, testing for
compliance is necessary where possible.  Testing is substantially complete for
the known building Systems on assets owned as of September 30, 1999.  The
Company's staff, outside vendors, or a combination of both have performed these
tests.

Third-Party Systems

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

     The Company has been identifying and contacting critical suppliers, service
providers, contractors, and clients to determine the extent to which the
Company's operations could be impacted as a result of third parties' failure to
remedy their own Y2K-related problems.  The Company substantially completed this
process for assets owned as of September 30, 1999.  To the extent the Y2K
readiness responses of the critical suppliers, service providers, contractors
and clients are unsatisfactory, the Company will evaluate the impact of this
relationship.  Should this relationship prove materially detrimental, the
Company will make every effort to change to a critical supplier, service
provider, contractor, or client that demonstrates Y2K readiness.  The Company is
not currently aware of any such situations, but the inability to locate an
alternative supplier, service provider, contractor, or client in a timely manner
could materially and adversely affect the Company's business, financial
condition or results of operations.

Estimate of Financial Impact

     The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations. The total costs associated with required
modifications to become Y2K compliant are not expected to be material to the
Company's financial position. The Company currently estimates the total Y2K
readiness costs are between $500,000 and $600,000. The costs incurred to date
are consistent with the various stages of completion of the three categories as
follows:

<TABLE>
<CAPTION>
Category                  Low            High           Q4/98          Q1/99          Q2/99          Q3/99          Q4/99
                          ---            ----           -----          -----          -----          -----          -----
<S>                   <C>             <C>            <C>            <C>            <C>            <C>             <C>
Non-Information        $400,000       $475,000             8%            61%             4%             14%          13%
 Technology
Information Systems      40,000         50,000            20%            70%            10%
Y2K Committee            60,000         75,000            80%            10%             5%              5%
                    -------------------------------
Total                  $500,000       $600,000
</TABLE>

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

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

                                       25
<PAGE>

Potential Risks of Inadequate Remediation

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

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

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

Contingency Plans

     The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K-related issues. The Company has
substantially completed the contingency plans for assets owned as of September
30, 1999. These contingency plans range from manual overrides, as described in
the aforementioned example, to alternative processes such as building lock-downs
in the event of a long-term power failure.  Fortunately, most buildings
currently have contingency plans in place for natural disasters such as
earthquakes, floods, ice storms, and the like, which provide a basis for the Y2K
contingency plans.  These plans may also include short-term use of backup
equipment and software, increased work hours for Company personnel or use of
contract personnel, and orderly shut-down of buildings on December 31, 1999 and
January 1, 2000 in order to perform tests of critical systems.

Disclaimer

    The Company's Y2K readiness program is an ongoing process and the estimates
of costs and completion dates for various components of the Company's Y2K
readiness program described above are subject to change. The Company's Y2K Plan
will also be applied to assets acquired or developed during 1999 and in future
years. Additionally, the Company's discussion of its Y2K readiness program
contains forward-looking statements that are based on assumptions as to future
events. There can be no guarantee as to the outcome of these future events.

Recently Issued Accounting Standards

     In September 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.  In September 1999, the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133 was originally effective for all
fiscal quarters of fiscal years beginning after September 15, 1999. FAS No. 137
deferred the effective date of FAS No. 133 to all fiscal quarters of all fiscal
years beginning after September 15, 2000. The Company believes that upon
implementation, FAS No. 133 will not have a material impact on the financial
statements of the Company.

                                       26
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     The Company's primary market risk exposure is to changes in interest rates
as a result of its Line of Credit and long-term debt.  At September 30, 1999,
the Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans, of approximately $941.2 million, or
approximately 46% of total market capitalization.  The Company's interest rate
risk objective is to limit the impact of interest rate fluctuations on earnings
and cash flows and to lower its overall borrowing costs.  To achieve this
objective, the Company manages its exposure to fluctuations in market interest
rates for its borrowings through the use of fixed rate debt instruments to the
extent that reasonably favorable rates are obtainable with such arrangements and
may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks to mitigate its interest rate risk on a related
financial instrument or to effectively lock the interest rate on a portion of
its variable debt.  The Company does not enter into derivative or interest rate
transactions for speculative purposes.  Approximately 67.4% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.26% at September 30, 1999. An additional 5.3% of the Company's
outstanding debt at September 30, 1999 was effectively locked at an interest
rate (before the spread over LIBOR) of 6.16% through an interest rate swap
agreement for a notional amount of $50.0 million. Further, 11.7% of the
Company's debt at September 30, 1999 was effectively locked at a rate (before
the spread over LIBOR) of 6.25% through an interest rate swap agreement for a
notional amount of $110.0 million. The Company regularly reviews interest rate
exposure on its outstanding borrowings in an effort to minimize the risk of
interest rate fluctuations.

     The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations.  For debt obligations outstanding at September
30, 1999, the table presents principal cash flows and related weighted average
interest rates by expected maturity dates including the Company's pro rata share
of joint venture debt totaling $86.4 million.  For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
contractual maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract.  Weighted average
variable rates are based on implied forward rates in the yield curve as of
September 30, 1999.

<TABLE>
<CAPTION>
                                            Expected Maturity Date
                                                (in thousands)
                           ----------------------------------------------------------------------------------
                                                                                                        Fair
                            1999      2000       2001       2002      2003   Thereafter    Total        Value
                            ----      ----       ----       ----      ----   ----------    -----        -----
<S>                        <C>     <C>       <C>        <C>        <C>       <C>          <C>       <C>
    Liabilities
Long-Term Debt:
  Fixed Rate               $ 864    $4,718   $  7,113   $ 17,711   $67,371     $536,866   $634,643    $634,643
    Average Interest       7.30%     7.30%      7.30%      7.30%     7.30%        7.18%
       Rate
  Variable Rate                     $4,033   $202,566   $100,000                          $306,599    $306,599
    Average Interest                 6.78%      6.78%      6.78%
       Rate

Interest Rate Derivatives
Interest Rate Swaps:
  Variable to Fixed                                                $50,000     $110,000   $160,000        $672
    Avg. Pay Rate          6.22%     6.22%      6.22%      6.22%     6.16%        6.25%
    Avg. Receive Rate      5.40%     5.40%      5.40%      5.40%     5.40%        5.40%
</TABLE>

     The table incorporates only those exposures that exist as of September 30,
1999 and does not consider exposures or positions which could arise after that
date.  In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value.  As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during the future
period, prevailing interest rates, and the Company's hedging strategies at that
time.  There is inherent rollover risk for borrowings as they mature and are
renewed at current market rates.  The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's financing requirements.

                                       27
<PAGE>

                                    PART II
                               OTHER INFORMATION

Item 1.  Legal Proceedings

     Not applicable.

Item 2.  Changes in Securities

     On September 17, 1999, the Company privately placed 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") with an institutional investor. The issue resulted
in gross consideration of $50 million. Such proceeds were used to repay
borrowings under the Company's Line of Credit (as earlier defined). The Series C
Perpetual Preferred Units are callable by the Company in five years at par value
and have a coupon rate of 9.45% per annum. The private placement is exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.

Item 3.  Defaults Upon Mortgages and Notes Payable

     Not applicable.

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

     Not applicable.

Item 5.  Other Information

     Not applicable.

Item 6.  Exhibits and Reports on Form 8-K

                                       28
<PAGE>

(a)  Exhibits

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

        3.1       -- Form of Amended and Restated Declaration of Trust of the
                  Registrant (filed as Exhibit 3.1 to the Company's Registration
                  Statement on Amendment No. 1 of Form S-11, File No. 333-09863,
                  and incorporated by reference herein).
        3.2       -- Bylaws of the Registrant (filed as Exhibit 3.2 to the
                  Company's Registration Statement on Amendment No. 1 of Form S-
                  11, File No. 333-09863, and incorporated by reference herein).
        3.3       -- Articles Supplementary, dated December 18, 1997,
                  Classifying and Designating a Series of Preferred Shares of
                  Beneficial Interest as Series A Cumulative Convertible
                  Redeemable Preferred Shares of Beneficial Interest and Fixing
                  Distribution and Other Preferences and Rights of Such Shares
                  (filed as Exhibit 3.1 to the Company's Current Report on Form
                  8-K filed on January 15, 1998, File No. 001-14516).
        3.4       -- Articles Supplementary, dated February 17, 1998,
                  Classifying and Designating a Series of Preferred Shares of
                  Beneficial Interest as Junior Participating Cumulative
                  Convertible Redeemable Preferred Shares of Beneficial
                  Interest, Series B, and Fixing Distribution and Other
                  Preferences and Rights of Such Shares (filed as an Exhibit to
                  the Company's Registration Statement on Form 8-A filed on
                  February 17, 1998, File No. 000-23813).
        3.5       -- Articles Supplementary, dated September 25, 1998,
                  Classifying and Designating a Series of Preferred Shares of
                  Beneficial Interest as Series B Cumulative Redeemable
                  Perpetual Preferred Shares of Beneficial Interest and Fixing
                  Distribution and Other Preferences and Rights of Such Shares
                  (filed as an exhibit to the Company's Form 10-Q filed on
                  August 12, 1998, File No. 001-14516)
        3.6*      -- Articles Supplementary, dated September 17, 1999,
                  Classifying and Designating a Series of Preferred Shares of
                  Beneficial Interest as Series C Cumulative Redeemable
                  Perpetual Preferred Shares of Beneficial Interest and Fixing
                  Distribution and other Preferences and Rights of Such Shares.
        4.1       -- Form of Common Share Certificate (filed as Exhibit 4.1 to
                  the Company's Registration Statement on Amendment No. 1 of
                  Form S-11, File No. 333-09863, and incorporated by reference
                  herein).
        4.2       -- Rights Agreement, dated February 6, 1998, between the
                  Company and First Chicago Trust Company of New York, as Rights
                  Agent (filed as an Exhibit 4.1 to the Company's Registration
                  Statement on Form 8-A filed on February 17, 1998, File No.
                  000-23813).
        4.3       -- Form of Rights Certificate (included as Exhibit A to the
                  Rights Agreement (Exhibit 4.2)).
        4.4       -- Form of Series A Preferred Share Certificate (filed as
                  Exhibit 4.2 to the Company's Registration Statement on Form S-
                  3, filed on October 16, 1998, File No. 333-65793)
        10.1*     -- Eighth Amendment to the Second Amended and Restated
                  Agreement of Limited Partnership of Prentiss Properties
                  Acquisition Partners, L.P.
        10.2*     -- Contribution Agreement, dated as of September 17, 1999, by
                  and among Belcrest Realty Corporation, Belair Real Estate
                  Corporation, Prentiss Properties Acquisition Partners, L.P.,
                  and the Company.
        27.1*     -- Financial Data Schedule.
        --------  ---------------------------

     * Filed herewith.

                                       29
<PAGE>

(b)  Reports on Form 8-K

     Not applicable.

                                       30
<PAGE>

                                   SIGNATURE
                                   ---------


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


                              PRENTISS PROPERTIES TRUST



Date:  November 10, 1999      By: /s/ Thomas P. Simon
                                  ----------------------------------------------
                                  Thomas P. Simon
                                  Senior Vice President and Chief Accounting
                                  Officer
                                  (Principal Accounting Officer and Duly
                                  Authorized Officer of the Company)

                                       31