UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                   -----------

                                    FORM 10-K

                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       or

              | | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

              For the Transition period from _________ to _________

                         Commission File Number: 1-13589

                            PRIME GROUP REALTY TRUST

             (Exact name of Registrant as specified in its charter)

           Maryland                                              36-4173047
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

   77 West Wacker Drive, Suite 3900,                               60601
        Chicago, Illinois                                       (Zip Code)
(Address of principal executive offices)

                                 (312) 917-1300
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each Exchange
        Title of each class                             on which registered
        -------------------                             -------------------

  Common Shares of Beneficial Interest,               New York Stock Exchange
      $0.01 par value per share

    Series B - Cumulative Redeemable                  New York Stock Exchange
Preferred Shares of Beneficial Interest,
      $0.01 par value per share

        Securities registered pursuant to Section 12(g) of the Act: None

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ____ ]

     The  aggregate  market  value of the  Registrant's  common  shares  held by
non-affiliates  was approximately  $35,370,090 based on the closing price on the
New York Stock Exchange for such shares on March 25, 1999.

     The number of the Registrant's  common shares outstanding was 15,135,727 as
of March 25, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this report  incorporates  information  by  reference  from the
definitive Proxy Statement for the Registrant's  Annual Meeting of Shareholders,
to be held on May 19, 1999.
                                      -1-
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

BACKGROUND AND GENERAL

     We are a  fully-integrated  real estate investment  company organized under
Maryland law, providing property management,  leasing,  marketing,  acquisition,
development, redevelopment, construction, finance and other related services. We
have elected to be taxed as a Real Estate  Investment Trust ("REIT") for federal
income tax purposes  beginning  with our taxable period ended December 31, 1997.
As  of  December  31,  1998,  we  owned  24  office  properties,  46  industrial
properties,  one retail  center and one parking  facility.  Our  properties  are
located  primarily  in the Chicago  metropolitan  area.  In  addition,  we own a
mortgage  on an office  property  located  at 180 N.  LaSalle  Street,  Chicago,
Illinois.

     We also own  approximately  225.0 acres of land that we may  develop.  This
acreage includes a development site which contains  approximately  67,000 square
feet  located in the Chicago  central  business  district and is held by a joint
venture with a third party. We also have rights to acquire  approximately  325.8
acres of developable land,  including rights to acquire two sites located in the
Chicago central business district containing  approximately 119,000 square feet.
We believe that this land could be developed to have  approximately  4.7 million
square  feet of  additional  office  space and over 7.6  million  square feet of
additional industrial space.

     We were formed on July 21, 1997 as a Maryland real estate  investment trust
to succeed  and expand the office and  industrial  real  estate  business of The
Prime Group, Inc. ("PGI"),  which was our predecessor.  On November 17, 1997, we
sold  12,380,000  of our  common  shares  at a price of  $20.00  per share in an
underwritten  offering and became a public  company.  Our executive  offices are
located at 77 West Wacker Drive,  Suite 3900,  Chicago,  Illinois 60601, and our
telephone number is (312) 917-1300.

     We are the managing  general  partner of, and  currently  hold 59.4% of the
economic interests in, Prime Group Realty, L.P., our operating  partnership.  We
conduct  substantially  all of our business through this operating  partnership,
except for leasing,  corporate advisory,  construction,  architectural and third
party property  management  services and land sales, which are conducted through
Prime Group Realty  Services,  Inc., a Maryland  corporation  and its affiliates
(the "Services Company").

TAX STATUS

     We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended.  As a REIT, we will not be subject to
federal  income  tax at the  corporate  level on  income  we  distribute  to our
shareholders  as  long as we  distribute  at  least  95% of our  taxable  income
(excluding any net capital gain) each year. Since our inception, we believe that
we have complied  with the tax  regulations  to maintain our REIT status.  If we
fail to qualify  as a REIT in any  taxable  year,  we will be subject to federal
income tax  (including any  applicable  alternative  minimum tax) on our taxable
income at regular  corporate  rates.  Even if we  qualify  as a REIT,  we may be
subject to certain state and local taxes on our income and property.

BUSINESS AND GROWTH STRATEGIES

     Our  primary  business  strategy is to achieve  our  investment  and growth
objectives by focusing on the  acquisition,  development and operation of office
and industrial  real estate located in the Chicago  metropolitan  area and, to a
lesser extent,  other midwestern markets. To implement this strategy,  we intend
to continue to:

     -    own, acquire,  develop,  redevelop,  lease, manage and operate Class A
          office buildings that have below market rents and, therefore,  provide
          the opportunity to enhance returns as leases expire or are renewed;

     -    develop Class A office  buildings in prime locations with  significant
          leasing potential;

     -    acquire distressed,  under-performing and under-managed Class B office
          buildings in desirable  locations and improve the income  potential of
          such assets by raising  them to a higher  operating  standard  through
          value-added renovation programs,  professional property management and
          aggressive leasing, retenanting and marketing efforts;


                                      -2-
<PAGE>
     -    acquire and develop  properties that underutilize  their sites or that
          have  excess  land for future  development; 

     -    acquire  properties or portfolios  of  properties  from  tax-sensitive
          owners where the properties  can be acquired on a  tax-deferred  basis
          using  common  units of limited  partner  interests  in our  operating
          partnership, as purchase consideration; and

     -    own,  acquire,  develop,  redevelop,  lease,  manage and operate  bulk
          warehouse/distribution  facilities  and  overhead  crane/manufacturing
          facilities.

     Class A office buildings are centrally located,  professionally managed and
maintained, attract high-quality tenants and command upper-tier rental rates and
are modern  structures or have been modernized to compete with newer  buildings.
Class B office  buildings have good location,  construction  and tenancy and are
sometimes  considered  to be  competitive  with the  lower  spectrum  of Class A
buildings.

     We believe that we can draw upon our  extensive  experience  and  long-term
presence in the Chicago  metropolitan  area to create a strategic  advantage  in
competing for future development and acquisition opportunities.

     OPERATING STRATEGY. We will focus on enhancing our cash flow per share by:

     -    engaging  in  pro-active   leasing  programs  and  effective  property
          management;

     -    managing  operating  expenses  through the use of in-house  management
          expertise;

     -    maintaining  and  developing  long-term  relationships  with a diverse
          tenant  group;

     -    attracting and retaining  motivated  employees by providing  financial
          and other incentives;

     -    continuing to emphasize  value-added  capital  improvements to enhance
          our properties' competitive advantages in their submarkets; and

     -    maximizing the cash flow of our properties.

     ACQUISITION  STRATEGY.  We plan to  increase  our cash  flow  per  share by
acquiring  additional  office and industrial  properties,  including  properties
that:

     -    provide attractive initial yields and significant potential for growth
          in cash flow from property operations;

     -    are well-located,  of high quality and competitive in their respective
          submarkets;

     -    are  located  in our  existing  submarkets  and/or in other  strategic
          submarkets  where the demand for office and  industrial  space exceeds
          available supply; and

     -    have  been   under-managed  or  are  otherwise   capable  of  improved
          performance through intensive management, marketing and leasing.

     We  plan  to  concentrate  our   acquisition   activities  in  the  Chicago
metropolitan  area and, to a lesser  extent,  in other  midwestern  markets.  We
believe that  attractive  opportunities  exist to acquire  office and industrial
properties in these markets at prices below  replacement  cost. Each acquisition
opportunity  will be reviewed  to  evaluate  whether it meets one or more of the
following criteria:

     -    potential  for higher  occupancy  levels  and/or  rents as well as for
          lower tenant turnover and/or operating expenses;

     -    ability to generate  returns in excess of our weighted average cost of
          capital,  taking into  account the  estimated  costs  associated  with
          renovation and tenant turnover (i.e.,  tenant improvements and leasing
          commissions);  and

     -    purchase prices at or below estimated replacement cost.



                                      -3-
<PAGE>
     We believe we have certain competitive  advantages that enhance our ability
to  identify  and  complete  acquisitions  on  a  timely  and  efficient  basis,
including:

     -    our  management's   significant  local  market  experience  with,  and
          knowledge of, properties, submarkets and potential tenants;

     -    our  management's  long-standing  relationships  with  commercial real
          estate brokers and  institutional  and other owners of commercial real
          estate in the Chicago metropolitan area;

     -    our fully-integrated real estate operations, which allow us to quickly
          evaluate and respond to  acquisition  opportunities;

     -    our  ability  to access  relatively  low-cost  financing  through  the
          capital  markets; 

     -    our management's  reputation as an experienced purchaser of office and
          industrial  properties with the ability to execute  transactions in an
          efficient and timely manner; and

     -    our ability to add a number of office and industrial properties to our
          portfolio  without the need for a significant  increase in general and
          administrative expenses, due to our expertise and depth of management.

     We also plan to make strategic  purchases of land where opportunities exist
for current or future development.

     We believe  that many of the owners of  commercial  real estate  properties
located  in  the  Chicago  metropolitan  area  have a low  tax  basis  in  their
properties  and  have  the  corresponding   potential  for  the  recognition  of
substantial taxable gains as a result of the disposition of such properties.  We
believe that our capital structure and ability to acquire properties in exchange
for common units,  and thereby  defer a seller's  potential  taxable gain,  will
enhance our ability to  consummate  transactions  quickly and to structure  more
competitive  acquisitions  than other real estate  companies in the market which
lack our access to capital and ability to acquire property with common units.

     DEVELOPMENT  STRATEGY.  As opportunities  arise and where market conditions
support a  favorable  risk-adjusted  return on  investment,  we intend to pursue
opportunities  for growth  through the  development of new office and industrial
properties. We believe that the strength and experience of our management in the
development  of  office  and  industrial  properties  will  provide  us  with  a
competitive  advantage  in  evaluating  and  pursuing  opportunities  to develop
additional  properties.  During the next few years,  we expect  that most of our
development  activities  will be focused on Chicago  central  business  district
office and suburban office and industrial properties in the Chicago metropolitan
area.

     Based on ongoing  marketing  activities and  discussions  with  prospective
tenants,  we expect that over the next several  years there will be  significant
demand  from  several  large  tenants  that are unable to find  large  blocks of
contiguous  Class A office  space in downtown  Chicago  which may lead to office
development  opportunities.  We believe that our  significant  land holdings and
land option  rights will provide us with a distinct  advantage in competing  for
future development opportunities.

     The Services Company's corporate advisory activities with third parties are
expected  to give us  further  access to future  development  opportunities  for
properties we will build and lease.  The Services  Company will also continue to
undertake build-to-suit projects for sale to third parties.

     FINANCING STRATEGY.  During 1998, our Board Trustees modified our financing
policy to specify that we intend to operate with a ratio of debt-to-total market
capitalization at a level below 50.0%.

     Our  Board  further  modified  our  financing  policy in  December  1998 by
replacing the debt-to-total market  capitalization  formulation with a series of
financial  ratios and other  measurements  which would  better  measure our debt
carrying  capacity.  As modified,  our new  financing  policy has the  following
targets in place as of December 31, 1998: (i) a minimum interest  coverage ratio
of at least 2.0,  (ii) a minimum fixed  coverage  charge ratio of at least 1.60,
(iii)  a ratio  of  debt-to-net  asset  value  of no more  than  50%,  and  (iv)
unencumbered  cash and credit  availability of at least $40.0 million,  of which
$10.0 million  should be cash on hand.  The  foregoing  ratios and  measures are
calculated  pursuant  to  detailed  definitions  set by our Board  and,  in some
instances, are adjusted over time pursuant to a schedule set by our Board.

                                       -4-
<PAGE>
     The above  targets  do not mean  that we will  operate  within  each of the
ratios at all time or that our Board will not approve  actions  which will cause
us to not be in compliance with this policy. Our financing policy may be altered
without the consent of our shareholders, and our organizational documents do not
limit the amount or type of indebtedness that we may incur.

     We intend to use one or more sources of capital for future acquisitions and
development  activities.  These capital sources may include  undistributed  cash
flow, borrowings under certain credit facilities, property specific non-recourse
debt,  proceeds from the issuance of long-term,  tax-exempt bonds and other debt
or equity securities and other bank and/or institutional borrowings.

     RECENT DEVELOPMENTS

     During 1998, we acquired the following eight office properties:

<TABLE>
<CAPTION>
                                                                 NET
                                                               RENTABLE      ACQUISITION
                                                                SQUARE           COST               MONTH
     PROPERTY                       LOCATION                     FEET        (IN MILLIONS)         ACQUIRED
-----------------------------------------------------------------------------------------------------------
<S>                               <C>                           <C>             <C>                <C>
33 North Dearborn Street          Chicago, IL                   302,818         $  34.4            January
Commerce Point                    Arlington Heights, IL         236,642            29.9            February
208 South LaSalle Street          Chicago, IL                   835,229            61.4            March
122 South Michigan Avenue         Chicago, IL                   512,369            29.7            April
2100 Swift Drive                  Oak Brook, IL                  58,000             6.3            April
6400 Shafer Court                 Rosemont, IL                  164,958            22.2            May
Two Century Centre                Schaumburg, IL                217,960            35.9            June
2000 York Road (1)                Oak Brook, IL                 200,045            16.2            June
                                                          ====================================
                                                              2,528,021         $ 236.0
                                                          ====================================
--------------------
<FN>
(1)  In  connection  with the  acquisition  of this  building,  we  completed  a
     property like-kind-exchange with a previously owned office building located
     at 350 N. Mannheim Road in Hillside, Illinois.
</FN>
</TABLE>

     During 1998, we acquired the following parcels of land:
<TABLE>
<CAPTION>
                                                                                ACQUISITION
                                                                                   COST            MONTH
   PROPERTY                         LOCATION                      ACRES        (IN MILLIONS)      ACQUIRED
-----------------------------------------------------------------------------------------------------------
<S>                               <C>                             <C>            <C>               <C>
Aurora Land - I                   Aurora, IL                      37.3           $  3.1            June
Aurora Land - II                  Aurora, IL                      17.4              1.4            June
DeKalb Land                       DeKalb, IL                      42.1              0.6            July
Rolling Meadows Land              Rolling Meadows, IL              0.6              0.1            July
Libertyville Industrial Land      Libertyville, IL                12.8              2.0            July
Libertyville Office Land          Libertyville, IL                21.6              3.3            September
                                                          ====================================
                                                                 131.8           $ 10.5
                                                          ====================================

</TABLE>

     The Aurora land contracts  require us to purchase an additional 132.7 acres
over a three to five year period for additional  consideration of $10.4 million.
Certain  minimum  installment  payments  are  required;  however,  the timing of
purchases is at our discretion.  During 1998, we made two  installment  payments
totaling $0.4 million.

     In July 1998, we began  construction  of a 242,000  square foot  industrial
facility and in September 1998, we began  construction of four office  buildings
with a total of 180,000  square feet on the  Libertyville  land  parcels  listed
above.





                                      -5-
<PAGE>
     Concurrently with the closing of our initial public offering, we obtained a
secured revolving credit facility from a group of financial  institutions with a
maximum  commitment  of $235.0  million.  We used the  credit  facility  to fund
property acquisitions and letters-of-credit  that provide credit enhancements on
certain of our bonds  payable.  The credit  facility is also  subject to various
financial and other  operating  covenants.  During 1998, the credit facility was
amended to provide that the commitments  under the credit facility be reduced to
$80.0  million  and the  interest  rate was  modified  from LIBOR plus 150 basis
points to LIBOR plus 225 basis points.  On February 4, 1999, the credit facility
was further  amended and the  commitment  was reduced to $75.0  million with the
interest rate remaining the same.

     On  January  1, 1998,  we  provided  the  Services  Company a $5.0  million
line-of-credit,  which (i)  accrues  interest  at LIBOR plus 3%,  (ii)  requires
monthly  principal and interest  payments from  available cash flow, as defined,
and (iii)  matures on  December  31,  2000.  The line is  collateralized  by the
Services  Company's third party receivables and is subject to various covenants.
As of December 31, 1998, the line-of-credit had $0.6 million outstanding.

     In January 1998, we obtained a $15.0 million revolving  line-of-credit with
a financial  institution.  The line-of-credit is collateralized by an industrial
property  located at as 475  Superior  Avenue in Munster,  Indiana.  Outstanding
balances  under the  line-of-credit  bear interest at a rate equal to LIBOR plus
195 basis  points.  In  January  1999,  we  exercised  an  option to extend  the
line-of-credit for one year to January 2000, with the existing terms and subject
to an  additional  one-year  extension at our option.  Generally,  the covenants
contained in the line-of-credit are identical to the covenants  contained in the
above  mentioned  credit  facility.  The $15.0  million  line-of-credit  and the
previously mentioned $75.0 million credit facility are collectively  referred to
as the "Credit Facilities."

     During 1998, we obtained the following new mortgage indebtedness:
<TABLE>
<CAPTION>
                                               ORIGINAL
                                              PRINCIPAL
                                               BALANCE                  INTEREST               MATURITY
    MORTGAGED PROPERTIES(1)                 (IN MILLIONS)                 RATE                  DATE
-------------------------------------------------------------------------------------------------------
<S>                                          <C>                     <C>                      <C> 
77 West Wacker Drive(2)................      $   170.0               LIBOR plus 1.0%          10/01/99
Continental Towers(3)..................           75.0                    7.22%                1/05/13
Various office and industrial(3).......           47.0                    7.17%                5/01/08
208 South LaSalle Street(3) ...........           45.8                    7.785%               4/11/13
Various industrial(3)..................           29.4                    6.85%                4/01/08
Two Century Centre(3)..................           20.5                    7.375%              11/11/08
180 N. LaSalle Street mortgage
   note receivable (3).................           20.0               LIBOR plus 2.50%         11/11/01
Commerce Point(3)......................           20.0                    7.07%                3/11/08
33 North Dearborn Street(2)............           18.0               LIBOR plus 1.65%          1/31/00
Various industrial(3)..................           14.6               LIBOR plus 1.5%           5/01/00
6400 Shafer Court(3)...................           14.3                    7.09%                6/11/08
2000 York Road(3)......................           12.0                    7.375%              11/11/08
Citibank Office Plaza(3)...............            8.8                    7.18%                5/11/08
2100 Swift Drive(3)....................            5.2                    7.19%                5/11/08
                                            =============
                                             $   500.6
                                            =============
--------------------
<FN>
(1)  All of the  mortgage  loans are  subject  to  various  financial  and other
     operating  covenants.

(2)  Interest payable monthly, with principal due at maturity.

(3)  Principal and interest payable monthly through maturity.
</FN>
</TABLE>

     We used a portion of the proceeds  from the mortgage  notes listed above to
purchase the above  properties,  repay previously  outstanding  mortgage debt of
$83.5 million, and reduce borrowings under the Credit Facilities.

     In February  1998, we refinanced  $48.8 million of  letters-of-credit  that
provided  credit  enhancements  on certain of our bonds  payable from one of our
Credit  Facilities  to a separate  financing  facility  provided  by a financial


                                      -6-
<PAGE>
institution.  The new  letters-of-credit  have an annual fee of 1.4% of the face
amount and are  collateralized  by  mortgages on certain  industrial  and office
properties and a $5.0 million cash collateral account.  This amount was included
in restricted cash escrows at December 31, 1998.

     On  March  30,  1998,  we  entered  into  a  joint  venture  that  acquired
approximately  67,000 square feet of vacant land located in the Chicago  central
business  district.  The parcel was acquired for the potential  development of a
Class A multi-purpose  facility,  with  approximately  1,000,000  square feet of
office space,  approximately  100,000  square feet of retail space and a parking
garage with a capacity for  approximately  250 cars. We have economic control of
the joint venture and, therefore,  have consolidated the operations of the joint
venture from the date of inception.  The joint venture  entered into a bank loan
in the amount of $13.5 million to acquire the land.  Interest is payable monthly
at a rate of LIBOR plus 200 basis points or at the lender's prime rate. The note
was to mature on April 1, 1999; however we have exercised a six-month  extension
option and extended the maturity to October 1, 1999.

     On March 25,  1998,  we  completed a private  placement of 2,579,994 of our
common  shares  to   institutional   investors  and  received  net  proceeds  of
approximately  $45.9  million,  which were used to fund the  acquisition  of the
office  properties  located at 208 South LaSalle  Street and 122 South  Michigan
Avenue.

     On March 31, 1998 and on September  28,  1998,  we issued a total of 22,500
common shares  granted to two of our officers and 2,500 common shares granted to
one of our board members pursuant to their  employment  agreements or consulting
agreement, as applicable.

     On June 5, 1998, we completed the sale of 4.0 million  shares of our Series
B -  Cumulative  Redeemable  Preferred  Shares  and  received  net  proceeds  of
approximately  $95.3 million which were used to fund (i) the  acquisition of Two
Century  Centre and 2000 York Road, and (ii) repay  borrowings  under the Credit
Facilities.  Distributions  on the Series B -  Redeemable  Preferred  Shares are
payable  quarterly on or about the last day of January,  April, July and October
of each year,  at the rate of 9%  (equivalent  to $2.25 per annum per Series B -
Cumulative  Redeemable  Preferred Share).  The Series B - Cumulative  Redeemable
Preferred Shares rank senior to our common shares and our Series A - Convertible
Preferred  Shares as to the payment of dividends and as to the  distribution  of
assets.  On and  after  June 5,  2003,  the  Series  B -  Cumulative  Redeemable
Preferred  Shares may be redeemed at our option at a redemption  price of $25.00
per share plus accrued and unpaid distributions. The redemption price is payable
solely  out of the  proceeds  from  the  sale of our  other  capital  shares  of
beneficial interest.

     On July 22, 1998, we entered into a purchase  agreement,  with an affiliate
of an investor in the operating  partnership,  to acquire two office  buildings,
IBM Plaza (a  1,354,354  square  foot  office  building  located in the  Chicago
central  business  district)  and  National  City Center (a 766,965  square foot
office building located in Cleveland,  Ohio) for an aggregate  purchase price of
approximately  $357.0 million. On September 15, 1998, we terminated the purchase
agreement in accordance  with the terms of the agreement due to the failure of a
material condition precedent to the closing of these acquisitions.  On September
21,  1998,  the sellers  notified  us in writing  that they  believed  they were
entitled to the $20.0 million  earnest money provided for by the agreement,  and
instructed  the earnest  money  escrow  agent to draw the full amount  under two
earnest money  letters-of-credit we provided under one of the Credit Facilities.
The  sellers  also filed a complaint  against us with the  Supreme  Court of New
York,  New York County  alleging that we breached the  contract.  On October 30,
1998, we filed our answer to the  complaint and denied all material  allegations
of the complaint. We also filed a counterclaim against the sellers alleging that
the sellers  breached the contract and sought the return of the above  mentioned
earnest money and other damages.

     On February 5, 1999, we entered into an amended  option  agreement with the
seller  of IBM  Plaza  and an  amended  purchase  agreement  with the  seller of
National City Center, which have the following terms:

     -    both the  original  lawsuit  filed by the sellers and our counterclaim
          were dismissed;

     -    we purchased  National  City Center on February 5, 1999 for a contract
          price of $100.0 million; and

     -    the $20.0 million  earnest money escrow  described  above was released
          and  credited  to the  purchase  of  National  City Center and an $8.0
          million  nonrefundable  payment for the option to purchase  IBM Plaza.

                                      -7-
<PAGE>
          The option  provides us with the opportunity to purchase IBM Plaza for
          $230.0  million  (exclusive  of the $8.0 million  deposit) and expires
          October 31,  1999.  If the option is  exercised,  the  purchase of the
          property must be completed no later than December 20, 1999.

     On August 21, 1998, we entered into two treasury lock  agreements  with two
financial  institutions to lock certain debt instruments at the interest rate on
ten-year  Treasury  Notes  effective  on the date of the  agreements  to provide
interest rate protection on future debt financings.  One of these agreements was
entered into in  anticipation  of a planned  future  securitization  of a $170.0
million loan related to the 77 West Wacker Drive  building,  and had a lock rate
of 5.364%.  The other  agreement  was  entered  into in  anticipation  of $160.0
million in debt  related  to the  acquisition  of IBM Plaza,  had a lock rate of
4.732% and was to expire on March 19, 1999.  We made deposits as required by the
agreements,  totaling  approximately  $14.6  million at December  31, 1998 ($5.9
million related to the $170.0 million  agreement and $8.7 million related to the
$160.0  million  agreement),  exclusive  of  a  $2.0  million  credit  threshold
described below and are included in other assets in our  consolidated  financial
statements. The $170.0 million agreement was to expire on February 18, 1999, but
was  extended to April 15,  1999.  At that time,  the lock rate was  modified to
5.016% and the credit  threshold  reduced from $2.0 million to $0.5 million.  If
the market rate on ten-year  Treasury  Notes falls below the locked rate and the
difference  between  $170.0  million and the  calculated  notional  amount is in
excess of the credit threshold, cash deposits are required. On March 1, 1999, we
terminated the $160.0 million treasury lock agreement due to the change in terms
and  timing  of the IBM  Plaza  purchase  as a result  of the  amended  purchase
agreement.  We had  approximately  $0.6 million on deposit that was forfeited at
the time of  termination.  During the period  January 1, 1999 through  March 24,
1999,  we received net cash  settlements  of  approximately  $9.2 million  ($1.0
million related to the $170.0 million agreement, and $8.2 million related to the
$160.0 million agreement) related to both treasury lock agreements. If the yield
on U.S. ten-year Treasury Notes at settlement is less than the locked yield, the
difference  between $170.0 million and the  calculated  notional  amount will be
amortized  over the terms of the future debt  instruments  as an  adjustment  to
interest  expense.  We  intend  to  consummate  debt  transactions  equal to the
notional value of the remaining agreement.

     During the third quarter of 1998, we entered into  contracts to acquire two
land parcels and an option to acquire a land parcel,  all located in the Chicago
metropolitan  area, for a total purchase price of  approximately  $62.0 million.
The purchase price is subject to an additional  $2.2 million based upon the date
the  purchase is  completed.  We were  required to make cash escrow  deposits of
approximately $25.2 million (including a $25.0 million non-refundable  deposit).
As of  December  31,  1998,  we had made cash escrow  deposits of $15.2  million
related to these  contracts and the remaining  $10.0 million was made in January
1999. We made an additional  non-refundable deposit of $0.6 million on March 10,
1999 related to the additional purchase price adjustment.  We expect to complete
the  acquisitions  by the  end of the  second  quarter  of  1999.  However,  the
acquisitions are subject to our completion of due diligence and the satisfaction
of other customary closing conditions. There can be no assurance that any or all
of the acquisitions will be completed.

     On September  14, 1998,  we  established  a program to repurchase up to the
lesser of (i) 1,550,000 of our common shares or (ii) $7.5 million for our common
shares in open market and privately negotiated  transactions,  with share prices
not to  exceed  $20.00  per  common  share.  As of  December  31,  1998,  we had
repurchased   474,200   common  shares  for  an  aggregate   purchase  price  of
approximately  $7.3 million.  No additional  shares have been repurchased  since
December 31, 1998.

     As part of an annual  incentive  award  program,  on December 17, 1998, our
Board of Trustees  granted to nineteen  of our  officers  (two of whom are Board
members) and one Board  member,  25,694 common  shares.  The common share grants
vest 50% on January 15, 1999 and 50% on January 15, 2000.

     On January 8, 1999,  we filed our initial shelf  registration  statement on
Form S-3 with the  Securities  and Exchange  Commission to register up to $500.0
million of our equity and debt securities for future sale.

     During the period from January 1, 1999 through  March 25, 1999, we acquired
the following office and industrial properties:







                                      -8-
<PAGE>
<TABLE>
<CAPTION>
                                                                   NET
                                                                 RENTABLE      ACQUISITION        MORTGAGE
                                                                  SQUARE          COSTS             DEBT             MONTH
       PROPERTY                         LOCATION                   FEET       (IN MILLIONS)     (IN MILLIONS)       ACQUIRED
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                       <C>             <C>             <C>                 <C>
Office:
   33 West Monroe Street               Chicago, IL                846,759       $ 101.3           $  65.0           January
   National City Center (1) (2)        Cleveland, OH              766,965         105.0              63.6           February

Industrial:
   901 Technology Way (2)              Libertyville, IL            68,824           4.1                --           January
                                                            =================================================
                                                                1,682,548       $ 210.4           $ 128.6
                                                            =================================================
<FN>
(1)  Acquisition  costs and  mortgage  debt  include  $2.0  million to adjust an
     assumed  above  market  rate  mortgage  note  payable  to a current  market
     interest rate.

(2)  These  properties were acquired from minority  interest unit holders of the
     operating partnership or their affiliates.
</FN>
</TABLE>

     On February 8, 1999, we signed a contract with a buyer pursuant to which we
will construct an approximately  1,018 space parking garage,  with approximately
4,000 square feet of retail space, on  approximately  22,700 square feet of land
that we have under option to purchase in the Chicago central business  district,
and  sell  the  competed  parking  garage  to the  buyer.  The  sales  price  is
approximately $34.6 million, plus the value of any of the retail space leased by
us at the time of sale, currently estimated to be approximately $4.0 million. In
addition,  we are  entitled to an  additional  $1.0  million  from the buyer if,
within  15  years  after  our  sale  of the  parking  garage  to the  buyer,  we
substantially  complete an office  building  containing at least 800,000  square
feet of  office  space,  which is  occupied  by at least one  tenant  who is not
affiliated  with us. We have  acquired this land with the intent to construct an
office  building  which we will own for  lease.  The land  parcel for the office
building  could  not be  obtained  without  obtaining  the land for the  parking
parking  garage and in order to  construct an office  building,  parking must be
provided pursuant to zoning requirements.

SEGMENT REPORTING DATA

     See Note 15 to our  consolidated  financial  statements for a discussion on
our  operating  segment  data for the year ended  December  31, 1998 and for the
period from November 17, 1997 through December 31, 1997.

COMPETITION

     We compete with other owners and developers;  some of whom may have greater
resources and more experience than we.  Additionally,  the number of competitive
properties in any  particular  market or submarket in which our  properties  are
located could have a material  adverse effect on both our ability to lease space
at our properties or any newly-acquired property and on the rents charged at our
properties.  We believe that our existing Credit  Facilities and our access as a
public  company  to the  capital  markets to raise  funds  during  periods  when
conventional sources of financing may be unavailable or prohibitively  expensive
provide us with substantial competitive advantages. Further, we believe that our
capital structure and ability to acquire properties in exchange for common units
in our operating  partnership  and, thereby defer a seller's  potential  taxable
gain,  enhance our ability to consummate  transactions  quickly and to structure
more  competitive  acquisitions  than other real estate  companies in the market
which lack our access to capital  and  ability to acquire  property  with common
units.  See  "Business and Growth  Strategies-Acquisition  Strategy." We believe
that the  number of real  estate  developers  has  decreased  as a result of the
recessionary  market conditions and tight credit markets during the early 1990's
as well as the reluctance on the part of more conventional  financing sources to
fund development and acquisition  projects.  In addition, we believe that we are
one of a limited  number of  publicly-traded  real  estate  companies  primarily
focusing on the office and industrial market in the Chicago metropolitan area.





                                      -9-
<PAGE>
SERVICES COMPANY

     The  Services  Company was formed in March 1997 under the laws of the state
of Maryland.  The operating  partnership owns 100.0% of the nonvoting  preferred
stock of the Services Company, representing 95.0% of its economic value and also
has a $4.8 million  promissory  note issued from Services  Company in connection
with its formation.  We have also provided a $5.0 million  line-of-credit to the
Services  Company.  The ownership  structure  permits us to share in the Service
Company's  income and also maintain our status as a REIT for federal  income tax
purposes. We receive substantially all of the economic benefit of the businesses
carried  on by the  Services  Company  because  we have  the  right  to  receive
dividends through the operating partnership's  investment in the preferred stock
and interest payments on the note held by the operating partnership. However, we
do not elect the Services Company's officers or directors and, consequently,  do
not have the  ability to  control  the  operations  of the  Services  Company or
require the declaration of dividends.

     The Services  Company  provides  certain  corporate  advisory,  management,
leasing,  tenant  improvement  construction,  painting,  contracting  and tenant
representation  services to buildings  owned by others.  The Services  Company's
leasing  division  provides  leasing  services to certain of our  properties and
other property  owners for fees. The Services  Company's  construction  division
provides   construction   and  construction   management   services  for  tenant
improvements,  renovations  and  other  construction  to the  properties  owned,
acquired or managed by us. The Services Company also acquires, markets and sells
land.

GOVERNMENT REGULATION

     ENVIRONMENTAL  MATTERS.  All of our  properties  were subject to Phase I or
similar  environmental  assessments  by independent  environmental  consultants.
Phase I  assessments  are  intended to discover  information  regarding,  and to
evaluate the  environmental  condition of, the surveyed property and surrounding
properties. Phase I assessments generally include an historical review, a public
records  review,   an   investigation  of  the  surveyed  site  and  surrounding
properties,  and the preparation  and issuance of a written  report,  but do not
include soil sampling or subsurface investigations.

     We are  aware  of  environmental  contamination  at  certain  of our  older
industrial  properties  contributed by PGI. These  properties are in remediation
programs  sponsored by the appropriate  state  environmental  agencies.  PGI has
contractually  agreed to retain  liability,  and indemnify us, for environmental
remediation  with regard to these  industrial  properties,  which  environmental
consultants  have  estimated  will cost, in the  aggregate,  up to $3.2 million.
Based on such estimates,  certain properties PGI contributed recorded provisions
for environmental remediation costs totaling $3.2 million in 1997 prior to their
contribution. During 1997, PGI initiated lawsuits against a former owner (who is
also a former tenant) of one of the properties and an  environmental  consultant
to cover the cost of the  remedial  action  plans.  On February  20,  1998,  PGI
reached  an  agreement  with  the  former  owner  and  received  a $1.8  million
settlement   payment,   in  addition  to  $0.5  million  previously  paid  as  a
reimbursement  for  costs.  In 1998,  PGI sued a  current  tenant  of one of the
properties to recover the cost of certain remedial action plans.

     We are also aware of  contamination  at 455  Academy  Drive in  Northbrook,
Illinois. The current tenant of the property,  National Service Industries,  has
provided us with an indemnity for all of the costs of environmental  remediation
regarding the property they caused either knowingly or unknowingly. In addition,
we are aware of contamination at 1301 E. Tower Road in Schaumburg, Illinois. The
property has been submitted into a remediation program sponsored by the Illinois
Environmental  Protection  Agency and we are in the process of  quantifying  the
cost of necessary  remedial actions.  In connection with 1301 E. Tower Road, the
previous owner and other third parties have placed approximately $0.8 million in
escrow to fund the clean-up of the property.  We currently  anticipate that this
escrow  will be  sufficient  to fund  the  necessary  remedial  action  for this
property,  although  the  previous  owner and other  third  parties  will not be
responsible for any costs in excess of the amount placed in escrow.

     We believe  that our other  properties  are in  compliance  in all material
respects  with all federal,  state and local laws,  ordinances  and  regulations
regarding  hazardous  or toxic  substances.  We have not  been  notified  by any
governmental   authority,   and  are  not  otherwise   aware,  of  any  material
noncompliance,  liability or claim relating to hazardous or toxic  substances in
connection  with  any  of  our  other  properties.  None  of  our  environmental
assessments of the properties  have revealed any  environmental  liability that,
after giving effect to the contractual  indemnities and escrows described above,


                                      -10-
<PAGE>
we believe would have a material  adverse  effect on our financial  condition or
results of  operations  taken as a whole,  nor are we aware of any such material
environmental liability. Nonetheless, it is possible that our assessments do not
reveal all  environmental  liabilities or that there are material  environmental
liabilities  of which we are unaware.  Moreover,  there can be no assurance that
(i)  future  laws,  ordinances  or  regulations  will not  impose  any  material
environmental  liability  or (ii) the  current  environmental  condition  of our
properties  will  not be  affected  by  tenants,  by the  condition  of  land or
operations  in  the  vicinity  of  our  properties  (such  as  the  presence  of
underground  storage  tanks) or by third parties  unrelated to us. If compliance
with the  various  laws and  regulations,  now  existing or  hereafter  adopted,
exceeds our budgets for such items,  our ability to make expected  distributions
to shareholders could be adversely affected.

     COSTS OF COMPLIANCE  WITH AMERICANS WITH  DISABILITIES  ACT. Under the ADA,
all public accommodations and commercial facilities are required to meet certain
federal  requirements  related  to access  and use by  disabled  persons.  These
requirements  became  effective in 1992.  Compliance  with the ADA  requirements
could require removal of access barriers,  and noncompliance could result in the
imposition of fines by the federal  government or an award of damages to private
litigants.  We believe that our properties are  substantially in compliance with
these  requirements;  however,  we may incur additional costs to comply with the
ADA. Although we believe that such costs will not have a material adverse effect
on our  financial  position,  if required  changes  involve a greater  amount of
expenditures  than  we  currently  anticipate,  our  ability  to  make  expected
distributions could be adversely affected.

     OTHER  REGULATIONS.  Our  properties  are also subject to various  federal,
state and local regulatory  requirements,  such as state and local fire and life
safety  requirements.  Failure to comply with these requirements could result in
the  imposition  of fines by  governmental  authorities  or awards of damages to
private  litigants.  We believe that our  properties  are  currently in material
compliance  with all such  regulatory  requirements.  However,  there  can be no
assurance that these  requirements  will not be changed or that new requirements
will not be imposed  which would  require us to make  significant  unanticipated
expenditures  and could have an adverse effect on our Funds from  Operations and
expected distributions.

INSURANCE

     We  believe  that our  properties  are  covered by  adequate  comprehensive
liability, rental loss, and all-risk insurance, provided by reputable companies,
with  commercially  reasonable  deductibles,  limits and  policy  specifications
customarily carried for similar properties. There are, however, certain types of
losses which may be either  uninsurable or not economically  insurable,  such as
losses due to floods,  riots or acts of war.  Should an uninsured loss occur, we
could lose both our  invested  capital in, and  anticipated  profits  from,  the
property.

EMPLOYEES

     As of December 31, 1998, we had approximately 200 full-time  employees.  We
believe that our relations with our employees are satisfactory.

ITEM 2.  PROPERTIES

GENERAL

     As of December 31, 1998, we owned 24 office properties (including 1701 Golf
Road, on which we own a second mortgage note, but for which we have consolidated
the property's operations),  46 industrial properties, one retail center and one
parking   facility.   Our  properties  are  located  primarily  in  the  Chicago
metropolitan area. In addition,  we own a mortgage on an office property located
at 180 N. LaSalle Street, in the Chicago central business district.  In terms of
net rentable square feet, approximately 90.2% of our office properties and 89.7%
of our  industrial  properties are located in the Chicago  metropolitan  area in
prime business locations within established business communities. The properties
located in the Chicago  metropolitan area accounted for  approximately  90.8% of
our rental revenue and 98.0% of our tenant  reimbursements  revenue for the year
ended December 31, 1998.

     Our management team has developed or redeveloped,  leased and managed 40 of
our 46 industrial  properties  (85.0% in terms of industrial net rentable square
feet) and 11 of our 24 office  properties (47.3% in terms of office net rentable
square  feet).  In the course of such  development  and  redevelopment,  we have
acquired  experience  across a broad  range  of  development  and  redevelopment


                                      -11-
<PAGE>
projects. For example, our management team has developed both office properties,
such as the 77 West Wacker Drive building in Chicago,  Illinois,  and industrial
properties,  such as 1001 Technology Way and 801 Technology Way in Libertyville,
Illinois. Our management team also has redeveloped both office properties,  such
as 201 4th Avenue in Nashville, Tennessee and industrial properties, such as the
Chicago  Enterprise   Center,   East  Chicago  Enterprise  Center,  and  Hammond
Enterprise  Center in the Chicago  metropolitan  area. We believe our properties
are well maintained  and, based on recent  engineering  reports,  do not require
significant capital improvements.

     We own approximately 225.0 acres of land that we may develop.  This acreage
includes a  development  site which  contains  approximately  67,000 square feet
located in the Chicago central business  district and is held by a joint venture
with a third party. We also have rights to acquire  approximately 325.8 acres of
developable  land,  including rights to acquire two sites located in the Chicago
central  business  district  containing  approximately  119,000  square feet. We
believe  that this land could be  developed  to have  approximately  4.7 million
square  feet of  additional  office  space and over 7.6  million  square feet of
additional  industrial  space.  Included  in the 325.8 acres are 94 acres and an
industrial  property  currently  under  development  that we are to acquire from
affiliates  of a member of our Board of Trustees for a total  purchase  price of
$20.9 million.

     Our office  properties are leased to tenants either (i) on a net basis with
tenants  obligated  to pay  their  proportionate  share  of real  estate  taxes,
insurance,  utility and  operating  expenses or (ii) on a gross basis,  with the
landlord responsible for the payment of these expenses up to the amount incurred
during the tenants first year of occupancy ("Base Year") or a negotiated  amount
approximating the tenants pro rata share of these expenses ("Expense Stop"). The
tenants pay their pro rata share of increases in expenses above the Base Year or
Expense Stop.  Most of the leases for our  industrial  properties are written on
either a (i) net basis,  with tenants paying their  proportionate  share of real
estate taxes, insurance, utility and other operating expenses as additional rent
or (ii) triple net lease  basis with the  tenants  paying all of the real estate
taxes, insurance, utility and other operating expenses for the property.

PROPERTIES

     The following table sets forth certain information  relating to each of our
properties  as of December 31, 1998,  unless  indicated  otherwise.  Through the
operating  partnership and other subsidiaries,  we own a 100% interest in all of
the office and the industrial properties,  except for 1701 Golf Road (we own the
second  mortgage note on this  property)  and 180 N. LaSalle  Street (we own the
first mortgage note on this property).

<TABLE>
<CAPTION>
                                                                                                         NET            PERCENTAGE
                                                                                YEAR BUILT/           RENTABLE         LEASED AS OF
              PROPERTY                                  LOCATION                 RENOVATED           SQUARE FEET        12/31/98(%)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                         <C>                     <C>            <C>
OFFICE PROPERTIES
  77 West Wacker Drive                              Chicago, IL                 1992                    944,556            97.2
  1701 Golf Road (Continental Towers) (1)           Rolling Meadows, IL         1977/1979/1981          928,766            97.0
  208 South LaSalle Street                          Chicago, IL                 1914/1956/1982/         835,229            93.0
                                                                                1991
  122 South Michigan Avenue                         Chicago, IL                 1910                    512,369            54.5
  33 North Dearborn Street                          Chicago, IL                 1967/1986               302,818            89.4
  201 4th Avenue North (Suntrust Bldg.)             Nashville, TN               1968/1985               250,566            81.2
  3800 and 3850 North Wilke Road and
       3930 Ventura Drive(Commerce Point)           Arlington Heights, IL       1987/1989               236,642            97.7
  1700 East Golf Road (Two Century Centre)          Schaumburg, IL              1989                    217,960           100.0
  2000 York Road (2000 York Brook)                  Oak Brook, IL               1960/1986               200,045            99.8
  4343 Commerce Court (The Olympian Office
       Center)                                      Lisle, IL                   1989                    167,756            58.9
  6400 Shafer Court                                 Rosemont, IL                1980/1990               164,958            94.0
  2205-2255 Enterprise Drive (Enterprise
       Office Center)                               Westchester, IL             1987                    129,574            98.7
  1990 Algonquin Road/2000-2060 Algonquin
       Road (Salt Creek Office Center)(2)           Schaumburg, IL              1979/1986               125,938            91.8
  941-961 Weigel Drive                              Elmhurst, IL                1989/1994               123,077           100.0
</TABLE>





                                      -12-
<PAGE>
<TABLE>
<CAPTION>
                                                                                                         NET            PERCENTAGE
                                                                                YEAR BUILT/           RENTABLE         LEASED AS OF
              PROPERTY                                  LOCATION                 RENOVATED           SQUARE FEET        12/31/98(%)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                         <C>                     <C>            <C>
OFFICE PROPERTIES (CONTINUED)
  1699 E. Woodfield Road (Citibank
       Office Plaza)                                Schaumburg, IL              1979                    105,602            99.1
  2675 N. Mayfair (Wauwatosa Bldg.)                 Wauwatosa, WI               1979                    104,031            96.5
  620 Market Street (Professional Plaza)            Knoxville, TN               1988                     93,711            80.9
  625 Gay Street (Centre Square II)                 Knoxville, TN               1988                     91,426            87.5
  1600-1700 167th Street (Narco River
       Business Center)                             Calumet City, IL            1981                     65,394            75.9
  280 Shuman Blvd. (Atrium)                         Naperville, IL              1979                     65,273           100.0
  2100 Swift Drive                                  Oak Brook, IL               1985/1991                58,000           100.0
  1301 E. Tower Road (Narco Tower)                  Schaumburg, IL              1992                     50,400           100.0
  4823 Old Kingston Pike (Weston Bldg.)             Knoxville, TN               1988                     34,638           100.0
  4100 West Madison Street                          Hillside, IL                1978                     24,551            42.4
                                                                                                   ---------------------------------
 OFFICE PROPERTIES SUBTOTAL                                                                           5,833,280            89.9
                                                                                                   ---------------------------------

INDUSTRIAL PROPERTIES
Warehouse/Distribution Facilities:
  475 Superior Avenue                               Munster, IN                 1989                    450,000           100.0
  3818 Grandville/1200 Northwestern                 Gurnee, IL                  1961/1990               345,232           100.0
  2160 McGaw Road                                   Obetz, OH                   1974                    310,100           100.0
  425 E. Algonquin Road                             Arlington Heights, IL       1978                    304,506           100.0
  1001 Technology Way                               Libertyville, IL            1996                    212,831           100.0
  11045 Gage Avenue                                 Franklin Park, IL           1970/1992               136,600           100.0
  4849 Groveport Road                               Obetz, OH                   1968                    132,100           100.0
  4248, 4250 and 4300 Madison Street                Hillside, IL                1980                    127,129           100.0
  1051 N. Kirk Road                                 Batavia, IL                 1990                    120,004           100.0
  4211 Madison Street                               Hillside, IL                1977/1992                90,344           100.0
  2400 McGaw Road                                   Obetz, OH                   1972                     86,400           100.0
  5160 Blazer Memorial Parkway (3)                  Dublin, OH                  1983                     85,962            66.8
  4160-4190 W. Madison Street                       Hillside, IL                1974/1992                79,532           100.0
  555 Huehl Road                                    Northbrook, IL              1987                     74,000           100.0
  801 Technology Way                                Libertyville, IL            1997                     68,824           100.0
  342-346 Carol Lane                                Elmhurst, IL                1989                     67,935           100.0
  200 E. Fullerton Avenue                           Carol Stream, IL            1968/1995                66,254           100.0
  370 Carol Lane                                    Elmhurst, IL                1977/1994                60,290           100.0
  600 London Road                                   Delaware, OH                1981                     52,441           100.0
  550 Kehoe Blvd                                    Carol Stream, IL            1997                     44,575           100.0
  388 Carol Lane                                    Elmhurst, IL                1979                     40,920            88.4
  306-310 Era Drive                                 Northbrook, IL              1984                     36,495           100.0
  343 Carol Lane                                    Elmhurst, IL                1989                     30,084           100.0
  350 Randy Road                                    Carol Stream, IL            1974                     25,200           100.0
  11039 Gage Avenue                                 Franklin Park, IL           1965/1993                21,935           100.0
  1401 S. Jefferson Street                          Chicago, IL                 1965/1985                17,265           100.0
Overhead Crane/Manufacturing Facilities:
  Chicago Enterprise Center                         Chicago, IL                 1916/1991-1996
    13535-A S. Torrence Avenue                                                                          384,806            37.9
    13535-B S. Torrence Avenue                                                                          239,752           100.0
    13535-C S. Torrence Avenue                                                                           99,333           100.0
    13535-D S. Torrence Avenue                                                                           77,325           100.0
    13535-E S. Torrence Avenue                                                                           57,453           100.0
    13535-F S. Torrence Avenue                                                                           44,800           100.0
    13535-G S. Torrence Avenue                                                                           54,743              --
    13535-H S. Torrence Avenue                                                                           73,612            56.3
  East Chicago Enterprise Center                    East Chicago, IN            1917/1991-1997
    Building 2 (4407 Railroad Avenue)                                                                   169,435              --
    Building 3 (4407 Railroad Avenue)                                                                   291,550           100.0
    Building 4 (4407 Railroad Avenue)                                                                    87,483            98.1
    4440 Railroad Avenue (4)                                                                             40,000           100.0
    4635 Railroad Avenue                                                                                 14,070              --
</TABLE>










                                      -13-
<PAGE>
<TABLE>
<CAPTION>
                                                                                                         NET            PERCENTAGE
                                                                                YEAR BUILT/           RENTABLE         LEASED AS OF
              PROPERTY                                  LOCATION                 RENOVATED           SQUARE FEET        12/31/98(%)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                         <C>                     <C>            <C>
INDUSTRIAL PROPERTIES (CONTINUED)
  Hammond Enterprise Center                         Hammond, IN                 1920-1952
    4507 Columbia Avenue                                                                                256,595           100.0
    4527 Columbia Avenue (5)                                                                             16,701            55.8
    4531 Columbia Avenue                                                                                250,266            99.2
  1301 Ridgeview Drive                              McHenry, IL                 1995                    217,600           100.0
  515 Huehl Road/500 Lindberg                       Northbrook, IL              1988                    201,244           100.0
  455 Academy Drive                                 Northbrook, IL              1976                    105,444           100.0
  4411 Marketing Place                              Groveport, OH               1984                     65,804           100.0
                                                                                                   ---------------------------------
 INDUSTRIAL PROPERTIES SUBTOTAL                                                                       5,834,974            90.5
                                                                                                   =================================
 PORTFOLIO TOTAL                                                                                     11,668,254            90.2
                                                                                                   =================================

MORTGAGE NOTE RECEIVABLE:
  180 N. LaSalle Street (6)                         Chicago, IL                 1982/1999               728,860            73.7
OTHER PROPERTIES:
  398 Unit Parking Facility                         Knoxville, TN               1981
  371-385 N. Gary Avenue (7)                        Carol Stream, IL            1978                     11,276            74.1

<FN>
(1)  We hold a mortgage note  receivable  on the property and have  consolidated
     the underlying property  operations based upon receiving  substantially all
     of the economic benefits of the property's operations.

(2)  This  property  complex is  comprised of 1990  Algonquin  Road (a two-story
     office building) and 2000-2060  Algonquin Road (seven  single-story  office
     buildings), but is treated as one office property.

(3)  This  property  is a mixed  use  industrial/office  property  that has been
     classified  as an  industrial  property. 

(4)  This property is an office building adjacent to the East Chicago Enterprise
     Center.

(5)  This property is an office building within the Hammond Enterprise Center.

(6)  We hold a mortgage note receivable on this office  property.  The operating
     results of this property have not been consolidated.

(7)  This is a retail center.
</FN>
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

     Neither we nor any of our properties are presently  subject to any material
litigation  nor, to the our  knowledge,  is any material  litigation  threatened
against us, other than  routine  litigation  arising in the  ordinary  course of
business, some of which is expected to be covered by liability insurance and all
of which  collectively is not expected to have a material  adverse effect on our
consolidated  financial  statements.  Although  subsequently settled in February
1999, we were subject to the litigation discussed below as of December 31, 1998.

     On July 22, 1998, we entered into a purchase  agreement,  with an affiliate
of an investor in the operating  partnership,  to acquire two office  buildings,
IBM Plaza (a  1,354,354  square  foot  office  building  located in the  Chicago
central  business  district)  and  National  City Center (a 766,965  square foot
office building located in Cleveland,  Ohio) for an aggregate  purchase price of
approximately  $357.0 million. On September 15, 1998, we terminated the purchase
agreement in accordance  with the terms of the agreement due to the failure of a
material condition precedent to the closing of these acquisitions.  On September
21,  1998,  the sellers  notified  us in writing  that they  believed  they were
entitled to the $20.0 million  earnest money provided for by the agreement,  and
instructed  the earnest  money  escrow  agent to draw the full amount  under two
earnest money  letters-of-credit we provided under one of the Credit Facilities.
The  sellers  also filed a complaint  against us with the  Supreme  Court of New
York,  New York County  alleging that we breached the  contract.  On October 30,
1998,  we  filed our answer to the complaint and denied all material allegations


                                      -14-
<PAGE>
of the complaint. We also filed a counterclaim against the sellers alleging that
the sellers  breached the contract and sought the return of the above  mentioned
earnest money and other damages.

     On February 5, 1999, we entered into an amended  option  agreement with the
sellers  of IBM Plaza and an  amended  purchase  agreement  with the  sellers of
National City Center, which have the following terms:

     -    both the  original  lawsuit  filed by the sellers and our counterclaim
          were dismissed;

     -    we purchased  National  City Center on February 5, 1999 for a contract
          price of $100.0 million; and

     -    the $20.0 million  earnest money escrow  described  above was released
          and  credited  to the  purchase  of  National  City Center and an $8.0
          million  nonrefundable  payment for the option to purchase  IBM Plaza.
          The  option  allows  us to  purchase  IBM  Plaza  for  $238.0  million
          (including the $8.0 million  deposit) and expires October 31, 1999. If
          the  option  is  exercised,  the  purchase  of the  property  must  be
          completed no later than December 20, 1999.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

     No matters  were  submitted  to vote of  securityholders  during the fourth
quarter of 1998.




















































                                      -15-
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common shares began trading on the New York Stock Exchange  ("NYSE") on
November  12, 1997,  under the symbol  "PGE".  On March 25,  1999,  the reported
closing sale price on the NYSE was  $13.125,  and there were  15,135,727  common
shares outstanding held by approximately 3,000 holders of record.  The following
table sets forth the high and low closing sales prices per common share reported
on the NYSE and the  distributions  we paid for the year ended December 31, 1998
and for the period from November 17, 1997 through December 31, 1997.

<TABLE>
<CAPTION>
                                                                       CASH
                                                                   DISTRIBUTIONS
                                     HIGH             LOW            PAID (1)
                           -----------------------------------------------------
<S>                               <C>               <C>             <C>
FISCAL YEAR 1998
First quarter                     $ 20 7/8          $ 19 5/8        $ 0.3375
Second quarter                      21                17 1/8          0.3375
Third quarter                       19 15/16          13 1/16         0.3375
Fourth quarter                      16 5/8            13 9/16         (2)

FISCAL YEAR 1997
November 12, 1997 through
  December 31, 1997                 20 5/16           19 1/2          0.1664 (3)
--------------------
<FN>
(1)  All distributions are per common share and common unit.
(2)  On December 31, 1998, our Board of Trustees  declared a dividend of $0.3375
     per common share and common unit for the fourth  quarter of 1998 to holders
     of record on December 31, 1998. These dividends were paid January 20, 1999.
(3)  This  distribution  was  for  a  partial  quarter.  It is  equivalent  to a
     quarterly distribution of $0.3375 per common share and common unit.
</FN>
</TABLE>
     We currently make quarterly  distributions  to holders of our common shares
and operating  partnership common units.  Distributions on the common shares and
common  units  are  not  permitted   unless  all  current  and  any  accumulated
distributions on our Series A - cumulative  convertible  preferred  shares,  our
Series B -  Cumulative  Redeemable  Preferred  Shares and the related  preferred
units in the  operating  partnership  have  been  paid in full or set  aside for
payment.  Future  distributions  by us will be at the  direction of our Board of
Trustees.  These  distributions  will  depend on the actual cash  available  for
distribution,   our  financial  condition,  capital  requirements,   the  annual
distribution requirements under the REIT provisions of the Internal Revenue Code
and such other factors as our Board of Trustees deems relevant.

     Concurrently  with the  completion  of our  initial  public  offering,  the
operating  partnership  issued  9,994,310  common units to PGI,  the  Primestone
Investment  Partners  L. P. (a joint  venture of PGI and a third  party),  other
contributors  and  certain  members  of  management  in  exchange  for  property
contributions  and cash.  In  addition,  the  operating  partnership  has issued
323,590 common units through December 31, 1998 as partial  consideration for its
acquisition  of the first  mortgage  note of 180 N. LaSalle  Street.  Holders of
9,390,800  of the above  mentioned  common  units may redeem  part or all of the
common units for common shares on a one-for-one  basis,  or at our option,  cash
equal to the fair market value of a common share at the time of exchange.

     Also  concurrently  with the completion of our initial public offering,  we
issued  2,000,000 of our Series A - Cumulative  Convertible  Preferred Shares of
Beneficial  Interest,  $0.01 par value per share,  in a private  placement to an
institutional investor for an aggregate purchase price of $40.0 million. Holders
of our Series A - Cumulative  Convertible  Preferred  Shares can convert them to
our common shares.

     On March  25,1998,  we issued  2,579,994 of our common  shares in a private
placement.  In addition,  during 1998, we granted 50,694 of our common shares to
certain of our officers and board members. See "Business - Recent Developments."

     The  issuance of 2,579,994  of our common  shares,  the common share grants
described  above to certain of our  employees  and  trustees,  the common  units
described  above and our  Series A -  Cumulative  Convertible  Preferred  Shares
constituted   private  placements  of  securities  which  are  exempt  from  the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof.
                                      -16-
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth our ("PGRT") and the predecessor's  selected
consolidated/combined  financial data and should be read in conjunction with our
and  the  predecessor's   consolidated/combined  financial  statements  included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
                                                             (In thousands, except per share data)
                                  --------------------------------------------------------------------------------------------------
                                   PGRT - CONSOLIDATED HISTORICAL                  PREDECESSOR - COMBINED HISTORICAL
                                  --------------------------------   ---------------------------------------------------------------
                                                    PERIOD FROM        PERIOD FROM
                                                    NOVEMBER 17,     JANUARY 1, 1997
                                     YEAR ENDED     1997 THROUGH         THROUGH                  YEAR ENDED DECEMBER 31,
                                    DECEMBER 31,    DECEMBER 31,       NOVEMBER 16,    ---------------------------------------------
                                        1998            1997               1997            1996            1995             1994
                                  --------------------------------   ---------------------------------------------------------------
<S>                                 <C>             <C>                <C>             <C>              <C>             <C>
Statements of Operations Data
Revenue:
  Rental.......................     $  97,212       $   7,293          $  27,947       $  30,538        $  33,251       $  30,352
  Tenant reimbursements........        37,545           2,041             12,490          14,225           14,382          12,451
  Mortgage note interest.......         5,866             248                 --              --               --              --
  Insurance settlement.........            --              --                 --              --            7,257              --
  Other........................         6,978             248              1,515           3,397            2,715           3,170
                                  --------------------------------   ---------------------------------------------------------------
Total revenue..................       147,601           9,830             41,952          48,160           57,605          45,973
Expenses:
  Property operations..........        29,598           2,213              8,622           9,767            9,479           8,852
  Real estate taxes............        25,077           1,765              8,575           9,383            9,445           9,057
  Depreciation and amortization        25,447           2,478             11,241          12,409           12,646          11,624
  Interest.....................        30,901           1,680             24,613          26,422           27,671          25,985
  Interest-affiliates..........            --              --              9,804          10,795            8,563           7,402
  General and administrative...         5,712             267              2,414           4,927            4,508           3,727
  Financing fees...............            --              --              1,180           1,232               --              --
  Property and asset management
    fees-affiliate.............            --              --              1,348           1,561            1,496           1,388
  Provision for environmental
    remediation costs..........            --              --              3,205              --               --              --
  Write-off of deferred tenant             --              --                 --           3,081           13,373              --
    costs......................
                                  --------------------------------   ---------------------------------------------------------------
Total expenses.................       116,735             8,403           71,002          79,577           87,181          68,035
                                  --------------------------------   ---------------------------------------------------------------
  Income (loss) before minority
    interests and extraordinary
    item.......................        30,866             1,427          (29,050)        (31,417)         (29,576)        (22,062)
  Minority interests...........        (9,368)             (635)             666             894            3,281           5,393
                                  --------------------------------   ---------------------------------------------------------------
Net income (loss) before
  extraordinary items..........        21,498               792          (28,384)        (30,523)         (26,295)        (16,669)
Extraordinary (loss) gain on
  early extinguishment of debt,
  net of minority interests'
  share in the amount of $878
  in 1998 and $1,127 in 1997...        (1,253)                -           65,990              --               --              --
                                  --------------------------------   ---------------------------------------------------------------
Net income (loss)..............        20,245               792        $  37,606       $ (30,523)       $ (26,295)      $ (16,669)
                                                                     ===============================================================
Net income allocated to
  preferred shareholders.......        (7,971)             (345)
                                  --------------------------------
    Net income available to
      common shareholders......     $  12,274           $   447
                                  ================================
 Earnings  per weighted
 average common share - basic
 and diluted (1):
   Income before extraordinary
   items.......................     $    0.91           $  0.04
   Extraordinary items.........         (0.08)               --
                                  ================================
 Net income....................     $    0.83           $  0.04
                                  ================================
</TABLE>


                                      -17-
<PAGE>
<TABLE>
                                                                                       (In Thousands)
                                                      -----------------------------------------------------------------------------
                                                      PGRT - CONSOLIDATED HISTORICAL         PREDECESSOR - COMBINED HISTORICAL
                                                                DECEMBER 31,                             DECEMBER 31,
                                                      ------------------------------   --------------------------------------------
                                                          1998              1997            1996             1995           1994
                                                      ------------------------------   --------------------------------------------
<S>                                                   <C>              <C>             <C>              <C>             <C>
BALANCE SHEET DATA:
  Real estate assets, exclusive of property
    under development and before accumulated
    depreciation.................................     $   843,031      $   589,279     $   291,757      $   289,558     $   285,687
  Total assets...................................       1,164,514          741,468         325,230          343,641         356,421
  Mortgage notes payable, credit facilities and
    bonds payable................................         593,168          328,044         421,983          405,562         388,309
  Total liabilities..............................         668,728          370,192         447,927          434,993         421,257
  Minority interests.............................         145,781          147,207          (6,905)          (6,047)            886
  Shareholders' equity (partners' deficit).......         350,005          224,069        (115,792)         (85,305)        (65,722)
</TABLE>

<TABLE>
<CAPTION>
                                                                      (Dollars In Thousands)
                                  --------------------------------------------------------------------------------------------------
                                   PGRT - CONSOLIDATED HISTORICAL                  PREDECESSOR - COMBINED HISTORICAL
                                  --------------------------------   ---------------------------------------------------------------
                                                    PERIOD FROM        PERIOD FROM
                                                    NOVEMBER 17,     JANUARY 1, 1997
                                     YEAR ENDED     1997 THROUGH         THROUGH                  YEAR ENDED DECEMBER 31,
                                    DECEMBER 31,    DECEMBER 31,       NOVEMBER 16,    ---------------------------------------------
                                        1998            1997               1997            1996            1995             1994
                                  --------------------------------   ---------------------------------------------------------------
<S>                                 <C>             <C>                <C>             <C>              <C>             <C>
OTHER DATA:
  Funds from operations(2).....     $   46,762    $     3,619          $   (14,461)    $   (17,367)     $  (12,733)     $   (12,930)
  Cash flows provided by
    (used in):
    Operating activities.......     $   53,525    $      6,706         $    (4,241)    $    (3,165)     $   (1,259)     $   (13,875)
    Investing activities.......       (361,384)       (353,864)             (3,926)          1,126          (9,176)          (6,495)
    Financing activities.......        342,390         355,390               6,331           5,733          10,873           15,422
  Ratio of earnings to
    combined fixed charges
    and preferred share                   1.48            1.50                  --              --              --               --
    distributions(3) ..........
  Office Properties:
    Square footage.............     5,833,280       4,073,722          2,353,759       1,414,897        1,414,897       1,414,897
    Occupancy (%)..............          89.9            91.9               88.0            92.5             95.8            93.7
  Industrial Properties:
    Square footage.............     5,834,974       5,832,974          5,696,355       2,462,430        2,551,624       2,547,388
    Occupancy (%)..............          90.5            87.9               87.9            73.5             72.9            62.3

--------------------
</TABLE>
(1)  Net  income  available  per  weighted-average  common  share of  beneficial
     interest-basic  and diluted  equals net income  divided by  14,862,958  and
     12,593,000  common shares for the year ended  December 31, 1998 and for the
     period from November 17, 1997 through December 31, 1997, respectively.  See
     Note 8 to our consolidated financial statements for further information.

(2)  As defined by the National  Association  of Real Estate  Investment  Trusts
     ("NAREIT"),  Funds from  Operations  represents  net income  (loss)  before
     minority  interest of holders of Common Units  (computed in accordance with
     GAAP),  excluding  gains (or losses) from debt  restructuring  and sales of
     property, plus real estate related depreciation and amortization (excluding
     amortization  of  deferred  financing  costs)  and  after  adjustments  for
     unconsolidated  partnerships  and joint ventures.  Non-cash  adjustments to
     Funds from Operations  were as follows:  in all periods,  depreciation  and
     amortization,  for the period from  January 1, 1997  through  November  16,
     1997,  provision for  environmental  remediation  cost, for the years ended
     December 31, 1996, 1995,  1994,  gains on the sale of real estate,  for the
     years ended December 31, 1996 and 1995, write-off of deferred tenant costs,
     and for the year ended  December 31, 1995,  excess  proceeds from insurance
     claims.  Management  considers Funds from Operations an appropriate measure
     of  performance  of an  office  and/or  industrial  REIT  because  industry
     analysts  have  accepted it as such.  We compute  Funds from  Operations in

                                      -18-
<PAGE>

     accordance  with standards  established by the Board of Governors of NAREIT
     in its March 1995 White Paper  (with the  exception  that we report  rental
     revenues on a cash basis (based on contractual lease terms),  rather than a
     straight-line  GAAP  basis,  which we believe  results  in a more  accurate
     presentation of our actual operating activities), which may differ from the
     methodology for calculating  Funds from Operations used by other REITs and,
     accordingly, may not be comparable to such other REITs. Further, Funds from
     Operations   does  not  represent   amounts   available  for   management's
     discretionary use because of needed capital replacement or expansion,  debt
     repayment obligations,  or other commitments and uncertainties.  Funds from
     Operations  should not be considered as an alternative  for net income as a
     measure of  profitability  nor is it comparable  to cash flows  provided by
     operating activities determined in accordance with GAAP.

(3)  The ratios of earnings  to  combined  fixed  charges  and  preferred  share
     distributions  were computed by dividing earnings by combined fixed charges
     and preferred share  distributions.  For this purpose,  earnings consist of
     income (loss)  before  minority  interest,  plus  combined  fixed  charges.
     Combined fixed charges  consist of interest  expense,  amortization of debt
     issuance  costs,  and  preferred  share  distributions.  The  Predecessor's
     historical   earnings   were   insufficient   to  cover  fixed  charges  by
     approximately $29.1 million, $31.4 million, $29.6 million and $22.1 million
     for the period from January 1, 1997  through  November 16, 1997 and for the
     years ended December 31, 1996, 1995, and 1994, respectively.

     The following is our consolidated quarterly summary of operations.
<TABLE>
<CAPTION>
                                                                                                                        PERIOD FROM
                                                                                                                       NOVEMBER 17,
                                                                  YEAR ENDED DECEMBER 31, 1998                             1997
                                            -----------------------------------------------------------------------      THROUGH
                                                             FOURTH          THIRD         SECOND          FIRST       DECEMBER 31,
                                                TOTAL       QUARTER         QUARTER        QUARTER        QUARTER          1997
                                            ----------------------------------------------------------------------------------------
                                                                   (In thousands, except per share amounts)
<S>                                         <C>            <C>            <C>            <C>            <C>            <C>
Total revenues...........................   $  147,601     $  40,675      $  41,252      $  36,923      $  28,751      $  9,830
Total expenses...........................      116,735        31,904         31,563         29,708         23,560         8,403
                                            ----------------------------------------------------------------------------------------
Income before minority interests and
    extraordinary item...................       30,866         8,771          9,689          7,215          5,191         1,427
Income allocated to minority interests...       (9,368)       (2,347)        (2,704)        (2,352)        (1,965)         (635)
                                            ----------------------------------------------------------------------------------------
Income before extraordinary items........       21,498         6,424          6,985          4,863          3,226           792
Extraordinary items - loss on early
    extinguishment of debt, net of
    minority interests in the amount
    $503 in the fourth quarter and $375
    in the second quarter................       (1,253)         (728)            --           (525)            --            --
                                            ----------------------------------------------------------------------------------------
Net income...............................       20,245         5,696          6,985          4,338          3,226           792
Net income allocated to preferred
    shareholders.........................       (7,971)       (2,980)        (2,950)        (1,341)          (700)         (345)
                                            ========================================================================================
Net income applicable to common shares...   $   12,274     $   2,716      $   4,035      $   2,997      $   2,526      $    447
                                            ========================================================================================
Earnings per common share - basic and
  diluted:
    Income before extraordinary items...    $     0.91     $    0.23      $    0.26      $    0.22      $    0.19      $   0.04
    Extraordinary items.................         (0.08)        (0.05)            --          (0.03)            --            --
                                            ========================================================================================
Net income..............................    $     0.83     $    0.18      $    0.26      $    0.19      $    0.19      $   0.04
                                            ========================================================================================
Weighted average common shares
  outstanding............................       14,875        15,137         15,535         15,572         13,181        12,593
                                            ========================================================================================
Distributions paid per common share......   $   1.1789     $  0.3375      $  0.3375      $  0.3375      $  0.1664      $     --
                                            ========================================================================================
</TABLE>







                                      -19-
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

     The following  discussion should be read in conjunction with our historical
consolidated  financial  statements  and the  predecessor's  combined  financial
statements and related notes thereto included elsewhere in this Form 10-K.

     We are a  fully-integrated  real estate investment  company organized under
Maryland law, providing property management,  leasing,  marketing,  acquisition,
development, redevelopment, construction, finance and other related services. As
of December 31, 1998, we owned 24 office  properties (eight were acquired during
1998  and the  remaining  were  owned  at  December  31,  1997),  46  industrial
properties  (all were owned at December 31, 1997),  one retail  center,  and one
parking   facility.   Our  properties  are  located  primarily  in  the  Chicago
metropolitan area. In addition,  we own a mortgage on an office property located
at 180 N. LaSalle Street, Chicago, Illinois.

     As  of  December  31,  1998,   in  terms  of  net  rentable   square  feet,
approximately  90.2%  of our  office  properties  and  89.7%  of our  industrial
properties  were  located in the  Chicago  metropolitan  area in prime  business
locations within established business communities. The properties located in the
Chicago  metropolitan area account for approximately 90.8% of our rental revenue
and 98.0% of our tenant  reimbursements  revenue for the year ended December 31,
1998. Our remaining office  properties are located in the Nashville,  Tennessee;
Knoxville, Tennessee; and Milwaukee, Wisconsin metropolitan areas. Our remaining
industrial properties are located in the Columbus, Ohio metropolitan area.

     Our income is derived  primarily  from  rental  revenue  (including  tenant
reimbursements)  from our  properties  supplemented  by  interest  income on the
mortgage note owned.  We expect that revenue  growth over the next several years
will come from a combination of additional  acquisitions  and revenue  generated
through increased rental and occupancy rates in the current portfolio.

CAUTIONARY STATEMENTS

     The  following  discussion  in  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations"  contain certain  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which reflect  management's current views with respect to future events and
financial  performance.  Such forward-looking  statements are subject to certain
risks and  uncertainties;  including,  but not limited to, the effects of future
events on our financial  performance;  the risk that we may be unable to finance
our  planned  acquisition  and  development  activities;  risks  related  to the
industrial and office  industry in which our properties  compete,  including the
potential  adverse  impact  of  external  factors  such as  inflation,  consumer
confidence,  unemployment  rates and  consumer  tastes  and  preferences;  risks
associated  with our  development  activities,  such as the  potential  for cost
overruns,  delays  and lack of  predictability  with  respect  to the  financial
returns  associated  with these  development  activities;  the risk of potential
increase in market interest rates from current rates;  and risks associated with
real estate  ownership,  such as the potential  adverse impact of changes in the
local economic climate on the revenues and the value of our properties.

RESULTS OF OPERATIONS

     The  following  analysis  provides a comparison of our  operations  for the
years ended  December 31, 1998 and 1997. The period from January 1, 1997 through
November 16, 1997  represents the activity of the  Predecessor's  properties and
the period from  November 17, 1997  through  December  31, 1998  represents  our
activity.

     YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

     In analyzing  the operating  results for the year ended  December 31, 1998,
the changes in rental and reimbursable  revenue,  property  operating  expenses,
real  estate  taxes  and  depreciation  and  amortization   from  1997  are  due
principally to the addition of operating results from properties contributed and
acquired as part of our initial public  offering as well as properties  acquired
after our initial public offering through December 31, 1998.

     The Predecessor's properties currently owned by us consisted of five office
properties, 17 industrial properties, and a parking facility. At the time of our
initial  public  offering,  nine  additional  office  properties,  29 additional
industrial properties and one retail center were contributed or acquired.  After


                                      -20-
<PAGE>
the date of our initial  public  offering  and through  December  31,  1998,  we
acquired ten additional  office properties and a first mortgage note encumbering
an office property as described in the footnotes to our  consolidated  financial
statements contained elsewhere in this Form 10-K.

     For  the  year  ended   December  31,  1998,   rental  revenue  and  tenant
reimbursements income increased $85.0 million, or 170.7%, to $134.8 million, and
other revenue  increased  $5.5  million,  or 372.4%,  to $7.0 million,  property
operating  expenses  and real estate tax expense  increased  $33.5  million,  or
158.2%,  to $54.7 million,  and depreciation and amortization  expense increased
$11.7 million, or 85.5%, to $25.4 million as compared to the year ended December
31, 1997.  The primary reason for the increases in the above revenue and expense
categories  was the  contribution  and  acquisition of new office and industrial
properties we have made since our initial public offering. The additional office
and industrial  properties resulted in increased total rental revenue and tenant
reimbursements income of $88.6 million, other revenue of $5.0 million,  property
operating expenses and real estate tax expense of $35.4 million and depreciation
and amortization  expense of $11.9 million for the year ended December 31, 1998.
Included in the rental  revenue  increase  for 1998 is $4.1  million  related to
lease  terminations.  Rental  revenue and tenant  reimbursement  revenue for the
Predecessor's  properties increased $0.6 million for the year ended December 31,
1998 compared to the same period in 1997.  Depreciation and amortization expense
for the  Predecessor's  properties  increased  $0.7  million  for the year ended
December 31, 1998 compared to the same period in 1997.

     Mortgage note interest income increased by $5.6 million to $5.9 million due
to the acquisition of the first mortgage note  encumbering the property known as
180 North LaSalle Street in December 1997.

     Interest  expense had a net increase of $4.6  million,  or 17.5%,  to $30.9
million during the year ended December 31, 1998. The increase was due to a $36.2
million  increase due to mortgages  obtained on certain of the properties  which
were contributed or acquired after our initial public  offering,  as well as our
Credit  Facilities  borrowings used to fund property  acquisitions,  offset by a
$31.6  million  decrease as a result of the repayment of debt with proceeds from
our initial public offering or debt forgiveness in 1997.

     General and  administrative  expense increased $3.0 million during the year
ended December 31, 1998,  reflecting  costs related to our new public status and
increased size.

     The $1.2 million  decrease in financing fees and the $1.3 million  decrease
in property and asset  management  fees are due to these fees being  incurred by
the Predecessor under their previous ownership and are costs we no longer incur.

     In 1997, the Predecessor recorded a provision for environmental remediation
costs of $3.2 million,  which  represents the estimated costs to be incurred for
the clean-up of environmental  contamination of certain  industrial  properties.
PGI has contractually agreed to indemnify us from any environmental  liabilities
we may incur. No additional provision was deemed necessary in 1998.

     Income  allocated  to minority  interests  increased  $9.4  million to $9.4
million for the year ended December 31, 1998 compared to the same period in 1997
due to an increase in income  before  minority  interest  of $58.5  million,  or
212.0%,  to $30.9  million due to the changes in revenue and expenses  described
above and a change in the  ownership  structure.  The increase in income  before
minority  interests is due to additional  properties either being contributed or
acquired and the effects they had on revenue and expenses  described  above. The
change in ownership structure is due to certain ownership  percentages  changing
do to our initial public offering.

     Extraordinary  gain on  extinguishment of debt decreased $67.2 million to a
$1.3 million  extraordinary loss in 1998, due to the gain in 1997 related to the
forgiveness  of debt principal net of the write-off of various  deferred  costs,
while the loss in 1998 represents only the write-off deferred costs for mortgage
indebtness  that was repaid or refinanced and a reduction in the maximum balance
that can be drawn on one of our Credit Facilities.

     Net income decreased $18.2 million, or 47.3%, to $20.2 million for the year
ended  December 31, 1998  compared to the same period in 1997 due to the changes
in revenue,  expenses,  minority  interest,  and  extraordinary  items described
above.

     The following analysis provides a comparison of the property operations for
the years  ended  December  31, 1997 and 1996.  The period from  January 1, 1997
through  November 16, 1997 and the year ended  December 31, 1996  represents the
activity of the  Predecessors  properties  and the period from November 17, 1997
through December 31, 1997 represents our activity.
                                      -21-
<PAGE>
     YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.

     Total revenue  increased  $3.6  million,  or 7.5%, to $51.8 million for the
year ended  December  31,  1997  compared  to $48.2  million  for the year ended
December 31, 1996 primarily due to the addition of the  properties  acquired and
contributed  at our initial  public  offering.  Rental  revenue  increased  $4.7
million, or 15.4%, to $35.2 million in 1997 from $30.5 million in 1996. In 1997,
rental revenue from our office properties  increased $3.2 million,  or 13.0%, to
$27.9  million  from $24.7  million in 1996.  In 1997,  rental  revenue from our
industrial  properties  increased $1.5 million,  or 25.9%,  to $7.3 million from
$5.8 million in 1996. Tenant  reimbursements  revenue increased $0.3 million, or
2.1%, to $14.5 million in 1997 from $14.2 million in 1996. Tenant reimbursements
revenue from our office properties remained consistent at $12.1 million for both
1997 and 1996.  During 1996 a significant  tenant of the 77 West Wacker building
paid no tenant reimbursements until a final restructuring  agreement was reached
in late 1996.  During  1997,  the above  mentioned  tenant paid $0.6  million of
tenant  reimbursements.  Tenant  reimbursements  from our industrial  properties
increased $0.3 million,  or 14.3%,  to $2.4 million in 1997 from $2.1 million in
1996.  Other  nonrecurring  items recorded in 1996 resulted in a net decrease of
$1.4 million,  or 41.2%,  in all other revenue to $2.0 million in 1997 from $3.4
million in 1996.  Included in our historical  financials,  related to the period
from November 17, 1997 to December 31, 1997 are rental revenues of $3.5 million,
tenant revenue  reimbursements of $0.8 million and $0.4 million of other revenue
related to the  non-Predecessor  properties  contributed or acquired during that
period

     Total expenses  decreased  $0.2 million,  or 0.3%, to $79.4 million for the
year ended  December  31,  1997  compared  to $79.6  million  for the year ended
December 31, 1996. Property operating expenses increased $1.0 million, or 11.2%,
to $10.8 million in 1997 from $9.8 million in 1996. In 1997,  property operating
expenses from our office  properties  increased $1.6 million,  or 19.5%, to $9.8
million for the year ended  December  31, 1997  compared to $8.2 million for the
year  ended  December  31,  1996.  The  property  operating  expenses  from  our
industrial  properties decreased $0.6 million, or 37.5%, to $1.0 million for the
year  ended  December  31,  1997  compared  to $1.6  million  for the year ended
December 31, 1996. In 1997, real estate tax expenses increased $1.0 million,  or
10.6%,  to $10.4  million  from $9.4  million  in 1996  primarily  due to higher
property  assessments in 1997. In 1997,  total interest  expense  decreased $1.1
million,  or 3.0%, to $36.1 million from $37.2 million in 1996  primarily due to
the  paydown of a  mortgage  note  collateralized  by the 77 West  Wacker  Drive
building.  In 1997, general and administrative  expenses decreased $2.2 million,
or  44.5%,  to $2.7  million  from $4.9  million  in 1996  primarily  due to the
nonrecurring  expenses  recorded  in the last six months of 1996.  In 1997,  the
Predecessor  recorded a provision for  environmental  remediation  costs of $3.2
million,  which represents the probable costs to be incurred for the clean-up of
environmental   contamination  at  certain   industrial   properties.   PGI  has
contractually  agreed to indemnify us from any environmental  liabilities we may
incur.  Other expenses  decreased $2.1 million on a net basis in 1997 from $18.3
million in 1996 compared to $16.2 million in 1997 primarily due to the write-off
of deferred tenant costs in 1996. Included in our historical  financials related
to the period  from  November  17,  1997 to  December  31,  1997,  are  property
operating  expenses of $0.6  million,  real estate tax expense of $0.6  million,
interest expense of $1.3 million and general and administrative  expense of $0.7
million related to the non Predecessor properties contributed of acquired during
the period.

     In 1997, net loss allocated to minority  interests  decreased $0.8 million,
or 88.9%,  to $0.1  million  from $0.9  million  in 1996,  primarily  due to the
changes  described above and an overall change in minority  interests  ownership
due to our initial public offering.

     In 1997,  net income of $38.4  million was  reported  compared to a loss of
$30.5  million in 1996,  primarily  due to the changes  described  above and the
extraordinary  gain on early  extinguishment  of debt of $66.0  million,  net of
minority interests, recorded in 1997.

LIQUIDITY AND CAPITAL RESOURCES

     CREDIT FACILITIES. Our Credit Facilities,  with a maximum loan availability
totaling $90.0 million,  have been provided by various  financial  institutions,
and are  collateralized  by first mortgages on certain  properties  owned by the
operating  partnership.  Subject  to our  compliance  with the  applicable  loan
covenants,  the Credit  Facilities may be used to provide funds for acquisitions
and development activities and to provide the replacement  letters-of-credit for
the  $26.9  million  of  tax-exempt  bonds.  No  amounts  were  drawn on  Credit



                                      -22-
<PAGE>
Facilities  at December  31, 1998  (except for the  letters-of-credit  impact on
current  availability).  See Note 4 to our consolidated financial statements for
further  information.  In January and February  1999, we drew $30.0 million from
our Credit Facilities to acquire two office buildings.

     MORTGAGE  NOTES.  We have  financed  a  portion  of our  acquisitions  with
proceeds from mortgage notes payable from various financial  institutions,  with
fixed and variable  interest  rates and maturities of 1999 through 2013. We feel
that our  properties  have  excess  value that may be  utilized  for  additional
mortgage  borrowing  or debt  securitizations.  See  Note 4 to our  consolidated
financial statements for further information.

     FUTURE  OFFERINGS.   On  January  8,  1999,  we  filed  our  initial  shelf
registration  statement on Form S-3 with the Securities and Exchange  Commission
to register up to $500.0  million of our equity and debt  securities  for future
sale.

     We intend to fund future acquisitions and development with a combination of
advances  from our Credit  Facilities,  additional  mortgage  notes  payable and
future equity and debt offerings.

     ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES.

     We expect to meet our short-term  liquidity  requirements  through net cash
provided by operations.  Our properties require periodic  investments of capital
for tenant-related  capital  expenditures and for general capital  improvements.
During 1998, our tenant improvements and leasing commissions averaged $18.04 per
square  foot of newly  leased  office  space,  $3.85 per square  foot of renewal
leased office space, and $4.53 per square foot of newly leased industrial space.
Our  estimated  annual  cost  of  recurring  tenant   improvements  and  leasing
commissions is approximately  $8.6 million based upon average annual square feet
for leases expiring during the years ending December 31, 1999 and 2000. Our cost
of general capital  improvements to our properties  average  approximately  $3.0
million annually based upon an estimate of $0.26 per square foot.

     We expect to meet our long-term  liquidity  requirements for the funding of
property  development,  property  acquisitions and other  non-recurring  capital
improvements  through  a  combination  of net cash  from  operations,  long-term
secured and unsecured  indebtedness  (including the Credit  Facilities)  and the
issuance of additional equity securities. The terms of the Credit Facilities and
our preferred  shares impose  restrictions on our ability to incur  indebtedness
and issue additional preferred shares.

HISTORICAL CASH FLOWS

     Historically, we have generated positive cash flows from operations to fund
distributions  to our  shareholders  and have  funded  our  expansion  primarily
through  equity  offerings  and  mortgage  debt  financing.   Historically,  the
Predecessor's   principal   sources  of  funding  for   operations  and  capital
expenditures were from mortgage debt financing.

     We had  consolidated  net cash  provided by operating  activities  of $53.5
million  for the year  ended  December  31,  1998.  We and the  Predecessor  had
consolidated  and combined net cash  provided by  operating  activities  of $2.5
million for the year ended  December 31, 1997 and the  Predecessor  had combined
net cash  used in  operating  activities  of $2.5  million  for the  year  ended
December 31, 1996. The $51.0 million  increase in net cash provided by operating
activities for the year ended December 31, 1998 from the year ended December 31,
1997 was primarily due to a $67.2 million  decrease in  extraordinary  items,  a
$9.4 million increase in income allocated to minority interests, a $11.7 million
increase in  depreciation  and  amortization,  a $4.6 million  increase in other
liabilities,  a $3.8  million  increase  in accrued  real estate  taxes,  a $2.5
million  increase in accrued  interest  payable,  and a $0.3 million decrease in
gain of sale of real estate, offset by a $18.2 million decrease in net income, a
$11.7  million  increase in other  assets,  a $9.8 million  decrease in interest
added to principal on mortgage note payable  affiliate,  a $3.1 million decrease
in accounts  payable and accrued  expenses,  a $2.5  million  increase in tenant
receivables, a $1.9 million decrease in deferred rent receivable, a $1.0 million
increase in interest income and developer fees added to mortgage note receivable
principal  and a $0.5 million  decrease in standby loan  fee-affiliate  added to
principal on mortgage note payable  affiliate.  The $4.9 million increase in net
cash provided by operating  activities for the year ended December 31, 1997 from
the year ended  December 31, 1996 was primarily due to a $68.9 million  increase
in net income,  a $1.3 million decrease in deferred tenant  receivables,  a $0.6
million  decrease in gain on sale of real  estate,  a $1.3  million  increase in
depreciation and amortization expense, a $0.9 million decrease in loss allocated


                                      -23-
<PAGE>
to minority interest, a $7.7 million increase in accrued real estate taxes and a
$9.3 million increase in accounts payable and accrued expenses, offset by a $0.2
million decrease in interest added to principal,  a $3.1 million decrease in the
write-off of deferred  tenant costs, a $66.0 million  increase in  extraordinary
gain, a $2.9 million increase in tenant receivables, a $10.1 million increase in
other  assets,  a $1.6 million  decrease in accrued  interest and a $1.1 million
decrease in other liabilities.

     We had consolidated net cash used in investing activities of $361.4 million
for the year ended December 31, 1998. We and the  Predecessor  had  consolidated
and combined net cash used in investing  activities of ($357.8  million) for the
year ended December 31, 1997 and the  Predecessor had combined net cash provided
by investing  activities  of $0.4 million for the year ended  December 31, 1996.
The $3.6 million increase in net cash used in investing  activities for the year
ended  December 31, 1998 from the year ended December 31, 1997 was primarily due
to a $46.2  million  decrease in advances on mortgage  note  receivable,  a $1.6
million decrease in expenditures  for real estate and equipment,  a $1.2 million
decrease in due from affiliates and a $0.4 million  decrease in cash contributed
to the Services  Company,  offset by a $50.7 million increase in restricted cash
escrows,  a $1.3  million  increase in deferred  leasing  costs,  a $0.6 million
increase in loans provided to the Service Company and a $0.3 million decrease in
proceeds from sale of real estate.  The $358.2 million increase in net cash used
in investing activities for the year ended December 31, 1997 from the year ended
December 31, 1996 was primarily due to a $1.8 million  decrease in proceeds from
the sale of real estate, a $298.8 million increase in real estate  expenditures,
a $51.2 million purchase of a mortgage note receivable,  a $0.8 million increase
in deferred costs, a $5.2 million  increase in amounts due from affiliates and a
$0.4 million cash contribution to the Services Company.

     We had  consolidated  net cash  provided by financing  activities of $342.4
million  for the year  ended  December  31,  1998.  We and the  Predecessor  had
consolidated  and combined net cash  provided by financing  activities of $361.7
million for the year ended December 31,1997 and the Predecessor had combined net
cash  provided  by  financing  activities  of $5.7  million  for the year  ended
December 31, 1996. The $19.3 million  decrease in net cash provided by financing
activities for the year ended December 31, 1998 from the year ended December 31,
1997 was primarily due to a $215.7 million net decrease in the net proceeds from
the sale of our preferred and common shares and operating  partnership  units, a
$7.3 million  increase in cash used to  repurchase  our common  shares,  a $43.3
million increase in the repayment of mortgage notes payable and net repayment of
credit  facilities,  a $35.2 million  increase in distributions to our preferred
and common shareholders and the operating  partnership's  minority interest unit
holders,  a $19.1 million increase in financings  costs, a $5.6 million decrease
in proceeds from mortgage note payable affiliates,  and a $44.3 million decrease
in contributions  from predecessor  partners offset by a $305.4 million increase
in proceeds from mortgage notes payable and net proceeds from credit facilities,
a $42.3  million  decrease in the  repayment  of  mortgage  notes  payable  from
affiliates,  a $0.7  million  decrease in due from  affiliates,  a $1.0  million
contribution  from minority interest - other and a $1.7 million decrease in debt
termination  fees. The $356.0 million increase in net cash provided by financing
activities for the year ended December 31, 1997 from the year ended December 31,
1996 was primarily due to $272.0 million in net proceeds from our initial public
offering,   private  placement,   $85.0  million  from  the  sale  of  operating
partnership  units,  a $242.4  million  increase in proceeds from mortgage notes
payable,  and  a  $44.3  million  increase  in  contributions  from  Predecessor
partners, offset by a $236.6 million increase in the repayment of mortgage notes
payable,  a $45.1 million  increase in the  repayment of mortgage  notes payable
affiliates,  the payment of $5.0  million of deferred  financing  costs and debt
termination fees and a $0.5 million decrease in due to affiliates.

FUNDS FROM OPERATIONS

     Industry analysts generally  consider Funds from Operations,  as defined by
NAREIT,  an alternative  measure of  performance  of an equity REIT.  Funds from
Operations  is  defined  by  NAREIT  to mean net  income  (loss)  determined  in
accordance with GAAP,  excluding gains (or losses) from debt  restructuring  and
sales of property,  plus depreciation and amortization  (other than amortization
of deferred  financing  costs and  depreciation  of non-real  estate assets) and
after adjustment for unconsolidated  partnerships and joint ventures. We believe
that in order to facilitate a clear understanding of our consolidated historical
operating results and the Predecessor's  combined historical  operating results,
Funds from Operations  should be examined in conjunction  with net income (loss)
as presented in audited  combined  financial  statements and selected  financial
data included  elsewhere in this Form 10-K. We compute Funds from  Operations in
accordance with standards established by the Board of Governors of NAREIT in its



                                      -24-
<PAGE>
March 1995 White Paper (with the exception  that we report rental  revenues on a
cash basis (based on contractual lease terms),  rather than a straight-line GAAP
basis,  which we believe  results in a more accurate  presentation of our actual
operating  activities),  which may differ from the  methodology  for calculating
Funds  from  Operations  used  by  other  REITs  and,  accordingly,  may  not be
comparable to such other REITs. As a result of our reporting  rental revenues on
a cash basis for Funds from  Operations,  contractual  rent increases will cause
reported Funds from Operations to increase.  Further, Funds from Operations does
not represent  amounts  available for management's  discretionary use because of
needed capital replacement or expansion,  debt repayment  obligations,  or other
commitments and uncertainties. Funds from Operations should not be considered as
an alternative to net income (loss),  as an indication of our  performance or to
cash flows as a measure of  liquidity  or the ability to pay  dividends  or make
distributions.

     The  following  is  our  consolidated   quarterly  summary  of  Funds  From
Operations.
<TABLE>
<CAPTION>
                                                                                                                        PERIOD FROM
                                                                                                                       NOVEMBER 17,
                                                                  YEAR ENDED DECEMBER 31, 1998                             1997
                                            -----------------------------------------------------------------------      THROUGH
                                                             FOURTH         THIRD          SECOND          FIRST       DECEMBER 31,
                                                TOTAL        QUARTER       QUARTER         QUARTER        QUARTER          1997
                                            ----------------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>            <C>            <C>            <C>
Net income allocated to common              $   12,274     $    2,716     $   4,035      $   2,997      $   2,526      $      447
  shareholders...........................

FFO adjustments:
  Real estate depreciation and
    amortization (1).....................       23,964          7,009         6,106          5,834          5,015           2,215
  Amortization of costs for leases
    assumed..............................        1,137            285           286            275            291             142
  Straight-line rental revenue
    adjustments..........................       (1,234)          (181)         (531)          (494)           (28)            180
  Minority interests.....................        9,368          2,347         2,704          2,352          1,965             635
  Extraordinary loss.....................        1,253            728            --            525             --              --
                                            ========================================================================================
  Funds from operations..................   $   46,762     $   12,904     $  12,600      $  11,489      $   9,769      $    3,619
                                            ========================================================================================
Other data:
  Net cash provided by (used in)
    operating activities.................   $   53,525     $     (133)    $  36,442      $   9,214      $   8,002      $    6,706
  Net cash used in investing activities..     (361,384)       (25,803)      (68,245)       (91,645)      (175,691)       (353,864)
  Net cash provided by financing
    activities...........................      342,390         64,298        26,774         86,011        165,307         355,390

--------------------

<FN>
(1)  Excludes the amortization of deferred  financing costs and non- real estate
     related depreciation.
</FN>
</TABLE>

YEAR 2000

     The year 2000 ("Y2K") issue refers generally to computer applications using
only the last two digits to refer to a year  rather than all four  digits.  As a
result,  these  applications  could  fail or create  erroneous  results  if they
recognize  "00" as the year 1900  rather  than the year 2000.  We have taken Y2K
initiatives in the following three general areas:

     INFORMATION TECHNOLOGY

     We have focused our efforts on the high-risk areas of the corporate  office
computer hardware,  operating systems and software  applications.  The principal
risks  relating to our  information  technology  are failure to  correctly  bill
tenants and pay  invoices.  Our  assessment  and  testing of existing  equipment
revealed that our hardware,  network operating  systems,  secondary  information
systems  and  desktop  software  applications  are Y2K  compliant.  However,  we
currently have four accounting and property  management systems that are not Y2K
compliant.  We initiated a  comprehensive  corporation  wide plan in mid-1998 to



                                      -25-
<PAGE>
completely  replace our financial and operational  systems by the fourth quarter
of 1999 in order to  facilitate  our future  growth  and to improve  operational
controls.  We  anticipate  the total cost of this effort will be $3.5 million to
$4.0 million and will have the  additional  benefit of making our  financial and
operational  systems Y2K  compliant.  Of the total  project  costs,  we estimate
approximately  $3.2 million to $3.7 million is  attributable to the purchase and
implementation  of new software and equipment  which will be capitalized and the
remainder  related to the  assessment,  modifications  to existing  hardware and
software,  and training which will be expensed as incurred. We also believe that
some of our telecommunication systems may not be Y2K compliant. We are currently
assessing these systems and, where material,  plan to replace, modify or upgrade
these systems, as appropriate, by the end of the second quarter of 1999.

     NON-INFORMATION TECHNOLOGY

     Non-information technology consists mainly of facilities management systems
such as telephone,  utility,  and security  systems for the corporate office and
owned  properties.   Based  on  our  current  efforts,  the  corporate  office's
non-information  technology is expected to be Y2K compliant by mid-1999.  We are
in the  process of  identifying  date  sensitive  systems and  equipment  at our
properties.  To date, we have not identified any critical non-compliant systems.
Assessment  and  testing of  non-information  technology  at our  properties  is
expected to be competed by mid-1999.

     THIRD PARTIES

     We have third-party relationships with tenants,  suppliers and contractors.
Many of these third  parties are  publicly  traded  corporations  and subject to
disclosure  requirements.  We have begun  assessment of major third parties' Y2K
readiness  including  tenants,  key suppliers of outsourced  services  including
stock transfer, debt servicing, banking collection and disbursement, payroll and
benefits,  while  simultaneously  responding  to their  inquiries  regarding our
readiness. The principal risks to us in our relationships with third parties are
the failure of third-party  systems used to conduct business such as (i) tenants
being unable to efficiently  conduct their business,  (ii) banks being unable to
process receipts and disbursements,  (iii) vendors being unable to supply needed
materials  and services to the  properties,  and (iv)  processing  of outsourced
payroll. Based on Y2K compliance work done to date, we have no reason to believe
that key tenants,  banks and suppliers will not be Y2K compliant in all material
respects or cannot be replaced within an acceptable time frame. Additionally, we
have obtained or are in the process of obtaining  compliance  certification from
suppliers of key services.

     We do not believe  that the impact of the Y2K problem  will have a material
adverse effect on our financial condition and results of operations. Such belief
is based on our  analysis  of our risks  related to both our own  potential  Y2K
problems  discussed above and our assessment of the Y2K problems of our vendors,
suppliers and customers. However, the description of our Y2K compliance is based
upon information obtained by management through evaluations of internal business
systems  from  inquiries  of key  tenants  and major  vendors  concerning  their
compliance  efforts.  If key tenants or major  vendors  with whom we do business
fail to adequately  address their Y2K issues,  our financial position or results
from operations could be materially adversely affected.

     We  currently  do not  have a  contingency  plan  in  place.  Once  we have
proceeded  further in the completion of steps outlined above,  contingency plans
will be developed.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the FASB issued Statement No. 133,  Accounting for Derivative
Instruments  and  Hedging  Activities,  which is required to be adopted in years
beginning  after June 15, 1999.  The Statement  permits early adoption as of the
beginning of any fiscal  quarter after its issuance.  We expect to adopt the new
Statement  effective January 1, 2000. The Statement will require us to recognize
all  derivatives  on the balance sheet at fair value.  Derivatives  that are not
hedges must be adjusted  to fair value  through  income.  If a  derivative  is a
hedge, changes in the fair value of the derivative will either be offset against
the change in fair  value of the hedged  asset,  liability,  or firm  commitment
through earnings,  or recognized in other comprehensive  income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately  recognized in earnings.  We do not anticipate
that the  adoption  of this  Statement  will  have a  significant  effect on our
results of operations or financial position.




                                      -26-
<PAGE>
INFLATION

     Substantially  all of our office and industrial  leases require  tenants to
pay, as  additional  rent,  a portion of any  increases in real estate taxes and
operating  expenses  over a base  amount.  In  addition,  many of the office and
industrial   leases  provide  for  fixed  increases  in  base  rent  or  indexed
escalations  (based on the Consumer Price Index or other  measures).  We believe
that inflationary  increases in expenses will be offset, in part, by the expense
reimbursements and contractual rent increases described above.

     As of December 31, 1998,  approximately  $310.6 million of our  outstanding
indebtedness  (including  our Credit  Facilities)  was  subject to  interest  at
floating  rates and future  indebtedness  may also be subject to  floating  rate
interest. Inflation, and its impact on floating interest rates, could affect the
amount of interest payments due on such indebtedness.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     The following  table provides  information  about our derivative  financial
instruments  and other  financial  instruments  that are sensitive to changes in
interest  rates.  For our mortgage note  receivable,  mortgage notes payable and
bonds  payable (no amounts were drawn on our Credit  Facilities  at December 31,
1998),  the table  presents  principal  cash flows and related  weighted-average
interest rates by expected  maturity dates.  For treasury lock  agreements,  the
table   presents   notional   amounts  to  be  entered   into  and  the  related
weighted-average lock rate by the maturity dates.

<TABLE>
<CAPTION>
                                                      INTEREST RATE SENSITIVITY
                                          PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
                                                        AVERAGE INTEREST RATE
------------------------------------------------------------------------------------------------------------------------------------
                                                1999         2000          2001         2002        2003       Thereafter   Total
                                            ----------------------------------------------------------------------------------------
                                                        (Dollars in Millions)
<S>                                         <C>          <C>            <C>          <C>          <C>          <C>          <C>
ASSETS
Mortgage note receivable (1)                      --           --             --           --           --     $  63.3      $   63.3
Fixed interest rate                               --           --             --           --           --        9.64%

LIABILITIES
Mortgage notes payable (2):
  Fixed rate                                $    3.6     $    3.8       $    4.2     $    4.5     $    4.8     $ 261.7      $  282.6
  Average interest rate                         7.25%        7.25%          7.26%        7.26%        7.25%       7.29%

  Variable rate                             $  183.5     $   32.6       $   20.0           --           --          --      $  236.1
  Average interest rate (3)                     6.15%        6.66%          7.58%          --           --          --

Bonds payable (2):
  Variable rate                                   --           --             --     $   48.2           --     $  26.3      $   74.5
  Average interest rate (3)                       --           --             --         4.13%          --        3.55%

TREASURY LOCK AGREEMENTS RELATED
TO ANTICIPATED LONG-TERM DEBT ISSUANCE
Treasury Lock Agreements (2), (4):
  Pay fixed                                 $  330.0           --             --           --           --          --      $  330.0
  Average lock rate                             5.05%          --             --           --           --          --

--------------------
</TABLE>

(1)  See  Note  2  to  our  consolidated  financial  statements  for  additional
     information.

(2)  See  Note  4  to  our  consolidated  financial  statements  for  additional
     information.

(3)  Based upon the rates in effect at December 31, 1998.  The  weighted-average
     interest  rate on our mortgage  notes payable and bonds payable at December
     31,  1998 were  6.62% and 3.92%,  respectively.  If  interest  rates on our
     variable rate debt increased by one percentage  point,  our annual interest
     expense would increase by $3.1 million.





                                      -27-
<PAGE>

(4)  At December 31, 1998, we made deposits  totaling  $14.6 million  related to
     treasury lock agreements of $170.0 million and $160.0  million,  which were
     to expire  in 1999.  The  average  lock rate  reflected  is based  upon the
     agreements in effect as of December 31, 1998 (5.364% for the $170.0 million
     agreement and 4.732% for the $160.0 million  agreement).  During the period
     from January 1, 1999  through  March 25,  1999,  we have  received net cash
     settlements  of  approximately  9.2 million  ($1.0  million  related to the
     $170.0  million  agreement,  $8.2  million  related to the  $160.0  million
     agreement).  On March 1, 1999, we terminated  the $160.0  million  treasury
     lock  agreement  due to the change in the terms and timing of the IBM Plaza
     purchase  as  a  result  of  the  amended   purchase   agreement   (we  had
     approximately  $0.6 million on deposit  related to this  agreement that was
     forfeited the time of the termination).


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial  statements and supplementary data required by Regulation S-X
are included in this Report on Form 10-K commencing on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     Not applicable.






















































                                      -28-
<PAGE>
                                    PART III

     Certain information  required by Part III is omitted from this Report as we
will file a  definitive  proxy  statement  within  120 days after the end of our
fiscal year pursuant to Regulation 14A for our Annual Meeting of Shareholders to
be held on May 19, 1999 (the "Proxy  Statement")  and the  information  included
therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  contained in the section captioned  "Election of Trustees"
of the Proxy Statement is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The  information  contained  in the  sections  captioned  "Compensation  of
Executives"  and  "Executive  Officers" of the Proxy  Statement is  incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  contained in the section  captioned  "Principal  Security
Holders  of the  Company"  of the  Proxy  Statement  is  incorporated  herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  contained in the section captioned "Certain  Relationships
and Related  Transactions"  of the Proxy  Statement  is  incorporated  herein by
reference.
















































                                      -29-
<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

    Prime Group Realty Trust and the Predecessor:
    Report of Independent Auditors........................................  F-2
    Consolidated Balance Sheets of Prime Group Realty
       Trust as of December 31, 1998 and 1997.............................  F-3
    Consolidated Statements of Operations of Prime Group Realty Trust
       for the year ended December 31, 1998 and for the period from
       November 17, 1997 through December 31, 1997 and Combined
       Statements of Operations of the Predecessor for the period from
       January 1, 1997 through November 16, 1997 and for the year ended
       December 31, 1996..................................................  F-4
    Consolidated Statements of Changes in Shareholders' Equity of Prime
       Group Realty  Trust for the year ended December 31, 1998 and for
       the period from November 17, 1997 to December 31, 1997.............  F-5

    Combined Statements of Changes in Predecessors' Deficit for the
       period from January 1, 1997 through November 16, 1997 and for
       the year ended December 31, 1996...................................  F-6

    Consolidated  Statements of Cash Flows of Prime Group Realty Trust
       for the year ended  December  31,  1998 and for the period
       from  November  17, 1997 through  December 31, 1997 and the
       Combined  Statements of Cash Flows of the Predecessor for the
       period from January 1, 1997  through  November 16, 1997 and for
       the year ended December 31, 1996...................................  F-7

    Notes to Consolidated and Combined Financial Statements...............  F-10

    2. Financial Statement Schedule

       The following financial statement schedule is included in
       Item 14(d)

       Report of Independent Auditors on Schedule (included with consent
       filed as Exhibit 23.1)

       Schedule III - Real Estate and Accumulated Depreciation of Prime
       Group Realty Trust as of December 31, 1998.........................  F-29

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting  regulation of the  Securities  Exchange  Commission are not required
under the related  instructions  or are  inapplicable,  and therefore  have been
omitted.






























                                      -30-
<PAGE>
    (3) Exhibits

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

3.1       Articles of Amendment and Restatement of Declaration of Trust of Prime
          Group  Realty  Trust as filed as an  exhibit to  Prime's  1997  Annual
          Report on Form 10-K and incorporated herein by reference

3.2       Articles Supplementary to the Articles of Amendment and Restatement of
          Declaration  of  Trust  of  Prime  Group  Realty  Trust as filed as an
          exhibit to Prime's Quarterly Report on Form 10-Q for the quarter ended
          June 30, 1998 and incorporated herein by reference

3.3       Articles Supplementary to the Articles of Amendment and Restatement of
          Declaration  of Trust or Prime Group Realty Trust dated as of December
          29, 1998

3.4       Amended and Restated Bylaws of Prime Group Realty Trust as filed as an
          exhibit to Prime's  1997 Annual  Report on Form 10-K and  incorporated
          herein by reference

3.5       Amended and Restated  Agreement of Limited  Partnership of Prime Group
          Realty,   L.P.  (the  "Amended  and  Restated   Agreement  of  Limited
          Partnership")  as filed as an exhibit to Prime's 1997 Annual Report on
          Form 10-K and incorporated herein by reference

3.6       Amendment  No. 1 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  December  15, 1998 as filed as an exhibit to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.7       Amendment  No. 2 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  December  15, 1998 as filed as an exhibit to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.8       Amendment  No. 3 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  January  15,  1998 as filed as an exhibit to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.9       Amendment  No. 4 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  February  13, 1998 as filed as an exhibit to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.10      Amendment  No. 5 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of March  13,  1998 as  filed as an  exhibit  to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.11      Amendment  No. 6 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of March  25,  1998 as  filed as an  exhibit  to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.12      Amendment  No. 7 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of April  15,  1998 as  filed as an  exhibit  to
          Amendment  No. 1 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.13      Amendment  No. 8 to the  Amended  and  Restated  Agreement  of Limited
          Partnership  dated  as of May  15,  1998 as  filed  as an  exhibit  to
          Amendment  No. 2 to Prime's  Registration  Statement on Form S-11 (No.
          333-51599) and incorporated herein by reference

3.14      Amendment  No. 9 to the  Amended  and  Restated  Agreement  of Limited
          Partnership dated as of June 5, 1998 as filed as an exhibit to Prime's
          Quarterly  Report on Form 10-Q for the quarter ended June 30, 1998 and
          incorporated herein by reference

3.15      Amendment  No. 10 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of June  15,  1998 as  filed  as an  exhibit  to
          Prime's  Quarterly  Report on Form 10-Q for the quarter ended June 30,
          1998 and incorporated herein by reference

                                      -31-
<PAGE>
EXHIBIT
  NO.                                 DESCRIPTION
-------   ----------------------------------------------------------------------

3.16      Amendment  No. 11 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of July  15,  1998 as  filed  as an  exhibit  to
          Post-Effective  Amendment No. 1 to Prime's  Registration  Statement on
          Form S-11 (No. 333-51935) and incorporated herein by reference

3.17      Amendment  No. 12 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of August  14,  1998 as filed as an  exhibit  to
          Post-Effective  Amendment No. 1 to Prime's  Registration  Statement on
          Form S-11 (No. 333-51935) and ncorporated herein by reference

3.18      Amendment  No. 13 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of September  15, 1998 as filed as an exhibit to
          Amendment  No.  1  to  Post-Effective   Amendment  No.  1  to  Prime's
          Registration  Statement on Form S-11 (No.  333-51935) and incorporated
          herein by reference

3.19      Amendment  No. 14 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  October  15,  1998 as filed as an exhibit to
          Amendment  No. 2 to Prime's  Registration  Statement  on Form S-3 (No.
          333-64973) and incorporated herein by reference

3.20      Amendment  No. 15 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  November  16, 1998 as filed as an exhibit to
          Amendment  No. 1 to Prime's  Registration  Statement  on Form S-3 (No.
          333-64973) and incorporated herein by reference

3.21      Amendment  No. 16 to the Amended  and  Restated  Agreement  of Limited
          Partnership  dated as of  December  15, 1998 as filed as an exhibit to
          Post-Effective  Amendment No. 3 to Prime's  Registration  Statement on
          Form S-3  (Registration  No.  333-51935)  and  incorporated  herein by
          reference

10.1      Amendment No. 2 to the Credit  Facility  dated as of March 16, 1998 as
          filed  as an  exhibit  to  Amendment  No.  1 to  Prime's  Registration
          Statement on Form S-11 (No.  333-51599)  as filed with the  Securities
          and Exchange  Commission  on May 14, 1998 and  incorporated  herein by
          reference

10.2      Amendment No. 3 to the Credit  Facility  dated as of March 30, 1998 as
          filed  as an  exhibit  to  Amendment  No.  1 to  Prime's  Registration
          Statement on Form S-11 (No.  333-51599)  as filed with the  Securities
          and Exchange  Commission  on May 14, 1998 and  incorporated  herein by
          reference

10.3      Purchase  Agreement  dated as of March 25,  1998  between  Prime Group
          Realty  Trust and the  purchasers  thereto  as filed as an  exhibit to
          Amendment  No.1 to Prime's  Registration  Statement  on Form S-11 (No.
          333-51599) as filed with the Securities and Exchange Commission on May
          14, 1998 and incorporated herein by reference

10.4      Registration Rights Agreement dated as of March 25, 1998 between Prime
          Group  Realty  Trust  and the  other  parties  thereto  as filed as an
          exhibit to Amendment No. 1 to Prime's  Registration  Statement on Form
          S-11  (No.  333-51599)  as filed  with  the  Securities  and  Exchange
          Commission on May 14, 1998 and incorporated herein by reference

10.5      Limited  Liability  Company  Agreement  of  Prime/Beitler  Development
          Company,  L.L.C.  dated as of March 30,  1998  between  Penny  Beitler
          L.L.C.  and  Prime  Group  Realty,  L.P.  as  filed as an  exhibit  to
          Amendment  No.1 to Prime's  Registration  Statement  on Form S-11 (No.
          333-51599) as filed with the Securities and Exchange Commission on May
          14, 1998 and incorporated herein by reference

10.6      Amendment No. 4 to the Credit  Facility  dated as of April 24, 1998 as
          filed  as an  exhibit  to  Amendment  No.  1 to  Prime's  Registration
          Statement on Form S-11 (No. 333-51599) as filed with the Commission on
          May 14, 1998 and incorporated herein by reference

10.7      Subordination  and  Intercreditor  Agreement  made as of May 14,  1998
          among  Connecticut  General  Life  Insurance  Company  and Prime Group
          Realty,  L.P. as filed as an exhibit to Prime's  Quarterly  Report for
          the quarter ended June 30, 1998 as filed with the Commission on August
          14, 1998 and incorporated herein by reference

                                      -32-
<PAGE>
EXHIBIT
  NO.                                 DESCRIPTION
-------   ----------------------------------------------------------------------

10.8      Employment  Agreement dated as of May 6, 1998 by and between Prime and
          Louis Conforti as filed as an exhibit to Prime's  Quarterly Report for
          the quarter ended June 30, 1998 as filed with the Commission on August
          14, 1998 and incorporated herein by reference

10.9      Promissory  Note  dated  May  14,  1998  in the  principal  amount  of
          $75,000,000.00  made by American  National  Bank and Trust  Company of
          Chicago, a national banking association,  not personally but solely as
          trustee under trust  agreement  dated July 26, 1977 and known as Trust
          No. 40935 and American  National Bank and Trust Company of Chicago,  a
          national  banking  association,  as  successor  trustee to First Bank,
          N.A., as successor trustee to National Boulevard Bank of Chicago,  not
          ersonally, but solely as trustee under trust agreement dated September
          27,  1976  and  known as  Trust  No.  5602,  payable  to the  order of
          Connecticut  General Life Insurance  Company as filed as an exhibit to
          Prime's  Quarterly Report for the quarter ended June 30, 1998 as filed
          with the  Commission  on August 14,  1998 and  incorporated  herein by
          reference

10.10     Loan Agreement,  dated October 1, 1998, between 77 West Wacker Limited
          Partnership  and Lehman  Brothers  Holdings,  Inc.,  doing business as
          Lehman Capital, a division of Lehman Brothers Holdings, Inc.

10.11     Amended  and  Restated  Loan  Agreement,  dated as of October 1, 1998,
          among Prime Group Realty,  L.P.,  Prime Group Realty Trust and LaSalle
          National Bank

10.12     Fifth  Amendment  to Credit  Agreement,  dated as of  October 1, 1998,
          among Prime Group Realty, L.P., Prime Group Realty Trust,  BankBoston,
          N.A. and the other lenders party thereto

10.13     Loan Agreement, dated October 21, 1998, between 2000 York Road, L.L.C.
          and The Capital Company of America

10.14     Loan  Agreement,  dated October 21, 1998,  between Two Century Centre,
          L.L.C. and The Capital Company of America

10.15     Loan Agreement, dated October 21, 1998, between 180 N. LaSalle, L.L.C.
          and The Capital Company of America

12.1      Computation  of  ratios of  earning  to  combined  fixed  changes  and
          preferred share distributions.

21.1      Subsidiaries of the Registrant

23.1      Consent of Independent Auditors

27.1      Financial Data Schedule.

(b)  Reports on Form 8-K

     We did not file any  reports  on Form 8-K or Form 8-KA  during  the  fourth
quarter of 1998.





















                                      -33-
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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 on March ____, 1999.

                                                  PRIME GROUP REALTY TRUST

Dated: March 31, 1999

                                                 /s/ Richard S. Curto
                                           -------------------------------------
                                                     Richard S. Curto
                                                    President and Chief
                                                     Executive Officer

Dated: March 31, 1999

                                                 /s/ William M. Karnes
                                           -------------------------------------
                                                     William M. Karnes
                                                Executive Vice President and
                                                  Chief Financial Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

            Name                          Title                        Date
            ----                          -----                        ----

/s/ Michael W. Reschke
-----------------------------
    Michael W. Reschke            Chairman of the Board          March 31, 1999
                                    and Trustee

/s/ Richard S. Curto
-----------------------------
    Richard S. Curto              President, Chief Executive     March 31, 1999
                                    Officer and Trustee

/s/ William M. Karnes
-----------------------------
    William M. Karnes             Executive Vice President       March 31, 1999
                                    and Chief Financial
                                    Officer

/s/ Roy P. Rendino
-----------------------------
    Roy P. Rendino                Senior Vice President -        March 31, 1999
                                    Finance and Chief
                                    Accounting Officer

/s/ Stephen J. Nardi
-----------------------------
    Stephen J. Nardi              Trustee                        March 31, 1999

/s/ James R. Thompson
-----------------------------
    James R. Thompson             Trustee                        March 31, 1999

/s/ Jacque M. Ducharme
-----------------------------
    Jacque M. Ducharme            Trustee                        March 31, 1999

/s/ Christopher J. Nassetta
-----------------------------
    Christopher J. Nassetta       Trustee                        March 31, 1999

/s/ Thomas J. Saylak
-----------------------------
    Thomas J. Saylak              Trustee                        March 31, 1999






                                      -34-
<PAGE>
             INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Financial Statements

Prime Group Realty Trust and the Predecessor:

Report of Independent Auditors............................................  F-2

Consolidated Balance Sheets of Prime Group Realty Trust as of December
  31, 1998 and 1997.......................................................  F-3

Consolidated  Statements of Operations of Prime Group Realty Trust for
  the year ended  December 31, 1998 and for the period from November 17,
  1997 through December 31, 1997 and Combined Statements of Operations
  of the Predecessor for the period from January 1, 1997 through
  November 16, 1997 and for the year ended December 31, 1996..............  F-4

Consolidated Statements of Changes in Shareholders' Equity of Prime
  Group Realty Trust for the year ended December 31, 1998 and for the
  period from November 17, 1997 to December 31, 1997......................  F-5

Combined Statements of Changes in Predecessors' Deficit for the period
  from January 1, 1997 through November 16, 1997 and for the year ended
  December 31, 1996.......................................................  F-6

Consolidated  Statements of Cash Flows of Prime Group Realty Trust for
  the year ended December 31, 1998 and for the period from November 17,
  1997 through December 31, 1997 and the Combined Statements of Cash
  Flows of the Predecessor for the period from January 1, 1997 through
  November 16, 1997 and for the year ended December 31, 1996..............  F-7

Notes to Consolidated and Combined Financial Statements...................  F-10

Financial Statement Schedule

  Schedule III - Real Estate and Accumulated Depreciation of Prime
  Group Realty Trust as of December 31, 1998..............................  F-29









































                                      F-1
<PAGE>






                         Report of Independent Auditors

Board of Trustees
Prime Group Realty Trust

     We have audited the accompanying consolidated balance sheets of Prime Group
Realty  Trust as of  December  31, 1998 and 1997,  and the related  consolidated
statements of operations, shareholders' equity and cash flows for the year ended
December 31, 1998 and for the period from  November 17, 1997 (date of formation)
through  December  31,  1997.  We have also  audited the  accompanying  combined
statements of operations,  changes in predecessors'  deficit,  and cash flows of
the  Predecessor  for the period from January 1, 1997 through  November 16, 1997
and for the year ended  December 31, 1996.  These  financial  statements are the
responsibility of Prime Group Realty Trust's and Predecessor's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial  position of Prime Group
Realty Trust at December 31, 1998 and 1997, and the consolidated  results of its
operations  and its cash flows for the year ended  December 31, 1998 and for the
period from November 17, 1997 through  December 31, 1997, and the  Predecessor's
combined results of operations and its cash flows for the period from January 1,
1997  through  November 16, 1997 and for the year ended  December  31, 1996,  in
conformity with generally accepted accounting principles.

                                                           /s/ ERNST & YOUNG LLP

Chicago, Illinois
March 24, 1999

































                                      F-2
<PAGE>
<TABLE>
                            PRIME GROUP REALTY TRUST
                           CONSOLIDATED BALANCE SHEETS
              (Dollars in thousands, except for per share amounts)
<CAPTION>
                                                     PRIME GROUP REALTY TRUST
                                                            DECEMBER 31,
                                                       1998            1997
                                                 ------------------------------
<S>                                              <C>               <C>
ASSETS
Real estate at cost:
  Land......................................     $   139,505        $    92,330
  Building and improvements.................         630,518            432,693
  Tenant improvements  .....................          73,008             64,256
                                                 ------------------------------
                                                     843,031            589,279
Accumulated depreciation....................         (24,756)            (2,338)
                                                 ------------------------------
                                                     818,275            586,941
Property under development..................          51,376                 --
                                                 ------------------------------
                                                     869,651            586,941
Mortgage note receivable....................          63,270             56,511
Cash and cash equivalents...................          46,500             11,969
Tenant receivables..........................           7,288              3,820
Restricted cash escrows......................         53,820              3,175
Deferred rent receivable.....................         39,062             37,828
Deferred costs - net.........................         32,891             28,472
Loans receivable from services company.......          7,055              5,258
Other........................................         44,977              7,494
                                                 ------------------------------
Total assets.................................    $ 1,164,514        $   741,468
                                                 ==============================

LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable......................     $   518,718        $    90,610
Credit facilities...........................              -             159,000
Mortgage note payable - affiliate...........              -               3,984
Bonds payable...............................          74,450             74,450
Accrued interest payable....................           2,440              1,245
Accrued real estate taxes...................          29,657             17,915
Accounts payable and accrued expenses.......          26,068             13,903
Liabilities for leases assumed..............           4,792              5,758
Dividends payable...........................           8,080              2,505
Other.......................................           4,523                822
                                                 ------------------------------
Total liabilities...........................         668,728            370,192
Commitments and contingencies                             --                 --
Minority interests:
  Operating partnership.....................         144,781            147,207
  Other.....................................           1,000                 --
Shareholders' equity:
  Preferred Shares, $0.01 par value;
  30,000,000 shares authorized:
    Series B - Cumulative Redeemable
      Preferred Shares, 4,000,000 shares
      designated, issued and outstanding
      at December 31, 1998..................              40                 --
    Series A - Cumulative Convertible
      Preferred Shares, 2,000,000 shares
      designated, issued and outstanding
      at December 31, 1998 and 1997.........              20                 20
  Common Shares: $0.01 par value;
    100,000,000 shares authorized;
    15,110,794 and 12,980,000 shares
    issued and outstanding at December 31,
    1998 and 1997, respectively.............             151                130
  Additional paid-in capital................         360,017            225,632
  Distributions in excess of earnings.......         (10,223)            (1,713)
                                                 ------------------------------
Total shareholders' equity..................         350,005            224,069
                                                 ==============================
Total liabilities and shareholders' equity..     $ 1,164,514        $   741,468
                                                 ==============================

                             See accompanying notes.
</TABLE>
                                      F-3
<PAGE>
<TABLE>
                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

         CONSOLIDATED STATEMENTS OF OPERATIONS OF THE PRIME GROUP REALTY
         TRUST AND COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR

              (Dollars in thousands, except for per share amounts)

<CAPTION>
                                                   PRIME GROUP REALTY TRUST                  PREDECESSOR
                                                -------------------------------     ---------------------------------
                                                                  PERIOD FROM       PERIOD FROM
                                                                  NOVEMBER 17,      JANUARY 1,
                                                  YEAR ENDED      1997 THROUGH      1997 THROUGH     YEAR ENDED
                                                 DECEMBER 31,     DECEMBER 31,      NOVEMBER 16,     DECEMBER 31,
                                                     1998             1997              1997             1996
                                                 ------------------------------     --------------------------------
<S>                                              <C>              <C>               <C>              <C>
Revenue
  Rental....................................     $    97,212      $     7,293       $    27,947      $     30,538
  Tenant reimbursements.....................          37,545            2,041            12,490            14,225
  Mortgage note interest....................           5,866              248                --                --
  Gain on sale of assets....................              --               --               286               846
  Other.....................................           6,978              248             1,229             2,551
                                                 ------------------------------     --------------------------------
  Total revenue.............................         147,601            9,830            41,952            48,160

Expenses
  Property operations.......................          29,598            2,213             8,622             9,767
  Real estate taxes.........................          25,077            1,765             8,575             9,383
  Depreciation and amortization.............          25,447            2,478            11,241            12,409
  Interest..................................          30,901            1,680            24,613            26,422
  Interest - affiliates.....................              --               --             9,804            10,795
  General and administrative................           5,712              267             2,414             4,927
  Financing fees............................              --               --             1,180             1,232
  Property and asset management fees -
    Affiliates..............................              --               --             1,348             1,561
  Provision for environmental remediation
    costs...................................              --               --             3,205                --
  Write-off deferred tenant costs...........              --               --                --             3,081
                                                 ------------------------------     --------------------------------
  Total expenses............................         116,735            8,403            71,002            79,577
                                                 ------------------------------     --------------------------------
Income (loss) before minority interests
  and extraordinary items...................          30,866            1,427           (29,050)          (31,417)
Minority interests..........................          (9,368)            (635)              666               894
                                                 ------------------------------     --------------------------------
Income (loss) before extraordinary items....          21,498              792           (28,384)          (30,523)
Extraordinary items; (loss) gain on
  extinguishment of debt, net of minority
  interests in the amount of $878 for the
  year ended December 31, 1998 and $1,127
  for the period from January 1, 1997
  through November 16, 1997.................          (1,253)              --            65,990                --
                                                 ------------------------------     --------------------------------
Net income (loss)...........................          20,245              792       $    37,606      $    (30,523)
                                                                                    ================================
Net income allocated to preferred
  shareholders..............................          (7,971)            (345)
                                                 ==============================
Net income available to common
  shareholders..............................     $    12,274      $       447
                                                 ==============================

Earnings per weighted-average common
  share - basic and diluted:
    Income before extraordinary items.......     $      0.91      $      0.04
    Extraordinary items.....................           (0.08)              --
                                                 ==============================
Net income..................................     $      0.83      $      0.04
                                                 ==============================

                            See accompanying notes.
</TABLE>




                                      F-4
<PAGE>
<TABLE>
                            PRIME GROUP REALTY TRUST

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
        OF PRIME GROUP REALTY TRUST FOR THE YEAR ENDED DECEMBER 31, 1998
       AND FOR THE PERIOD FROM NOVEMBER 17, 1997 THROUGH DECEMBER 31, 1997

              (Dollars in thousands, except for per share amounts)


<CAPTION>
                                                       Preferred Shares                    Additional    Distributions
                                                 ------------------------      Common        Paid-In     in Excess of
                                                  Series B      Series A       Shares        Capital        Earnings        Total
                                                 -----------------------------------------------------------------------------------
<S>                                              <C>           <C>           <C>           <C>           <C>              <C>
Issuance of 2,000,000 Series A -
   preferred shares.........................     $       --    $       20    $       --    $   39,580     $         --    $  39,600
Issuance of 12,980,000 common shares........             --            --           130       232,222               --      232,352
Step-up in basis from the purchase of
  third-party owner's interest in
  predecessor...............................             --            --            --         1,430               --        1,430
Reclassification of predecessor's minority
  interest..................................             --            --            --        (6,564)              --       (6,564)
Reclassification of net deficit of
  predecessor...............................             --            --            --       (33,976)              --      (33,976)
Additional contribution by predecessor......             --            --            --        11,873               --       11,873
Contribution of net liabilities to service
  company...................................             --            --            --           380               --          380
Additional paid-in capital allocated to
  minority interest.........................             --            --            --       (19,313)              --      (19,313)
Net income..................................             --            --            --            --              792          792
Series A-preferred share dividends
  declared ($0.173 per share)...............             --            --            --            --             (345)        (345)
Common share dividends declared
  ($0.166 per share)........................             --            --            --            --           (2,160)      (2,160)
                                                 -----------------------------------------------------------------------------------
Balance at December 31, 1997................             --            20           130       225,632           (1,713)     224,069
Issuance of 2,579,994 common shares.........             --            --            26        45,904               --       45,930
Issuance of 4,000,000 Series B - preferred
  shares....................................             40                                    95,285               --       95,325
Issuance of 25,000 common shares
  granted during the year...................             --            --            --           458               --          458
Repurchase of 474,200 common shares.........             --            --            (5)       (7,262)              --       (7,267)
Net income..................................             --            --            --            --           20,245       20,245
Series B-preferred share dividends
  declared ($1.29 per share)................             --            --            --            --           (5,141)      (5,141)
Series A-preferred share dividends
  declared ($1.42 per share)................             --            --            --            --           (2,830)      (2,830)
Common share dividends declared
  ($1.35 per share).........................             --            --            --            --          (20,784)     (20,784)
                                                 ===================================================================================
Balance at December 31, 1998................        $    40    $       20    $      151    $  360,017     $    (10,223)   $ 350,005
                                                 ===================================================================================

</TABLE>

                             See accompanying notes.




















                                      F-5
<PAGE>
<TABLE>

                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

             COMBINED STATEMENTS OF CHANGES IN PREDECESSORS' DEFICIT
              PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 16, 1997
                    AND FOR THE YEAR ENDED DECEMBER 31, 1996

                             (Dollars in thousands)

<S>                                                                   <C>
Balance at January 1, 1996......................................     $  (85,305)
Contributions...................................................             40
Distributions...................................................             (4)
Net loss........................................................        (30,523)
                                                                     ----------
Balance at December 31, 1996....................................       (115,792)
Contributions...................................................         44,330
Distributions...................................................           (120)
Net income......................................................         37,606
                                                                     ==========
Balance at November 16, 1997....................................     $  (33,976)
                                                                     ==========

                             See accompanying notes.
</TABLE>




















































                                      F-6
<PAGE>
                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

        CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST
            AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                   PRIME GROUP REALTY TRUST                  PREDECESSOR
                                                -------------------------------     ---------------------------------
                                                                  PERIOD FROM       PERIOD FROM
                                                                  NOVEMBER 17,      JANUARY 1,
                                                  YEAR ENDED      1997 THROUGH      1997 THROUGH     YEAR ENDED
                                                 DECEMBER 31,     DECEMBER 31,      NOVEMBER 16,     DECEMBER 31,
                                                     1998             1997              1997             1996
                                                 ------------------------------     --------------------------------
<S>                                              <C>              <C>               <C>              <C>
OPERATING ACTIVITIES
Net income (loss)...........................     $    20,245       $       792      $    37,606      $   (30,523)
Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities:
  Amortization of costs for leases assumed
    (included in rental revenue)............           1,137               142            1,022            1,244
  Interest income and developer fees
    added to mortgage note receivable
    principal...............................          (1,010)               --               --               --
  Gain on sale of real estate...............              --                --             (286)            (846)
  Depreciation and amortization.............          25,447             2,478           11,241           12,409
  Interest added to principal on mortgage
    note payable affiliate..................              --                --            9,772           10,002
  Standby loan fee-affiliate added to
    principal on mortgage note payable
    affiliate...............................              --                --              460              522
  Write-off of deferred tenant costs........              --                --               --            3,081
  Minority interests........................           9,368               635             (666)            (894)
  Extraordinary items, net of minority
    interest................................           1,253                --          (65,990)              --
  Changes in operating assets and
   liabilities:
    (Increase) decrease in tenant
       receivables..........................          (3,468)              (15)            (916)           1,990
    (Increase) decrease in deferred rent
       receivable...........................          (1,234)              180              487             (645)
    (Increase) decrease in other assets.....         (21,184)          (10,032)             506              566
    Increase (decrease) in accrued interest
       payable..............................           1,195              (175)          (1,118)             316
    Increase in accrued real estate taxes...          11,742             7,556              415              251
    Increase in accounts payable and
       accrued expenses.....................           7,299             7,202            3,498            1,380
    Decrease in liabilities for leases
       assumed..............................            (966)             (350)          (1,049)          (1,532)
    Increase (decrease) in other
       liabilities..........................           3,701            (1,707)             777              217
                                                 -------------------------------------------------------------------
Net cash provided by (used in) operating
    activities..............................          53,525             6,706           (4,241)          (2,462)
</TABLE>




















                                      F-7
<PAGE>
                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

        CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST
      AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (CONTINUED)

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                   PRIME GROUP REALTY TRUST                  PREDECESSOR
                                                -------------------------------     ---------------------------------
                                                                  PERIOD FROM       PERIOD FROM
                                                                  NOVEMBER 17,      JANUARY 1,
                                                  YEAR ENDED      1997 THROUGH      1997 THROUGH     YEAR ENDED
                                                 DECEMBER 31,     DECEMBER 31,      NOVEMBER 16,     DECEMBER 31,
                                                     1998             1997              1997             1996
                                                 ------------------------------     --------------------------------
<S>                                              <C>              <C>               <C>              <C>
INVESTING ACTIVITIES
Expenditures for real estate and equipment..     $  (301,068)     $  (297,019)      $    (5,659)     $    (3,842)
Proceeds from sale of real estate...........              --               --               298            2,110
Purchase of and additional advances on
  mortgage note receivable..................          (4,943)         (51,163)               --               --
Increase in restricted cash escrows.........         (50,736)              --                --               --
Leasing costs...............................          (2,840)             (48)           (1,459)            (703)
Loans provided to services company..........          (1,797)          (5,258)               --               --
Cash contributed to services company........              --             (376)               --               --
Decrease in due from affiliates.............              --               --             2,894           2,858
                                                 ------------------------------     -------------------------------
Net cash (used in) provided by investing
  activities................................        (361,384)        (353,864)           (3,926)             423

FINANCING ACTIVITIES
Net proceeds from the sale of preferred
  shares....................................          95,325           39,600                --               --
Net proceeds from the sale of common shares.          45,930          232,352                --               --
Common share repurchases....................          (7,267)              --                --               --
Proceeds from sale of operating partnership
  units.....................................              --           85,000                --               --
Financing costs.............................          (7,785)          (3,328)               --              (10)
Deposits under treasury lock agreements.....         (14,641)              --                --               --
Proceeds from mortgage notes payable........         514,065           84,198               480            1,239
Proceeds from mortgage notes payable -
  affiliates................................              --               --             5,647            5,891
Net (repayment of) proceeds from credit
  facilities................................        (159,000)         159,000                --               --
Repayment of mortgage notes payable.........         (85,957)        (236,537)             (119)             (83)
Repayment of mortgage notes payable
  - affiliates..............................          (3,984)          (4,895)          (41,367)          (1,150)
Decrease in due to affiliates...............              --               --              (708)            (226)
Contribution from minority interests
  - other...................................           1,000               --                --               --
Distributions to minority interest
  - operating partnership...................         (12,116)              --              (120)              --
Dividends paid to Series B - preferred
  shareholders..............................          (2,891)              --                --               --
Dividends paid to Series A - preferred
  shareholders..............................          (2,445)              --                --               --
Dividends paid to common shareholders.......         (17,844)              --                --               --
Contributions from partners.................              --               --            44,330               80
Distributions to partners...................              --               --              (120)              (8)
Debt termination fees.......................              --               --            (1,692)              --
                                                 ------------------------------     -------------------------------
Net cash provided by financing activities...         342,390          355,390             6,331            5,733
                                                 ------------------------------     -------------------------------
Net increase (decrease) in cash and cash
  equivalents...............................          34,531            8,232            (1,836)           3,694
Cash and cash equivalents at beginning of
  period....................................          11,969            3,737             5,573            1,879
                                                 ==============================     ===============================
Cash and cash equivalents at end of period..     $    46,500      $    11,969       $     3,737      $     5,573
                                                 ==============================     ===============================
</TABLE>






                                      F-8
<PAGE>
<TABLE>
                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

        CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME GROUP REALTY TRUST
      AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (CONTINUED)

                             (Dollars in thousands)

Supplemental disclosure of non-cash investing and financing
activities:
<S>                                                                  <C>
The following represents noncash activity for the year
ended December 31, 1998:
  Accounts payable and accrued expenses for property under
    development.................................................     $    4,060
  Accounts payable and accrued expenses for mortgage note
    receivable advances...................................                  806
  Issuance of partnership units and common share grants.........          1,658
                                                                     ==========
                                                                     $    6,524
                                                                     ==========

  Accounts payable and accrued expenses.........................     $    4,866
  Partnership units issued to minority interest - operating
    partnership.................................................          1,200
  Issuance of common share grants (additional paid-in capital)..            458
                                                                     ==========
                                                                     $    6,524
                                                                     ==========

     The following assets and liabilities  (Includes $12,000 of bonds receivable
which have been netted against the  corresponding  bonds payable  contributed by
the  Predecessor.  Also includes cash of $376, net equipment of $83 and accounts
payable  of $839  which the  Company  immediately  contributed  to the  Services
Company.) were contributed by certain minority  interest partners to the Company
on November 17, 1997:

Real estate, net................................................     $  243,637
Cash and cash equivalents.......................................          3,737
Tenant receivable...............................................         41,813
Deferred costs, net.............................................         25,270
Other assets....................................................            885
                                                                     ----------
Total assets....................................................        315,342

Mortgage notes payable..........................................        241,432
Bonds payable...................................................         74,450
Accrued interest payable........................................          1,420
Accrued real estate taxes.......................................         10,359
Accounts payable and accrued expenses...........................          7,711
Liabilities for leases assumed..................................          6,108
Other liabilities...............................................          2,529
Minority interests..............................................         (6,564)
                                                                     ----------
Total liabilities and minority interests........................        337,445
                                                                     ==========
Predecessor's net contribution..................................     $  (22,103)
                                                                     ==========

     The  following  represents  our  noncash  activity  during the period  from
November 17, 1997 through December 31, 1997:

Mortgage note receivable........................................     $    5,100
Real estate.....................................................         48,814
                                                                     ==========
                                                                     $   53,914
                                                                     ==========

Debt assumed....................................................     $   10,396
Partnership units issued to minority interest...................         42,088
Step-up in basis from purchase of third-party owner's interest
   in the Predecessor...........................................          1,430
                                                                     ==========
                                                                     $   53,914
                                                                     ==========

                             See accompanying notes.
</TABLE>
                                      F-9
<PAGE>
                  PRIME GROUP REALTY TRUST AND THE PREDECESSOR

             NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

        (Dollars in thousands, except for per share and per unit amounts)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FORMATION AND ORGANIZATION OF THE COMPANY

     Prime Group Realty Trust (the  "Company") was organized in Maryland on July
21, 1997 to continue the  business of The Prime  Group,  Inc. and certain of its
affiliates  (collectively  "PGI").  The  Company  qualified  as  a  real  estate
investment  trust  ("REIT")  beginning  with the period ended December 31, 1997,
under the Internal  Revenue  Code of 1986,  as amended,  for Federal  income tax
purposes.  On November  17,  1997,  the  Company  completed  its initial  public
offering with the sale of 12,380,000 of its common shares of beneficial interest
at $20.00 per share and the private  placement  of  2,000,000  of the  Company's
Series  A-cumulative  convertible  preferred  shares of  beneficial  interest at
$20.00 per share.  The Company  contributed  the initial net  proceeds  from the
offering  and private  placement  in exchange  for  12,380,000  common  units of
partnership  interest and 2,000,000  preferred units of partnership  interest in
Prime Group  Realty,  L.P.  (the  "Operating  Partnership").  Subsequent  to the
initial  public  offering,  the Company  issued an  additional  3,204,994 of its
common shares (sold 600,000 common shares in 1997, sold 2,579,994  common shares
in 1998  and  granted  25,000  shares  in  1998)  and  4,000,000  of its  Series
B-cumulative redeemable preferred shares and contributed the net proceeds to the
Operating  Partnership  in  exchange  for the same  number of  common  units and
preferred units of partnership interest.  In addition,  during 1998, the Company
repurchased  474,200 of its common  shares for an  aggregate  purchase  price of
$7,267, pursuant to a common share repurchase program the Company established in
September  1998.  (Repurchase  the lesser of  1,550,000  common  shares or spend
$7,500 with share prices not to exceed $20.00 per common share.)

     The Company is the managing  general  partner of the Operating  Partnership
and owns all of the  preferred  units and 59.4%  and 55.9% of the  common  units
issued at December 31, 1998 and 1997,  respectively.  Each common unit  entitles
the  Company  to  receive   distributions   from  the   Operating   Partnership.
Distributions  declared or paid to holders of common shares and preferred shares
are based upon such  distributions  the  Company  receives  with  respect to its
common units and preferred units.

     In conjunction  with the Company's  initial  contribution  to the Operating
Partnership,  PGI contributed its interest in 23 partnerships that owned various
office and industrial  properties  (represents the Predecessor's  operations) to
the  Operating   Partnership  in  exchange  for  3,465,000   common  units  (PGI
contributed  3,375,000 of these common units to Primestone  Investment  Partners
L.P. described below) and received approximately $6,487 for the reimbursement of
the Company's  formation  costs advanced by PGI. The Operating  Partnership  was
required  to  acquire  a  third-party  ownership  interest  in  certain  of  the
Predecessor's properties for $1,797, resulting in a step-up in the basis of real
estate  of  $3,227.  Certain  other  individuals   contributed  their  ownership
interests in various  properties,  including  the related debt, to the Operating
Partnership in exchange for cash of  approximately  $15,761 and 1,849,417 common
units  valued  at  $20.00  per unit  (total  value  of  $36,988).  In  addition,
Primestone  Investment Partners L.P., an entity in which PGI has a 60% ownership
interest,  acquired  4,569,893  common units from the Operating  Partnership for
$85,000  (PGI  directly  or  indirectly  owns  31.6% and 34.7% of the  Operating
Partnership  at December  31,  1998 and 1997,  respectively.)  These  properties
(including the Predecessor's properties),  along with other acquired properties,
are controlled by the Operating  Partnership.  PGI, the other  contributors  and
Primestone  Investment  Partners L.P. have been reflected as minority interest -
Operating Partnership in the consolidated financial statements.

BASIS OF PRESENTATION

     The  Company's   consolidated  financial  statements  include  all  of  its
accounts,  including,  the Operating Partnership and the other entities in which
the Company has control.  The combined  financial  statements of the Predecessor
include the accounts of the  partnerships  in which the Predecessor had majority
interest,  control or  managed.  The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.


                                      F-10
<PAGE>
     Investments in corporations  and partnerships in which the Company does not
have operational  control or a majority interest are accounted for on the equity
method of accounting.

     Significant  intercompany accounts and transactions have been eliminated in
consolidation and combination.

     Certain  amounts in the prior period  consolidated  and combined  financial
statements have been reclassified to conform to the current period presentation,
with no effect  on the  Company's  consolidated  or the  Predecessor's  combined
financial position or results of operations.

     On  December  15,  1997,  the  Company  acquired  the first  mortgage  note
encumbering an office property known as Continental Towers for $108,870,  with a
face value of $157,161. On May 15, 1998, the Company sold $75,000 of the note to
a third-party bank and the note became  subordinate to the third-party note. The
note  has a base  interest  rate  of  6.5%  per  annum  payable  monthly,  and a
contingent interest rate of 6.5% per annum,  payable from available cash flow as
defined.  All unpaid  interest is added to principal.  The note matures  January
2013. The Company will receive all of the economic benefits from its interest in
the property and therefore, has consolidated the operations of the property from
the acquisition date.

     On November 17, 1997,  the  Operating  Partnership  acquired the assets and
business of two property  management and realty services  companies from a third
party and contributed  these entities and certain other assets to a newly formed
corporation,  Prime Group Realty  Services,  Inc. (the "Services  Company").  In
exchange for its contribution,  the Operating  Partnership  received 100% of the
non-voting  preferred stock of the Services Company and a note receivable in the
amount of $4,800 (See Note 10). Certain members of the Company's  management own
100% of the voting common stock.  The Services  Company was formed  primarily to
operate our business lines that are not directly  associated with the collection
of rents. The Services Company is subject to federal, state and local taxes. The
Company records its ownership in the Services Company using the equity method of
accounting.

REAL ESTATE

     Depreciation is calculated on the  straight-line  method over the estimated
useful lives of assets, which are as follows:

     Building and improvements                        40 years
     Tenant improvements                              Term of related leases
     Furniture and equipment                          3-7 years

     Development  costs,  which include land acquisition  costs,  fees and other
costs incurred in developing new properties,  are capitalized as incurred.  Upon
completion  of  construction,  development  costs are included in buildings  and
improvements  and are  depreciated  over  the  useful  lives  of the  respective
properties on a straight-line basis. Interest,  financing costs and other direct
costs incurred during development  periods are capitalized as a component of the
building costs.

     Real  estate is carried at  depreciated  cost.  Expenditures  for  ordinary
maintenance  and repairs are expensed to  operations  as  incurred.  Significant
renovations and improvements  which improve and/or extend the useful life of the
asset are capitalized and depreciated over their estimated useful life.

CASH EQUIVALENTS

     The Company  considers  highly liquid  investments with a maturity of three
months or less when purchased to be cash equivalents.

DEFERRED COSTS

     Costs  incurred  in  connection  with  financings,   refinancings  or  debt
modifications  are capitalized as deferred  financing costs and are amortized on
the  straight-line   method  over  the  lives  of  the  related  loans.  Leasing
commissions  and other leasing costs directly  attributable to tenant leases are
capitalized  as deferred  leasing costs and are  amortized on the  straight-line
method over the terms of the related lease agreements.

LEASES ASSUMED

     In  connection  with  certain  tenant  leases,  the Company has assumed the
liability  for the  remaining  terms of the  tenants'  existing  leases in their
previous  location.  The Company has  recorded a  liability  for the  difference

                                      F-11
<PAGE>
between total remaining costs for leases assumed and the expected  benefits from
subleases of the assumed lease  properties.  The related incentive to lessee has
been  capitalized as a deferred  charge and is being amortized to rental revenue
over the life of the respective lease. The deferred charge and related liability
are adjusted for changes in the expected  benefits  from  subleases.  During the
year ended  December  31,  1998,  the Company  assumed  additional  liability of
$1,357. During the period from January 1, 1997 through November 16, 1997 and for
the year ended December 31, 1996, the  Predecessor  wrote off $1,049 and $3,893,
respectively,  of deferred  charges and  reduced  the related  liability  due to
changes in the estimated  benefits from  subleases.  No amounts were written off
during the year ended  December 31, 1998 or during the period from  November 17,
1997 through December 31, 1997.

RENTAL REVENUE

     Rental  revenue is recorded on the  straight-line  method over the terms of
the related lease  agreements.  Differences  between  rental  revenue earned and
amounts due per the  respective  lease  agreements  are credited or charged,  as
applicable, to deferred rent receivable. Rental payments received prior to their
recognition as income are classified as rent received in advance.

TREASURY LOCK AGREEMENTS

     The Company uses  treasury  lock  agreements  to  synthetically  manage the
interest rate  characteristics of its outstanding debt to a more desirable fixed
or variable  rate basis or to limit the  Company's  exposure to rising  interest
rates.  Interest  rate  differentials  to be paid or  received  as a  result  of
treasury lock agreements are accrued and recognized as an adjustment of interest
expense  related  to the  designated  debt.  The fair  values of  treasury  lock
agreements are not recognized in the financial statements.

     Amounts  related  to  treasury  lock  agreement  deposits  (See Note 4) are
deferred and amortized as an  adjustment to interest  expense over the period of
interest  exposure,   provided  the  related  designated   long-term  borrowings
liability  continues  to  exist  or  is  probable  of  occurring.  Realized  and
unrealized  changes in fair value of treasury lock  agreements  designated  with
long-term borrowings that no longer exist or are no longer probable of occurring
are recorded as a component of the gain or loss arising from the  disposition of
the designated long-term borrowings.

EARNINGS PER SHARE

     Basic  earnings  per share  ("EPS") is  calculated  by dividing  net income
available  to  common  shareholders  by the  weighted  average  number of shares
outstanding  during the period.  Diluted EPS includes the  potentially  dilutive
effect,  if any, which would occur if outstanding  (i) common stock options were
exercised,  (ii) common units were converted into shares of common share,  (iii)
share  grants were  fully-vested,  and (iv)  convertible  preferred  shares were
converted into common shares.

STOCK BASED COMPENSATION

     The Company  accounts for share option grants in accordance with Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB 25").  Under APB 25, no  compensation  expense is recognized for the share
option grants  because the exercise price of the options equals the market price
of the underlying share at the date of grant.

INCOME TAXES

     Commencing  with the period ended December 31, 1997, the Company elected to
be taxed as a REIT under the  Internal  Revenue Code of 1986,  as amended.  As a
REIT,  the Company  generally  will not be subject to federal  income tax to the
extent  that it  distributes  at least  95% of its REIT  taxable  income  to its
shareholders.  REITs are subject to a number of  organizational  and operational
requirements. If the Company fails to qualify as a REIT in any taxable year, the
Company  will be  subject  to  federal  income  tax  (including  any  applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.

     As of December 31, 1998, for income tax purposes, the Company's real estate
had a gross and net basis of $751,142 and $735,283 respectively,  mortgage notes
receivable had a basis of $172,149,  deferred costs had a gross and net basis of
$37,920 and $33,614 respectively, and deferred rent receivable had no tax basis.

     The  Predecessor  paid no  income  taxes,  and the  income or loss from its
partnerships   is  included  on  the  respective   income  tax  returns  of  the
Predecessor's partners.

                                      F-12
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
("SFAS") No. 133, Accounting for Derivative  Instruments and Hedging Activities.
The Company  expects to adopt the new Statement  effective  January 1, 2000. The
Statement  will require the Company to recognize all  derivatives on the balance
sheet at fair value.  The Company does not anticipate  that the adoption of this
Statement  will  have a  significant  effect on its  results  of  operations  or
financial position.

2.   MORTGAGE NOTE RECEIVABLE

     On December 16, 1997,  the Company  acquired for  approximately  $51,163 in
cash and $5,100 in common units,  the first mortgage note encumbering the office
property known as 180 North LaSalle Street, which is a 39-story office building,
located in Chicago, Illinois,  (containing 728,860 square feet of rentable space
and is  approximately  73.7% leased at December  31,  1998).  During  1998,  the
Company made additional advances of $4,943, which were used to fund improvements
to the  building and pay various  operating  expenses.  The Company  anticipates
providing additional advances of $11,600 to complete the building  improvements.
The note requires  principal  payments due at maturity on January 15, 2004.  The
note has a face value of $69,277  and  $62,518 at  December  31,  1998 and 1997,
respectively.

     The note provides for interest at an accrual rate of 9.64% per annum, and a
minimum  pay rate at the  lower of 8.25%  per  annum,  or  $2,400  annually,  as
defined,  payable  monthly.  During 1998, the Company  received  interest income
payments of $5,373.  No payments were  received  during the period from November
17, 1997 through December 31, 1997.  During the year ended December 31, 1998 and
the period from  November  17, 1997 through  December  31, 1997,  $258 and $248,
respectively, of interest income was added to the principal balance.

     Included in the purchase was a  non-refundable  option,  exercisable  until
July 30, 2000, to acquire the existing  $85,000 second  mortgage on the property
for  $4,400 in common  units  (annually  $1,200)  of the  Operating  Partnership
(amount  included in  minority  interest-operating  partnership),  valued at the
lower of $20.00 per unit or the Company's  common share price at the date issued
(5,000  common units if the  Company's  common share market value is equal to or
greater than $20.00 per share or $100 in common units per month if the Company's
common share market  value is below $20.00 per share;  67,018  common units were
issued during the year ended December 31, 1998), subject to certain adjustments,
as defined.  At December 31, 1998, $1,300 is included in other assets related to
the  options.  In  addition,  the Company  has an option to purchase  the equity
ownership  of the  property  during the period from January 15, 2004 to February
15,  2004 for a price  equal to the  greater  of the  fair  market  value of the
interest or $2,000.

     During 1998, the Company provided construction  management services of $752
to the property,  which have been added to the principal  balance.  The Services
Company  provides  property  management  and leasing  services  for the property
pursuant to a 10-year management and leasing contract.

3.   DEFERRED COSTS

     Deferred costs consist of the following:
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       1998             1997
                                                 ------------------------------
<S>                                              <C>                <C>
Financing costs.............................     $    10,964        $     5,572
Leasing costs...............................          26,022             23,182
                                                 ------------------------------
                                                      36,986             28,754
 Less: Accumulated amortization.............          (4,095)              (282)
                                                 ------------------------------
                                                 $    32,891        $    28,472
                                                 ==============================
</TABLE>








                                      F-13
<PAGE>
4.   MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE

     Mortgage notes payable,  credit  facilities and bonds payable  consisted of
the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       1998             1997
                                                 ------------------------------
<S>                                              <C>                <C>
MORTGAGE NOTES PAYABLE (A), (B):
Mortgage notes payable to various financial
  institutions, collateralized by various
  properties, interest at fixed rates
  ranging from 6.85% to 7.785 (weighted
  average rate at December 31, 1998 - 7.29%)
  per annum, with principal and interest
  payable through dates ranging from 2008
  through 2013..............................     $   282,618        $    89,912
Mortgage notes payable to various financial
  institutions, collateralized by various
  properties, interest at variable rates
  ranging from LIBOR (5.08% at December 31,
  1998) plus 100 basis points to LIBOR plus
  250 basis points (weighted average rate
  at December 31, 1998 - 6.34%) per annum
  with principal and interest payable
  monthly through dates ranging from 1999
  through 2001..............................         236,100                698
                                                 ==============================
Total mortgage notes payable................     $   518,718        $    90,610
                                                 ==============================

CREDIT FACILITIES (A), (B):
Line-of-credit with various financial
  institutions, collateralized by various
  properties with a maximum draw of $80,000,
  interest at rates ranging from the higher
  of prime or federal funds rate plus 50
  basis points to LIBOR plus 225 basis
  points, per annum, as defined, with
  interest payable monthly and principal
  due November 2000 (D).....................     $        --        $   159,000

Line-of-credit with a financial institution,
  collateralized by an industrial property
  with a maximum draw of $15,000, interest
  at LIBOR plus 195 basis points, per
  annum as defined, with interest payable
  monthly and principal due January 2000,
  with an option to extend the line for
  one year..................................              --                 --
                                                 ==============================
 Total credit facilities....................     $        --        $   159,000
                                                 ==============================

BONDS PAYABLE:
Variable rate taxable and tax-exempt bonds
  issued by various state and local
  government authorities (B), (C), (D)......     $    74,450        $    74,450
                                                 ==============================
</TABLE>


(A)  The above  mortgage  notes  payable  and credit  facilities  are subject to
     various  operating  and  financial  covenants,  which  the  Company  is  in
     compliance with at December 31, 1998.

(B)  The majority of the  Company's  real estate  assets and its  mortgage  note
     receivable  have been pledged as collateral for its mortgage notes payable,
     credit facilities and bonds payable. In addition, the Company had a $12,000
     cash collateral account (amount included in restricted cash at December 31,
     1998) on  deposit  with a  financial  institution  related  to the  $80,000
     line-of-credit.  Subsequent  to December  31,  1998,  the Company  provided
     replacement collateral in the form of mortgages on two office buildings and
     the cash collateral account was released.

                                      F-14
<PAGE>

(C)  Permanent  financing for the development of certain  industrial  properties
     has been provided by $48,150 of tax exempt industrial  development  revenue
     bonds that mature on June 1, 2022.  On December  13,  1995,  and on May 20,
     1996,  the  bonds  were  acquired  by  independent  third  party  financial
     institutions from an affiliate of PGI.

     Under  the  terms  of  the  bond  loan   agreements,   the  Company   makes
     interest-only payments monthly, calculated using a floating rate determined
     by the remarketing agent of the bonds. The rates ranged from 2.97% to 4.50%
     during 1998, 3.35% to 4.75% during 1997 and 2.85% to 4.40% during 1996. The
     rate at December 31, 1998 was 4.13%.

     The  maximum  annual  interest  rate on the  bonds  is 13%.  Under  certain
     conditions, the interest rate on the bonds may be converted to a fixed rate
     at the Company's request.

     Beginning February 1998, the bonds were collateralized by letters of credit
     totaling  $48,800 from a financial  institution  which expire February 2002
     (the  bonds  become  due on this  date  unless  replacement  collateral  is
     obtained.)  The letters of credit are  collateralized  by  mortgages on the
     related industrial facilities and a $5,000 cash collateral account and have
     an annual fee of 1.4% of the letters of credit face amounts.  From November
     17, 1997 through February 1998, the bonds were collateralized by letters of
     credit totaling $48,000 from our $80,000  line-of-credit.  From May 1996 to
     November 16, 1997, the bonds were  collateralized by letters of credit that
     required the  Predecessor  to pay financing  fees of 1.75% per annum of the
     face amount, payable quarterly in advance.

     The  bondholders  may tender  bonds on any business day during the variable
     interest rate period  discussed above and receive  principal,  plus accrued
     interest through the tender date. Upon tender,  the remarketing  agent will
     immediately remarket the bonds. In the event the remarketing agent fails to
     remarket any bonds,  the Company is obligated to purchase those bonds.  The
     remarketing  agent  receives  a fee of 0.11% per  annum of the  outstanding
     bonds balance, payable quarterly in advance.

(D)  Permanent  financing for the  development of certain office  properties has
     been provided by $26,300 of tax-exempt  industrial revenue bonds. The bonds
     mature on December  1, 2014.  Under the terms of the bond  agreements,  the
     Company makes interest-only  payments monthly,  calculated using a floating
     rate  determined by the  remarketing  agent of the bonds.  The rates ranged
     from 3.40% to 4.00% during 1998,  3.35% to 3.85% during 1997,  and 3.40% to
     4.05% during 1996. The rate at December 31, 1998 was 3.55%.

     Under certain conditions,  the interest rates on the bonds may be converted
     to a fixed rate at the Company's request.

     The bonds are collateralized by letters of credit totaling $26,930 from our
     $80,000 line-of-credit,  which are subject to an annual fee of 2.25% of the
     amount outstanding.

     Under the terms of the bond agreements,  the bondholders have the option to
     require the  Company to purchase  any of their bonds on the 15th day of any
     month  while  the  bonds  are   outstanding.   Upon  the  exercise  of  the
     bondholders'  option to  purchase  the bonds,  the  remarketing  agent will
     immediately remarket the bonds. In the event the remarketing agent fails to
     remarket the bonds,  the Company is obligated to purchase those bonds.  The
     remarketing  agent  receives  a fee of 0.10% per  annum of the  outstanding
     bonds balance, payable quarterly in advance.

     During the year ended December 31, 1998, the Company wrote-off net deferred
     financing costs of $900, net of accumulated amortization of $32, related to
     mortgage notes and bonds payable that were repaid or refinanced  during the
     year,  $1,140,  net of accumulated  amortization  of $321, and $91 of other
     fees related to the  reduction in the maximum  balance that can be drawn on
     the $80,000 line-of-credit  (reduced from $235,000 to $80,000 during 1998).
     The total of these write-offs has been reflected as an  extraordinary  loss
     in the 1998 statement of operations,  net of amounts  allocated to minority
     interests of $878.


     The  Predecessor  had  entered  into  a  mortgage  note  agreement  with  a
consortium  of  commercial   lenders   providing  a  maximum  loan  of  $230,000
collateralized  by a first  mortgage on the 77 West Wacker Drive  building.  The
loan was repaid with proceeds from the initial public offering.  Under the terms
of the loan, the Predecessor  made monthly  interest-only  payments,  calculated

                                      F-15
<PAGE>
using  certain  variable  rate  indices,  as  defined.  To reduce  the impact of
increases in interest rates,  the Predecessor also entered into an interest rate
swap agreement with affiliates of one of 77 West Wacker Drive  building's  third
party owners  (Counterparties) for the outstanding loan principal balance. Under
the  terms  of the  interest  rate  swap  agreement,  the  Predecessor  paid the
Counterparties  interest  monthly  at  a  fixed  rate  of  10%  per  annum.  The
Predecessor was to receive monthly interest payments from the  Counterparties at
the  variable  rate and was then  responsible  for making the  monthly  interest
payments required under the terms of the loan. The Predecessor  incurred $692 of
fees  to  terminate  the  swap  agreement,  which  have  been  reflected  in the
extraordinary  item  extinguishment  of debt in the period from  January 1, 1997
through November 16, 1997.

     Total interest paid on the mortgage notes  payable,  credit  facilities and
bonds  payable was $32,204 and $1,855,  $25,731,  and $25,643 for the year ended
December 31, 1998, the period from November 17, 1997 through  December 31, 1997,
the period from  January 1, 1997 through  November  16,  1997,  and for the year
ended December 31, 1996, respectively.  During the year ended December 31, 1998,
the Company incurred interest expense of $33,399 of which $2,498 was capitalized
related to  development  projects (no interest was  capitalized  in the previous
periods.)

     On August 21, 1998, the Company into two treasury lock  agreements with two
financial  institutions to lock certain debt instruments at the interest rate on
ten-year  Treasury  Notes  effective  on the date of the  agreements  to provide
interest rate protection on future debt financings.  One of these agreements was
entered into in  anticipation of a planned future  securitization  of a $170,000
loan  related  to the 77 West  Wacker  Drive  building,  and had a lock  rate of
5.364%. The other agreement was entered into in anticipation of $160,000 in debt
related to the  acquisition  of IBM Plaza,  had a lock rate of 4.732% and was to
expire  on March  19,  1999.  The  Company  made  deposits  as  required  by the
agreements,  totaling approximately $14,641 at December 31, 1998 ($5,922 related
to the $170,000 agreement and $8,719 related to the $160,000  agreement),  which
are  included in other  assets in the  consolidated  financial  statements.  The
deposits  are  exclusive  of a $2,000  credit  threshold  described  below.  The
$170,000 agreement was to expire on February 18, 1999, but was extended to April
15,  1999.  At that time,  the lock rate was  modified  to 5.016% and the credit
threshold  reduced from $2,000 to $500. If the market rate on ten-year  Treasury
Notes falls below the locked rate and the  difference  between  $170,000 and the
calculated  notional amount is in excess of the credit threshold,  cash deposits
are required.  On March 1, 1999, the Company  terminated  the $160,000  treasury
lock  agreement due to the change in terms and timing of the IBM Plaza  purchase
as a result of the amended purchase agreement. Approximately $557 on deposit was
forfeited at the time of termination.  During the period January 1, 1999 through
March 24, 1999,  the Company  received  net cash  settlements  of  approximately
$9,215  ($1,053  related to the $170,000  agreement,  and $8,162  related to the
$160,000  agreement)  related to both treasury lock agreements.  If the yield on
U.S.  ten-year  Treasury Notes at settlement is less than the locked yield,  the
difference between $170,000 and the calculated notional amount will be amortized
over the terms of the future  debt  instruments  as an  adjustment  to  interest
expense.  The  Company  intends to  consummate  debt  transactions  equal to the
notional value of the remaining agreement.

     The following  represents the Company's future minimum  principal  payments
due  on  its  mortgage  notes  payable,  credit  facilities  and  bonds  payable
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
    Year ending December                                             Amount
    -----------------------------------------------------------------------
    <S>                                                           <C>
    1999........................................................  $ 187,098
    2000........................................................     36,427
    2001........................................................     24,159
    2002........................................................     52,623
    2003........................................................      4,811
    Thereafter..................................................    288,050
                                                                  ---------
                                                                  $ 593,168
                                                                  =========
</TABLE>






                                      F-16
<PAGE>
5.   MORTGAGE NOTES AND BONDS PAYABLE-AFFILIATES

     Mortgage note payable -affiliate consisted of the following at December 31,
1998 and 1997:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      1998              1997
                                                 ------------------------------
<S>                                              <C>                 <C>
Mortgage note payable-limited partner,
  collateralized an industrial property,
  interest at 7.0% per annum, was repaid
  on January 2, 1998........................     $        --         $    3,984
                                                 ==============================
</TABLE>

     The Predecessor had an 11% subordinate  loan agreement with affiliates of a
former  third  party owner of the 77 West Wacker  Drive  building  for a maximum
disbursement  amount of $60,000.  A portion of the loan was repaid ($4,895) with
proceeds of the initial public  offering,  and a portion was  considered  repaid
from  the swap  agreement  between  PGI and a third  party  related  to the loan
described  in Note 4 ($42,584  was  recorded as a  contribution  from PGI in the
period from January 1, 1997 through  November  17, 1997) and the  remainder  was
forgiven  ($67,847),  as of November 16, 1997 and included in the  extraordinary
item-extinguishment  of debt in the period from January 1, 1997 through November
16, 1997. The third party owner had provided a guarantee of 77 West Wacker Drive
building's  first  mortgage  note payable and charged the  Predecessor a standby
loan fee, as defined,  which was  included as a component  of interest  expense.
Standby  loan fees  incurred  were $460 for the period  from  January 1, 1997 to
November  16,  1997 and  $522 for the year  ended  December  31,  1996,  (unpaid
interest  expense is  included  in general  and  administrative  expenses in the
Predecessor's  combined  statements  of  operations).  Under  the  terms  of the
subordinate  loan  agreement,  the  Predecessor  was not  required  to make  any
periodic  principal or interest payments prior to the date of stabilization,  as
defined; unpaid interest was added to the principal balance monthly. Included in
the extraordinary item-extinguishment of debt in the period from January 1, 1997
through  November  16,  1997 is  $1,000  in  loan  termination  fees  paid to an
affiliate  of the third party owner and the  write-off of  unamortized  deferred
financing fees of $165.

     Permanent  financing for the development of certain  industrial  properties
has been  provided by $12,000 of taxable  debt  industrial  development  revenue
bonds and held by an  affiliate  of PGI.  The bonds  mature on June 1, 2022.  On
November 17, 1997, PGI contributed  the related bond  receivables as part of its
contribution  to  us.  The  bonds  payable  and  related  receivable  have  been
eliminated in the Company's  consolidated  financial statements.  The bonds have
the same terms as the bonds described in letter (C) of Note 4.

     Total  interest  paid on the mortgage  notes  payable and bonds  payable to
affiliates was $33, $32 and $1,256 for the year ended December 31, 1998, for the
period from  January 1, 1997  through  November  16, 1997 and for the year ended
December  31,  1996,  respectively.  No  interest  was paid for the period  from
November 17, 1997 to December 31, 1997.

6.   FUTURE MINIMUM LEASE INCOME AND PAYMENTS

     The Company has entered into lease agreements with tenants with lease terms
ranging from one year to twenty years. The leases generally  provide for tenants
to share in increases  in operating  expenses and real estate taxes in excess of
specified base amounts.

     Approximately  16%, 39%, 57%, and 60%, of rental revenue for the year ended
December 31, 1998, the period from November 17, 1997 through  December 31, 1997,
the period from  January 1, 1997 through  November  16,  1997,  and for the year
ended  December 31, 1996,  respectively,  was received  from four tenants  (only
three of these  tenants for the year ended  December 31, 1998 and for the period
from November 17, 1997 through December 31, 1997).

     The total future  minimum  rentals to be received by the Company under such
noncancelable  operating  leases in effect at December  31,  1998,  exclusive of
tenant reimbursements and contingent rentals, are as follows:





                                      F-17
<PAGE>
<TABLE>
<CAPTION>
    Year ending December                                             Amount
    -----------------------------------------------------------------------
    <S>                                                           <C>
    1999........................................................  $  95,555
    2000........................................................     84,943
    2001........................................................     74,644
    2002........................................................     65,205
    2003........................................................     54,180
    Thereafter..................................................    183,218
                                                                  ---------
                                                                  $ 557,745
                                                                  =========
</TABLE>

     Future minimum  rentals include amounts to be received from PGI and certain
affiliates totaling $4,738.

     In  addition,  as a part of lease  agreements  entered  into  with  certain
tenants, the Company assumed the tenants' leases at their previous locations and
subsequently  executed subleases for certain of the assumed lease space.  Future
minimum rental payments to be paid by the Company under leases  assumed,  net of
subleases executed through December 31, 1998, are as follows:

<TABLE>
<CAPTION>
    Year ending December                                             Amount
    -----------------------------------------------------------------------
    <S>                                                           <C>
    1999........................................................  $   1,303
    2000........................................................      1,320
    2001........................................................      1,353
    2002........................................................        726
    2003........................................................         90
                                                                  ---------
                                                                  $   4,792
                                                                  =========
</TABLE>

     During the year ended  December  31,  1998,  the Company  recognized  lease
termination income of $4,124, which is included in rental revenue.

     During  1995,  a tenant of the 77 West Wacker  Drive  building  experienced
financial difficulties and in 1997 defaulted on certain 1997 rental payments. As
a result of the default,  the  Predecessor  as of December  31, 1996,  wrote-off
$3,081 of deferred tenant costs, representing $940 of tenant receivables related
to straight-lining of the tenant's rental revenue and $2,141 of deferred leasing
costs.  In early November 1997,  the  Predecessor  reached an agreement with the
tenant to  terminate  the lease.  During the period from January 1, 1997 through
November 16, 1997, the Predecessor  recognized  revenue from this tenant only to
the extent cash was received.

7.   PREFERRED SHARES

     The Company is authorized to issue up to 30,000,000 of non-voting preferred
shares of  beneficial  interest in one or more series.  At December 31, 1998 and
1997, the Company had 2,000,000 Series A-Cumulative Convertible Preferred Shares
of beneficial  interest  ("Series A - preferred  shares") with a $0.01 par value
designated,  issued and outstanding.  On June 5, 1998, the Company completed the
sale of 4,000,000 Series B-Cumulative  Redeemable Preferred Shares of beneficial
interest  ("Series B -  preferred  shares")  with a $0.01 par value,  which were
designated issued and outstanding at December 31, 1998.

     Distributions on the Series  B-preferred shares are payable quarterly on or
about the last day of January, April, July and October of each year, at the rate
of 9% (equivalent to $2.25 per annum per Series  B-preferred  share). The Series
B-preferred  shares  rank  senior to the  Company's  common  shares and Series A
preferred  shares as to the payment of dividends and as to the  distribution  of
assets. On and after June 5, 2003, the Series B-preferred shares may be redeemed
at the Company's  option at a redemption  price of $25.00 per share plus accrued
and unpaid  distributions.  The  redemption  price is payable  solely out of the
proceeds from the sale of other Company capital shares of beneficial interest.





                                      F-18
<PAGE>
     Distributions on the Series  A-preferred shares are payable quarterly on or
about the last day of March,  June,  September  and December of each year,  at a
rate of 7.5%  (Equivalent  of $1.50  per  annum  per  Series  A-preferred  share
starting November 17, 1998, prior to November 17, 1998,  equivalent of $1.40 per
annum per Series A -  preferred  share.).  The Series  A-preferred  shares  rank
senior to the  Company's  common shares as to the payment of dividends and as to
the distribution of assets.  Series  A-preferred  shareholders can convert their
preferred shares into the Company's  common shares based on a conversion  price,
as defined.  The Company has the option to redeem the Series  A-preferred shares
beginning on and after  November 17, 2007,  in cash equal to the original  issue
price ($20.00) plus any accrued and unpaid dividends.  The holders of the Series
A-preferred  shares  have the  right  to elect  two  additional  members  to the
Company's Board of Directors if the equivalent of two quarterly dividends are in
arrears.  Each of such two directors  will be elected to serve until the earlier
of: (1) the election and qualification of such directors' successor,  or (2) the
payment of the dividend arrearage.

8.   EARNINGS PER SHARE

     The following  table sets forth the  computation of the Company's basic and
diluted net income  available  per  weighted-average  common share of beneficial
interest for the year ended  December 31, 1998 and for the period from  November
17, 1997 through December 31, 1997:

<TABLE>
<CAPTION>
                                                                  Period from
                                                                  November 17,
                                                 Year ended       1997 through
                                                 December 31,     December 31,
                                                    1998              1997
                                                 ------------------------------
<S>                                              <C>              <C>
Numerator:
  Net income available to common shares
    before extraordinary items..............     $    13,527      $         447
  Extraordinary items.......................          (1,253)                --
                                                 ------------------------------
  Numerator for basic and diluted earnings
    per share-income available to common
    shares..................................     $    12,274      $         447
                                                 ==============================

Denominator:
  Denominator for basic earnings per
    share-weighted average common
    shares..................................      14,862,958         12,593,000

Effect of dilutive securities:
  Employee stock options....................          11,100                 --
  Employee stock grants.....................             977                 --
                                                 ------------------------------
Denominator for diluted earnings per share
  - adjusted weighted average common shares
    and assumed conversions ................      14,875,035         12,593,000
                                                 ==============================
Basic and diluted earnings available to
  common  shares per  weighted  average
  common share:
    Net income before extraordinary items...     $      0.91      $        0.04
    Extraordinary items.....................           (0.08)                --
                                                 ------------------------------
Net income per common share.................     $      0.83      $        0.04
                                                 ==============================
</TABLE>

     All of the Company's  options during the second and third quarters of 1998,
1,150,000  options  during the fourth  quarter and all options during the period
from  November  17, 1997  through  December  31,  1997 were not  included in the
computation of diluted earnings per share because the conversion would have been
antidilutive.

     The minority  interest in the  Operating  Partnership  had  10,282,521  and
10,250,882  weighted  average  common  units  outstanding  during the year ended
December 31, 1998 and for the period from November 17, 1997 through December 31,
1997,  respectively,  of which  9,355,421 and  9,323,782,  respectively,  may be


                                      F-19
<PAGE>
converted into common shares at the Company's option on a one for one basis. The
convertible  common  units  were not  included  in the  computation  of  diluted
earnings per share because the conversion would have been antidilutive.

     The Company had 2,000,000 Series A-cumulative  convertible preferred shares
outstanding  during the year ended  December  31,  1998 and for the period  from
November 17, 1997 through December 31, 1997. The Series A-convertible  preferred
shares  were not  included  in the  computation  of diluted  earnings  per share
because the conversion would have been antidilutive.

9.   EMPLOYEE BENEFIT PLANS

     On November 17, 1997, the Company  established a Share  Incentive Plan (the
"Plan") which permits the grant of stock  options,  stock  appreciation  rights,
restricted  stock,  restricted units and performance units to officers and other
key  employees  and to officers and  employees of  subsidiaries,  the  Operating
Partnership,  the Services Company and other-owned  partnerships.  The Plan also
permits the grant of stock options to non-employee Trustees.

     Under the Plan,  up to  1,850,000  of the  Company's  common  shares may be
issued or transferred to  participants.  The maximum  aggregate number of common
shares and share  equivalent  units that may be subject to awards granted during
any calendar year to any one participant under the Plan,  regardless of the type
of  awards,  is  200,000.   This  limit  applies   regardless  of  whether  such
compensation is paid in common shares or share equivalent units.

     Under the Plan, each of the seven Trustees as of November 17, 1997 received
options to acquire 5,000 of the Company's common shares at $20.00 per share (the
closing price on the day of the grant of the options).  Stock options granted to
the  Trustees  have a term of 10 years and will vest and be  exercisable  at the
rate of 33.3% per year over three years  commencing on the first  anniversary of
their date of grant.

     The Company's Board of Directors (the "Board") administers the Plan and has
the  authority  to  determine,  among  other  things,  subject  to the terms and
conditions of the Plan,  the  individuals  to be granted  options,  the exercise
price at which shares may be acquired,  the number of shares subject to options,
the vesting  requirements  and the exercise period of each option.  The Board is
granted  discretion to determine the term of each option  granted under the Plan
to employees,  executives and Trustees, but in no event will the term exceed ten
years and one day from the date of the  grant.  The Board has  delegated  to the
Compensation Committee of the Board the authority take to such actions on behalf
of the full Board. On November 17, 1997, the Board granted options to purchase a
total of 1,160,500 of the Company's common shares  (including the 75,000 options
granted to Board  members  described  below) at an exercise  price of $20.00 per
share to various executives and employees of the Company. During 1998, the Board
granted options to purchase a total of 132,000  (exclusive of options  described
below as part of the Company's  annual incentive award program) of the Company's
common  shares at exercise  prices  ranging from $14.00 to $21.00 per share (the
closing  price on the day before the grant of the options) to various  employees
and  executives  of the Company  hired  during 1998.  In addition,  during 1998,
117,500  options  expired  as the result of  employees  or  executive,  who held
options,  resigning  from the Company  (exercise  prices  ranging from $20.00 to
$20.44 per share). Options for these shares granted under the plan to executives
and  employees  have a term of 10  years  and  will be  exercisable  and vest in
installments  as follows:  (i) 33.3% of the number of shares  commencing  in the
first  anniversary of the date of grant; (ii) an additional 33.3% for the shares
commencing  on the second  anniversary  of the date of the grant;  and (iii) the
remainder  of the  shares  commencing  on the third  anniversary  of the date of
grant.

     Under a  consulting  agreement  with one of the  members of the Board,  the
Board granted on November 17, 1997,  options to purchase 75,000 of the Company's
common  shares  at an  exercise  price of  $20.00  per  share.  Pursuant  to the
agreement,  the options  granted have a term of 10 years and will be exercisable
and vest at the rate of 33.3% per year over three years  commencing on the first
anniversary of their date of grant.

     During 1998,  the Company issued a total of 22,500 common shares granted to
two of its officers and 2,500 common shares  granted to one of its Board members
pursuant to their employment agreements or consulting agreement,  as applicable,
valued at the market price of the Company's  common shares at the date of grant,
totaling $458.

     As part of an annual  incentive  award  program,  on December 17, 1998, the
Board granted certain  executives  25,694 shares of the Company's  common shares
and options to purchase  538,889 of the  Company's  common shares at an exercise

                                      F-20
<PAGE>
price of $14.00 per share.  The common share grants vest 50% on January 15, 1999
and 50% on January  15, 2000 and the options  vested on January  15,  1999.  The
Board  also  granted  certain  executives  options  to  purchase  254,000 of the
Company's common shares,  at an exercise price of $14.00 per share, as part of a
long-term  incentive  program.  These options vest at the rate of 25.0% per year
over four years  commencing on January 15, 1999. As the total options granted to
date exceed that  authorized  under the plan,  the excess options are subject to
the Company's shareholders' approval.

     The unaudited pro forma  information  regarding net income and earnings per
share is required by SFAS No. 123,  "Accounting for  Stock-Based  Compensation",
and has been  determined  as if the Company had  accounted for its options under
the fair value  method of that  statement.  The fair value for the  options  was
estimated at the date of grant using a  Black-Scholes  option pricing model with
the following weighted average assumptions for 1998 and 1997; respectively, risk
free interest rate of 5.01% in 1998 and 5.41% in 1997,  expected  dividend yield
of 6.7%;  volatility  factor of the expected market price of our common stock of
0.339 in 1998 and 0.156 in 1997;  and a  weighted-average  expected  life of the
options of three years for both  periods.  The unaudited pro forma expense would
be $1,174 ($0.08 per basic and diluted common share) for the year ended December
31, 1998 and $69 ($0.01 per basic and diluted  common share) for the period from
November 17, 1997 through  December 31, 1997. The effects on unaudited pro forma
net income and pro forma  earnings per common share for the year ended  December
31, 1998 and for the period  from  November  17,  1997 to  December  31, 1997 of
amortizing  to  expense  the  estimated  fair  value  of stock  options  are not
necessarily representative of the effects on net income to be reported in future
years due to such things as the  vesting  period of the stock  options,  and the
potential for issuance of additional stock options in future years. For purposes
of pro forma  disclosures,  the estimated fair value of the options is amortized
to expense over the options' vesting period.

     The  Black-Scholes  options  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because changes in the subjective input  assumptions can materially
affect the fair value estimate, in the Company's management opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
the options granted under the plan.

     The  following is a summary of the  Company's  stock option  activity,  and
related information for the year ended December 31, 1998 and for the period from
November 17, 1997 through December 31, 1997 follows:

<TABLE>
<CAPTION>
                                                Shares              Weighted
                                              Subject to        Average Exercise
                                                Option          Price Per Share
                                           ----------------     ----------------
 <S>                                       <C>                     <C>
 Initial options granted...............        1,160,500           $    20.00
 Options canceled......................               --                   --
                                           ----------------
 Balance at December 31, 1997...........       1,160,500                20.00
 Additional options granted.............         924,889                14.77
 Options canceled.......................        (117,500)               20.01
                                           ================
 Balance at December 31, 1998..........        1,967,889                17.54
                                           ================
</TABLE>
     At December 31, 1998, 350,167 shares were exercisable at a weighted average
exercise price of $20.00 per share.  No options were exercised and no options on
shares were  available  for future  grant at December 31,  1998.  The  remaining
weighted-average   contractual  life  of  these  options  was  8.99  years.  The
weighted-average  grant date fair value of all options  granted  during the year
ended  December 31, 1998 and the period from November 17, 1997 through  December
31, 1997 was $2.49 and $1.39, respectively.

10.  RELATED PARTY TRANSACTIONS

     The Company  owns 100% of the  nonvoting  preferred  stock of the  Services
Company which has an initial  carrying value of $425 and the Company  provided a
loan in the amount of $4,800 to the Services Company (unpaid interest expense is
included in due from affiliates at December 31, 1998 and 1997), with interest at
11%  per  annum,  payable  quarterly and principal due November 2007. On January


                                      F-21
<PAGE>
1, 1998, the Company provided the Services Company a $5,000 line-of-credit, with
interest at LIBOR plus 3%, principal and interest payable monthly from available
cash  flow,  as  defined,  and  matures  on  December  31,  2000.  The  line  is
collateralized by the Services  Company's third party receivables and is subject
to various covenants.  As of December 31, 1998, the  line-of-credit  balance was
$600 and is included in loans receivable from Services Company. Also included in
loans  receivable  from the  Services  Company at  December  31, 1998 is accrued
interest of $594 related to the above loans and other advances of $1,061.

     During the year ended  December  31, 1998 and for the period from  November
17,  1997  through  December  31,  1997,  the Company  recorded  $133 and ($19),
respectively,  representing  its share of the Services  Company's  income (loss)
from  operations  (net of interest  income realted to the  previously  described
loans).  The Company also paid general and  administrative  expenses  (primarily
rent,  salaries  and  benefits) of $233 on behalf of the  Services  Company.  No
amounts were paid for the period from  November  17, 1997  through  December 31,
1997.

     During the year ended  December 31, 1998 (no services were provided for the
period from November 17, 1997 through  December 31, 1997),  the Services Company
provided the Company with development,  acquisition due diligence, construction,
construction  management,  leasing and property management  services,  which are
summarized as follows:

<TABLE>
<CAPTION>
                                                                   Year ended
                                                                   December 31,
                                                                      1998
                                                                  -------------
<S>                                                               <C>
Development, construction and construction management...........  $       2,639
Acquisition due diligence.......................................            182
Leasing.........................................................            361
Property management.............................................            301
</TABLE>
     The Company has lease  agreements  with PGI and  certain  affiliates,  from
which it  recognized  rental  revenue of $933 and $85 and tenant  reimbursements
revenue of $644 and $46 for the year ended  December 31, 1998 and for the period
from November 17, 1997 through December 31, 1997, respectively.  In addition, in
1998  the  Company  provided  $452  to one  of the  PGI  affiliates  for  tenant
improvements (included in tenant improvements at December 31, 1998.).

     In  connection  with  the  leasing  and  management  of  the  Predecessor's
properties,  PGI was entitled to payments and fees for services performed.  Such
amounts  incurred  during the period from January 1, 1997  through  November 16,
1997, and for the year ended December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
                                                                  Period from
                                                                  November 17,
                                                 1997 through      Year ended
                                                 December 31,     December 31,
                                                    1997              1996
                                                 ------------------------------
<S>                                              <C>              <C>
Property management fee (a).................     $     1,238      $       1,429
Administration fees (b).....................             463                468
Construction management (c).................              --                102
Legal fees (d)..............................             271                127
Leasing fees (e)............................               2                 19
Reimbursables (f)...........................             252                184
Asset management fee (g)....................             110                132
</TABLE>
--------------------

(a)  PGI was  entitled to a property  management  fee ranging from 2.5% to 4% of
     gross  receipts,  payable  monthly in  arrears.  Amounts  are  included  in
     property and asset management fees to affiliates in the combined  financial
     statements of the Predecessor.

(b)  PGI  was  entitled  to an  annual  administration  fee  as  defined  in the
     Partnership  agreement.  Amounts are included in general and administrative
     expenses in the combined financial statements of the Predecessor.

(c)  PGI  was  entitled  to  a  construction  management  fee  equal  to  3%  of
     construction costs.

                                      F-22
<PAGE>

(d)  PGI was reimbursed for reasonable legal and accounting expenses incurred in
     connection with the operations of the Predecessor partnerships. Amounts are
     included in general and  administrative  expenses in the combined financial
     statements of the Predecessor.

(e)  PGI was  entitled  to  leasing  commissions  for  all  leases  signed.  The
     commissions  are  equal  to  1.5%  to  3%  of  rent,  exclusive  of  tenant
     reimbursements, during the base term of the lease; commissions were payable
     upon commencement of the respective leases.

(f)  PGI was entitled to reimbursement  for expenses paid for the benefit of the
     Predecessor   partnerships.   Amounts   are   included   in   general   and
     administrative  expenses  in  the  combined  financial  statements  of  the
     Predecessor.

(g)  PGI was entitled to annual fees for providing asset management  services to
     the Predecessor  partnerships  which was payable from available cash flows.
     Amounts are included in property and asset management fees to affiliates in
     the combined financial statements of the Predecessor.


     Predecessor amounts due to affiliates are for amounts due for advances made
by  affiliates  and amounts due from  affiliates  were for advances  made by the
Predecessor partnerships to affiliates.  Predecessor amounts due from and due to
affiliates  incurred interest at prime plus 2% and were payable upon demand. Any
unpaid  amounts due to affiliates or amounts due from  affiliates as of November
16, 1997, have been reflected as distributions  to or contributions  from PGI in
the combined financial statements of the Predecessor.

         Average  balances of amounts due from (including  loans receivable from
Services  Company) and due to affiliates  for the year ended  December 31, 1998,
for the period from November 17, 1998 through  December 31, 1997, for the period
from January 1, 1997 through  November 16, 1997 and for the year ended  December
31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
                                                   PRIME GROUP REALTY TRUST                  PREDECESSOR
                                                -------------------------------     ---------------------------------
                                                                  PERIOD FROM       PERIOD FROM
                                                                  NOVEMBER 17,      JANUARY 1,
                                                  YEAR ENDED      1997 THROUGH      1997 THROUGH     YEAR ENDED
                                                 DECEMBER 31,     DECEMBER 31,      NOVEMBER 16,     DECEMBER 31,
                                                     1998             1997              1997             1996
                                                 ------------------------------     --------------------------------
<S>                                              <C>              <C>               <C>              <C>
Due from affiliates.........................     $     6,441      $     5,029       $     1,447       $    4,323
Due to affiliates...........................              --               --               354              821
</TABLE>

11.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments" and
SFAS No. 119, "Disclosure about Derivative Financial  Instruments and Fair Value
of Financial Instruments" require disclosure of the fair value of certain on-and
off-balance sheet financial instruments for which it is practicable to estimate.
Fair value is  defined  by SFAS No.  107 as the  amount at which the  instrument
could be exchanged in a current transaction between willing parties,  other than
in a forced or liquidation sale.

     The Company used the following  methods and  assumptions  in estimating the
fair value disclosures for financial instruments.

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH ESCROWS

     The  carrying  amount  of cash and cash  equivalents  and  restricted  cash
escrows reported in the  consolidated  and combined balance sheets  approximates
their fair value.

     The Company  maintains its cash and cash  equivalents  and restricted  cash
escrows at various financial institutions. The combined account balances at each
institution  periodically exceed FDIC insurance coverage, and as a result, there
is a  concentration  of credit  risk  related to amounts on deposit in excess of
FDIC insurance coverage. The Company believes that the risk is not significant.




                                      F-23
<PAGE>
MORTGAGE NOTES PAYABLE, CREDIT FACILITIES AND BONDS PAYABLE

     The carrying  amount of the  Company's  variable and fixed rate  borrowings
(including  accrued  interest)  approximates  fair  value  based on the  current
borrowing rate for similar types of borrowing arrangements.

12.  COMMITMENTS AND CONTINGENCIES

     The  Company is a  defendant  in legal  actions  arising  during the normal
course of business.  The Company  believes  that the  ultimate  outcome of those
actions will not materially affect its consolidated financial position.

     All  of the  Company's  properties  were  subject  to  Phase  I or  similar
environmental  assessment by independent  environmental  consultants  which were
intended to discover  information  regarding,  and to evaluate the environmental
condition of, the surveyed property and surrounding  properties.  The Company is
aware of contamination at certain of the industrial  properties  included in the
Predecessor  properties,  which are already in remediation programs sponsored by
the state in which  they are  located.  The Phase I  assessments  estimate  that
remedial action plans will have a probable cost of approximately  $3,205. During
1997, PGI initiated  lawsuits  against a former  environmental  consultant and a
former  tenant of one of these  properties  for damages to cover the cost of the
remedial  action plans.  During 1997,  the  Predecessor  recorded a liability of
$3,205  (included in accounts  payable and accrued expenses at December 31, 1998
and 1997).  PGI has  contractually  agreed to  indemnify  the  Company  from any
environmental  liabilities  the Company may incur.  On February  20,  1998,  PGI
reached an agreement  with the former  tenant and  received a $1,822  settlement
payment. The Company is also aware of contamination at two other properties; one
of the  properties the tenant has provided the Company with an indemnity for all
the cost associated with the environmental  remediation,  the second property is
in the remediation  program sponsored by the state in which it is located with a
remedial  action plan and the  previous  owner has  provided the Company with an
escrow  account of $760  (maximum  cost the  previous  owner has agreed to pay),
which the Company will use in the clean-up of the property.

     On July 22,  1998,  the Company  entered  into a purchase  agreement,  with
affiliates of a limited partner of the Operting  Partnership (the "Sellers"), to
acquire two office buildings, IBM Plaza (a 1,354,354 square foot office building
located in the Chicago  central  business  district) and National City Center (a
766,965  square  foot  office  building  located  in  Cleveland,  Ohio),  for an
aggregate purchase price of approximately  $357,000.  On September 15, 1998, the
Company  terminated the purchase  agreement in accordance  with the terms of the
agreement,  because  the Sellers were  unable to  satisfy a  material  condition
precedent  to the closing of these  acquisitions.  On September  21,  1998,  the
Sellers notified the Company in writing that they believed they were entitled to
the $20,000  (amount  included in restricted  cash at December 31, 1998) earnest
money  provided for by the  agreement,  and  instructed the earnest money escrow
agent to draw the full amount  under two  earnest  money  letters-of-credit  the
Company provided under one of the Credit Facilities,  and also filed a complaint
against the Company alleging that it breached the contract. On October 30, 1998,
the  Company  filed its answer to the above  complaint  and denied all  material
allegations of the complaint.  The Company also filed a counterclaim against the
Sellers alleging that the Sellers breached the contract and sought the return of
the above  mentioned  earnest money and other damages.  On February 5, 1999, the
Company entered into an amended purchase  agreement and an option agreement with
the Seller with the following terms:

     -    Both the  original  lawsuit  filed  by the  Sellers and the  Company's
          counterclaim were dismissed.

     -    The Company  purchased  National City Center on February 5, 1999 for a
          contract price of $100,000.

     -    The $20,000  earnest money escrow was released and the Company used it
          to  fund  the   purchase  of  National   City  Center  and  an  $8,000
          nonrefundable payment for the option to purchase IBM Plaza. The option
          provides  the Company with the  opportunity  to purchase IBM Plaza for
          $230,000 (exclusive of the $8,000  nonrefundable  deposit) and expires
          October 31,  1999.  If the option is  exercised,  the  purchase of the
          property must be completed no later than December 20, 1999.

     The  Company has  contracts  to acquire  parcels of land and an  industrial
property from  affiliates of a member of the Board for a total purchase price of
approximately  $20,856,  $12,284 of which is payable  in  Operating  Partnership
common units.  The contracts  require the Company to acquire minimum portions of
the land on an annual basis until all of the parcels are acquired by 2002.


                                      F-24
<PAGE>
     During 1998, the Company entered into contracts to acquire three parcels of
land totaling 233.5 acres,  of which 100.8 acres was purchased in June 1998. The
remaining 132.7 acres must be purchased,  at the Company's discretion,  over the
next three to five years for approximately  $11,224.  The Company is required to
make periodic  installment  payments,  of which $400 was made as of December 31,
1998 (amount  included in other  assets).  In addition  during 1998, the Company
entered  into  contracts  to acquire two land parcels and an option to acquire a
land parcel, all located in the Chicago  metropolitan area, for a total purchase
price of approximately  $62,000,  subject to an additional $2,162 based upon the
date the  purchase  is  completed.  The  Company  made cash  escrow  deposits of
approximately  $15,200  ($15,000  is  non-refundable)  as of  December  31, 1998
(amount included in other assets at December 31, 1998) and an additional $10,600
($10,000  is  non-refundable)  in  January  and  March  1999  related  to  these
contracts.

13.  PROPERTY ACQUISITIONS

     The following  operating  properties  were acquired in 1998. The results of
their operations are included in the Company's 1998  consolidated  statement of
operations from their respective dates of acquisitions
<TABLE>
<CAPTION>
                                                          ACQUISITION        MONTH
     PROPERTY                     LOCATION                   COST           ACQUIRED
--------------------------------------------------------------------------------------
<S>                             <C>                        <C>              <C>
33 North Dearborn Street        Chicago, IL                $   34,425       January
Commerce Point                  Arlington Heights, IL          29,971       February
208 South LaSalle Street        Chicago, IL                    61,352       March
122 South Michigan Avenue       Chicago, IL                    29,680       April
2100 Swift Drive                Oak Brook, IL                   6,253       April
6400 Shafer Court               Rosemont, IL                   22,228       May
Two Century Centre              Schaumburg, IL                 35,886       June
2000 York Road                  Oak Brook, IL                  16,232       June
                                                           ==========
                                                           $  236,027
                                                           ==========
</TABLE>

14.  UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

     The accompanying unaudited Pro Forma Condensed  Consolidated  Statements of
Operations  are  presented  as if, at  January  1,  1997,  (i) the  Company  had
completed  its initial  public  offering and its 1998 common share and preferred
share offerings and  contributed the net proceeds to the Operating  Partnership,
(ii) PGI and the other contributors had contributed  certain of their respective
properties  and  operations  to the Operating  Partnership,  (iii) the Operating
Partnership  had  completed  the sale of common units to  Primestone  Investment
Partners,  L.P.,  (iv) the Operating  Partnership  acquired  various  office and
industrial  properties and the Services Company from various third parties,  and
(v) the  Operating  Partnership  repaid  debt  on  certain  of the  contribution
properties.  In the Company's management opinion,  all adjustments  necessary to
reflect the effects of the above transactions have been made.

     The unaudited Pro Forma Condensed Consolidated Statements of Operations are
not necessarily  indicative of what the actual results of operations  would have
been  assuming  the  above  mentioned  transactions  had  occurred  at the dates
indicated  above,  nor do they purport to represent the Company's future results
of operations.
<TABLE>
            PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<CAPTION>
                                                     Year ended December 31,
                                                      1998              1997
                                                 ------------------------------
<S>                                              <C>              <C>
Total revenue...............................     $   160,069      $     141,121
                                                 ==============================
Net income..................................     $    23,757      $      18,556
                                                 ==============================
Net income available to common
  shareholders..............................     $    11,757      $       6,556
                                                 ==============================
Earnings per diluted common share...........     $      0.79      $        0.44
                                                 ==============================
</TABLE>
                                      F-25
<PAGE>
15.  SEGMENT REPORTING

     The  Company  adopted  SFAS No.  131,  "Disclosures  about  Segments  of an
Enterprise and Related Information", during the fourth quarter of 1998. SFAS No.
131 established  standards for reporting information about operating segments in
annual financial  statements and requires  selected  information about operating
segments in interim financial reports issued to shareholders. Operating segments
are  defined as  components  of an  enterprise  about which  separate  financial
information  is  available  that is evaluated  regularly by the chief  operating
decision maker, or decision making group, in deciding how to allocate  resources
and in assessing  performance.  The Company's  chief  operating  decision makers
manage  its  operating  segments   separately  because  each  operating  segment
represents  a  strategic  business  unit  that has  different  issues  and serve
different  markets.  The Company's  reportable  operating  segments  include its
office division and industrial division,  with properties principally located in
the mid-western  portion of the United States.  The Company evaluates its office
and industrial divisions operations principally on their contribution to overall
net income and funds from operations.

     The following summarizes the Company's historical segment operating results
for the year ended  December 31, 1998 and for the period from  November 17, 1997
through December 31, 1997:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 1998
                                                 -----------------------------------------------------------------
                                                                                    ORPORATE/
                                                                                    OPERATING
                                                     OFFICE        INDUSTRIAL       PARTNERSHIP          TOTAL
                                                 -----------------------------------------------------------------
<S>                                              <C>              <C>              <C>              <C>
Revenue:
  Rent......................................     $    76,754      $    20,458      $        --      $    97,212
  Tenant reimbursements.....................          31,960            5,585               --           37,545
  Mortgage note interest....................           5,866               --               --            5,866
  Other.....................................           3,838              266            2,874            6,978
                                                 -----------------------------------------------------------------
Total revenue...............................         118,418           26,309            2,874          147,601

Expenses:
  Property operations.......................          26,838            2,760               --           29,598
  Real estate taxes.........................          19,858            5,219               --           25,077
  Depreciation and amortization.............          17,854            6,724              869           25,447
  Interest..................................              --               --           30,901           30,901
  General and administrative................              --               --            5,712            5,712
                                                 -----------------------------------------------------------------
Total expenses..............................          64,550           14,703           37,482          116,735
                                                 -----------------------------------------------------------------
Income (loss) before minority interests
  and extraordinary items...................          53,868           11,606          (34,608)          30,866

FFO adjustments (unaudited):
  Real estate depreciation and amortization.          17,610            6,354               --           23,964
  Amortization of costs for leases assumed..           1,137               --               --            1,137
  Straight-line rental revenue adjustments..            (525)            (709)              --           (1,234)
  Net income allocated to preferred
    shareholders............................              --               --           (7,971)          (7,971)
                                                 -----------------------------------------------------------------
Funds from operations.......................     $    72,090      $    17,251      $   (42,579)     $    46,762
                                                 =================================================================
</TABLE>
















                                      F-26
<PAGE>
<TABLE>
<CAPTION>
                                                                     PERIOD FROM NOVEMBER 17, 1997
                                                                       THROUGH DECEMBER 31, 1997
                                                 -----------------------------------------------------------------
                                                                                   CORPORATE/
                                                                                   OPERATING
                                                     OFFICE        INDUSTRIAL      PARTNERSHIP          TOTAL
                                                 -----------------------------------------------------------------
<S>                                              <C>              <C>              <C>              <C>
Revenue:
  Rent......................................     $     5,025      $     2,268      $        --      $    7,293
  Tenant reimbursements.....................           1,663              378               --           2,041
  Mortgage note interest....................             248               --               --             248
  Other.....................................              87               --              161             248
                                                 -----------------------------------------------------------------
Total revenue...............................           7,023            2,646              161           9,830
Expenses:
  Property operations.......................           1,815              338               60           2,213
  Real estate taxes.........................           1,479              286               --           1,765
  Depreciation and amortization.............           1,582              803               93           2,478
  Interest..................................              --               --            1,680           1,680
  General and administrative................              --               --              267             267
                                                  ----------------------------------------------------------------
Total expenses                                         4,876            1,427            2,100           8,403
                                                  ----------------------------------------------------------------
Income (loss) before minority interests
  and extraordinary items...................           2,147            1,219           (1,939)          1,427

FFO adjustments (unaudited):
  Real estate depreciation and amortization.           1,470              745               --           2,215
  Amortization of costs for leases assumed..             142               --               --             142
  Straight-line rental revenue adjustments..             180               --               --             180
  Net income allocated to preferred
    shareholders............................              --               --             (345)           (345)
                                                 =================================================================
Funds from operations                            $     3,939      $     1,964      $    (2,284)     $    3,619
                                                 =================================================================
</TABLE>
     The following  summarizes  the Company's  segment assets and activity as of
December 31, 1998 and 1997 and for the periods then ended.
<TABLE>
<CAPTION>
                                                          DECEMBER 31
                                                    1998                1997
                                                 ------------------------------
<S>                                              <C>              <C>
Segment assets:
  Office....................................     $   827,872      $     541,382
  Industrial................................         180,116            180,682
  Corporate/operating partnership (includes
    property under development).............         156,526             19,404
                                                 ------------------------------
 Total consolidated assets..................     $ 1,164,514      $     741,468
                                                 ==============================
</TABLE>
<TABLE>
<CAPTION>
                                                                    Period from
                                                                   November 17,
                                                  Year ended       1997 through
                                                  December 31,     December 31,
                                                    1998                1997
                                                 ------------------------------
<S>                                              <C>              <C>
Expenditures for real estate:
  Office....................................     $   250,854      $     417,802
  Industrial................................           2,898            171,477
  Corporate/operating partnership
    (primarily property under development)..          47,316                 --
                                                 ------------------------------
 Total expenditures for real estate.........     $   301,068      $     589,279
                                                 ==============================
</TABLE>




                                      F-27
<PAGE>
16.  SUBSEQUENT EVENTS

     On  January 8, 1999,  the  Company  filed its  initial  shelf  registration
statement on Form S-3 with the Securities and Exchange Commission to register up
to $500,000 of its equity and debt securities for future sales.

     On January 20, 1999, the Company paid  distributions of $ 0.3649 per Series
A-preferred share, and $0.3375 per common share per and on January 29, 1999 paid
distributions of $0.5625 per Series  B-preferred share to shareholders of record
on December 31, 1998.

     In January and February,  1999, the Company  acquired the following  office
and industrial properties:

<TABLE>
<CAPTION>
                                                                  NET
                                                                RENTABLE
                                                                 SQUARE         ACQUISITION         MORTGAGE             MONTH
         PROPERTY                       LOCATION                  FEET             COSTS              DEBT              ACQUIRED
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                      <C>             <C>                <C>                 <C>
Office:
  33 West Monroe Street                Chicago, IL                846,759       $   101,293        $   65,000          January
  National City Center (1), (2), (3)   Cleveland, OH              766,965           105,035            63,621          February
Industrial:
  901 Technology Way (3)               Libertyville, IL            68,824             4,126                --          January
                                                                ===============================================
                                                                1,682,548       $   210,454        $  128,621
                                                                ===============================================
</TABLE>
--------------------

(1)  The  Company  funded a portion of the  acquisition  costs  with  $30,000 in
     advances from its credit facilities (See Note 4).

(2)  Acquisition  costs and mortgage  debt  include  $2,044 to adjust an assumed
     above mortgage rate mortgage note payable to a current market rate.

(3)  These  properties were acquired from minority  interest unit holders of the
     Operating Partnership or their affiliates.

On February  8, 1999,  the Company  signed a contract  with a buyer  pursuant to
which it will  construct  an  approximately  1,018 space  parking  garage,  with
approximately 4,000 square feet of retail space, on approximately  22,000 square
feet of land that the  Company  has  under  option to  purchase  in the  Chicago
central business district,  and sell the completed parking garage to such buyer.
The sales price is  approximately  $34,600,  plus the value of any of the retail
space  leased by the  Company at the time of sale up to a maximum of $4,000.  In
addition,  the Company is entitled  to an  additional  $1,000 from the buyer if,
within 15 years after the sale of the parking  garage to the buyer,  the Company
substantially  completes an office  building  containing at least 800,000 square
feet of  office  space,  which is  occupied  by at least one  tenant  who is not
affiliated with the Company.  The Company has acquired this land with the intent
to construct an office  building which the Company will own for lease.  The land
parcel for the office building could not be obtained without  obtaining the land
for the parking  garage and in order to  construct an office  building,  parking
must be provided pursuant to zoning requirements.




















                                      F-28
<PAGE>
<TABLE>
                            PRIME GROUP REALTY TRUST

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                             AS OF DECEMBER 31, 1998
                             (Dollars in Thousands)
<CAPTION>
                       ENCUM-                          COST CAPITALIZED
                      BRANCES                           SUBSEQUENT TO           GROSS AMOUNT CARRIED
                       (1)          INITIAL COST        ACQUISITION           AT DECEMBER 31, 1998
                     --------- -------------------- -------------------- -------------------------------
                                             BUILD-              BUILD-               BUILD-             ACCUMULATED
                                             INGS                INGS                 INGS              DEPRECIATION     DATE OF
                     DECEMBER                AND                  AND                  AND                    AT      ACQUISITION(A)
                        31,                IMPROVE-             IMPROVE-             IMPROVE-            DECEMBER 31, CONTRIBUTION
                       1998        LAND     MENTS      LAND      MENTS      LAND       MENTS     TOTAL     1998 (2)        (C)
                     --------- -------------------- -------------------- ------------------------------- ------------ --------------
<S>                  <C>       <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>          <C> 
OFFICE
77 W. Wacker Bldg... $ 170,000 $  17,595  $ 162,755 $      --  $     980 $  17,595  $ 163,735  $ 181,330 $     7,774  Nov. 1997(C)
201 4th Ave N (4)...     4,800     1,530      7,072        85      1,334     1,615      8,406     10,021         240  Nov. 1997(C)
620 Market St. (4)..     9,000        --      7,090        --        951        --      8,041      8,041         514  Nov. 1997(C)
4823 Old Kingston
  Pike (4)..........     3,500       378      2,808        19        209       397      3,017      3,414         177  Nov. 1997(C)
625 Gay St.(4)......     9,000        --      7,379        --      1,138        --      8,517      8,517         559  Nov. 1997(C)
Triad Parking
  Facility (4)......        --       507      1,046        24         64       531      1,110      1,641          33  Nov. 1997(C)
1990 Algonquin Road.        --     1,550      6,375        --         --     1,550      6,375      7,925         209  Nov. 1997(A)
2010 Algonquin Road.        --       508      2,044        --         14       508      2,058      2,566          60  Nov. 1997(A)
1699 Woodfield Road.     8,716     1,962      7,853        16        134     1,978      7,987      9,965         225  Nov. 1997(A)
2205-2255
  Enterprise Drive..        --     2,304      9,259         3         80     2,307      9,339    11,646          276  Nov. 1997(A)
280 Shuman Blvd (5).        --     1,261      5,056        --         61     1,261      5,117      6,378         146  Nov. 1997(A)
1701 Golf Road......    74,363    21,780     87,324        --      1,043    21,780     88,367    110,147       2,312  Dec. 1997(A)
2675 N. Mayfair (5).        --     1,613      6,443         1         --     1,614      6,443      8,057         163  Dec. 1997(A)
4343 Commerce
  Court(3)..........        --     5,370     21,394       192      1,755     5,562     23,149     28,711         565  Nov. 1997(A)
941-961 Wiegel
  Drive(3)..........        --     3,234     12,926        --         --     3,234     12,926     16,160         364  Nov. 1997(A)
1600-1700 167th
  Street(3).........        --     1,073      4,291        70        414     1,143      4,705      5,848         131  Nov. 1997(A)
1301 E. Tower
  Road(3)...........        --     1,005      4,020        60        561     1,065      4,581      5,646         126  Nov. 1997(A)
4100 W. Madison
  Street............        --        41        169        --          6        41        175        216           5  Nov. 1997(A)
371-385 N. Gary
  Avenue(3).........        --       218        871         5         26       223        897      1,120          36  Nov. 1997(A)
33 North Dearborn...    18,000     6,904     27,521        --        214     6,904     27,735     34,639         674  Jan. 1998(A)
3800 North Wilke
  Road..............    19,817     5,994     23,977        23        106     6,017     24,083     30,100         643  Feb. 1998(A)
208 South LaSalle
  Street............    45,553    12,310     49,042        --        818    12,310     49,860     62,170         970  Mar. 1998(A)
122 South Michigan
  Ave...............        --     5,952     23,728        --        573     5,952     24,301     30,253         474  Apr. 1998(A)
2100 Swift Drive....     5,183     1,391      4,862        --        727      1391      5,589      6,980          90  Apr. 1998(A)
6400 Shafer Court...    14,300     4,385     17,843        --        258     4,385     18,101     22,486         272  May 1998 (A)
1700 East Golf Road.    20,478     7,258     28,628        --      2,194     7,258     30,822     38,080         422  June 1998(A)
2000 York Road......    12,000     3,234     12,998        --        367     3,234     13,365     16,599         197  June 1998(A)
                     --------- -------------------- -------------------- -------------------------------  ----------
  Total office......   414,710   109,357    544,774       498     14,027   109,855    558,801    668,656      17,657
                     --------- -------------------- -------------------- -------------------------------  ----------

INDUSTRIAL
East Chicago
  Enterprise
  Center (5)........        --        27        533        --          7        27        540        567          48  Nov. 1997(C)
EC I................     2,900        18        577        --          4        18        581        599          37  Nov. 1997(C)
EC II...............     5,000        18      2,360        --        978        18      3,338      3,356         239  Nov. 1997(C)
EC III..............     4,500        20      7,038        --        102        20      7,140      7,160         514  Nov. 1997(C)
EC IV...............     2,600        11      1,217        --          2        11      1,219      1,230         117  Nov. 1997(C)
Hammond Enterprise
  Center (5)........        --        26        614        --         73        26        687        713          70  Nov. 1997(C)
EC V................     5,000        81      2,883        --        294        81      3,177      3,258         324  Nov. 1997(C)
EC VI...............     4,900       101      2,936        --      1,360       101      4,296      4,397         325  Nov. 1997(C)



</TABLE>
                                      F-29
<PAGE>
<TABLE>
                            PRIME GROUP REALTY TRUST
       SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
                             AS OF DECEMBER 31, 1998
                             (Dollars in Thousands)
<CAPTION>
                       ENCUM-                          COST CAPITALIZED
                      BRANCES                           SUBSEQUENT TO           GROSS AMOUNT CARRIED
                        (1)         INITIAL COST        ACQUISITION           AT DECEMBER 31, 1998
                     --------- -------------------- -------------------- -------------------------------
                                              BUILD-              BUILD-               BUILD-             ACCUMULATED
                                              INGS                INGS                 INGS              DEPRECIATION     DATE OF
                      DECEMBER                AND                  AND                  AND                    AT     ACQUISITION(A)
                         31,                IMPROVE-             IMPROVE-             IMPROVE-           DECEMBER 31, CONTRIBUTION
                        1998        LAND     MENTS      LAND      MENTS      LAND       MENTS     TOTAL    1998 (2)        (C)
                     --------- -------------------- -------------------- ------------------------------- ------------ --------------
<S>                  <C>       <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>          <C>
INDUSTRIAL (CONTINUED)
Chicago Enterprise
  Center (5)........ $      -- $     748  $     975 $          $      34 $     748  $   1,009  $   1,757 $       247  Nov. 1997(C)
EC VII..............     7,200       517      4,968        --         90       517      5,058      5,575         357  Nov. 1997(C)
EC VIII.............     7,000       124      2,493        --         44       124      2,537      2,661         792  Nov. 1997(C)
EC IX...............     4,750       269      1,127        --         18       269      1,145      1,414          88  Nov. 1997(C)
EC X................     4,300       248      2,836        --         49       248      2,885      3,133         293  Nov. 1997(C)
Arlington Heights I
  (5)...............        --       617      2,638        --         18       617      2,656      3,273         259  Nov. 1997(C)
Arlington Heights
  II(5).............        --       456      2,062        --         14       456      2,076      2,532         136  Nov. 1997(C)
Arlington Heights
  III(5)............        --       452      1,938        --         12       452      1,950      2,402         128  Nov. 1997(C)
2160 McGraw Rd......        --       904      3,617        --        373       904      3,990      4,894         151  Nov. 1997(A)
4849 Groveport......        --       507      2,014        --         26       507      2,040      2,547          76  Nov. 1997(A)
2400 McGraw Rd......        --       348      1,382        --         18       348      1,400      1,748          53  Nov. 1997(A)
5160 Blazer
  Memorial Pkwy.....        --       470      1,866        --         24       470      1,890      2,360          71  Nov. 1997(A)
600 London Rd.......        --       223        885        --         11       223        896      1,119          33  Nov. 1997(A)
4411 Marketing Pl...        --       445      1,767        --         23       445      1,790      2,235          67  Nov. 1997(A)
1001 Technology Way.     6,308     1,909      7,637        17         65     1,926      7,702      9,628         231  Nov. 1997(A)
801 Technology Way
  (3)...............        --       813      3,236        --         17       813      3,253      4,066          98  Nov. 1997(A)
475 Superior Ave.
  (6)...............        --     2,700     10,801        --        112     2,700     10,913     13,613         299  Nov. 1997(A)
3818 Grandville/1200
  Northwestern (3)..        --     2,125      8,465        --         42     2,125      8,507     10,632         254  Nov. 1997(A)
306-310 Era Dr.(3)..        --       719      2,863        --         15       719      2,878      3,597          87  Nov. 1997(A)
1301 Ridgeview
  Drive(3)..........        --     2,287      9,100        --         48     2,287      9,148     11,435         276  Nov. 1997(A)
515 Huehl Road/500
  Lindburg(3).......        --     1,775      7,062        --         37     1,775      7,099      8,874         214  Nov. 1997(A)
455 Academy Drive...        --       754      2,997        --         16       754      3,013      3,767          91  Nov. 1997(A)
1051 N. Kirk Rd.(3).        --       911      3,325        --          7       911      3,332      4,243          98  Nov. 1997(A)
4211 Madison St.(3).        --       690      2,745        --         --       690      2,745      3,435          78  Nov. 1997(A)
555 Huehl Road(3)...        --     1,291      5,137        --         27     1,291      5,164      6,455         155  Nov. 1997(A)
200 E. Fullerton(3).        --       525      2,100        --         10       525      2,110      2,635          60  Nov. 1997(A)
350 Randy Road(3)...        --       267      1,063        --         23       267      1,086      1,353          31  Nov. 1997(A)
4300,4248,4250
  Madison Street(3).        --     1,147      4,588        --         31     1,147      4,619      5,766         131  Nov. 1997(A)
370 Carol Lane(3)...        --       527      2,107         9         47       536      2,154      2,690          60  Nov. 1997(A)
388 Carol Lane(3)...        --       332      1,329        --         25       332      1,354      1,686          37  Nov. 1997(A)
342-346 Carol
  Lane(3)...........        --       600      2,398        --         56       600      2,454      3,054          67  Nov. 1997(A)
343 Carol Lane(3)...        --       350      1,398         6         16       356      1,414      1,770          40  Nov. 1997(A)
11039 Gage Ave.(3)..        --       191        767        --         10       191        777        968          22  Nov. 1997(A)
11045 Gage Ave.(3)..        --     1,274      5,092        --        215     1,274      5,307      6,581         143  Nov. 1997(A)
1401 S. Jefferson
  (3)...............        --       171        685        --         20       171        705        876          20  Nov. 1997(A)
4160-4190 W. Madison
   Street(3)........        --       931      3,708        --        169       931      3,877      4,808         104  Nov. 1997(A)
550 Kehoe Blvd.(3)..        --       686      2,743        13         71       699      2,814      3,513          78  Nov. 1997(A)
                     --------- --------- ---------- ---------  -------------------  --------------------------------
  Total Industrial..    54,458    29,605    140,072        45      4,653    29,650    144,725    174,375       7,099
                     --------- --------- ---------- ---------  -------------------  --------------------------------
 Total.............. $ 469,168 $ 138,962 $  684,846 $     543  $  18,680 $ 139,505  $ 703,526   $843,031 $    24,756
                     ========= ========= ========== =========  ===================  ================================
</TABLE>
--------------------


                                      F-30
<PAGE>
                            PRIME GROUP REALTY TRUST

       SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
                             AS OF DECEMBER 31, 1998
                             (Dollars in Thousands)

(1)  The Company has a $20,000 mortgage note payable that is collateralized by a
     mortgage  note  receivable  and a $13,500  mortgage  note  payable  that is
     collateralized by property under  development.  See Note 4 to the Company's
     consolidated  financial  statements for a description of its mortgage notes
     payable, credit facilities and bonds payable.

(2)  Depreciation is calculated on the  straight-line  method over the estimated
     useful lives of assets, which are as follows:
         Building  and  improvements                  40 years
         Tenant improvements                          Term of related leases
         Furniture and equipment (included in
            buildings and improvements)               3-7 years

(3)  These  properties  are  collateral  for $90,500 in various  mortgage  notes
     payable.

(4)  These properties are collateral for a $80,000 line-of-credit,  which had no
     amount drawn at December 31, 1998.

(5)  These properties are collateral for letters-of-credit  that support certain
     industrial revenue bonds on other properties reflected in this table.

(6)  This  property is  collateral  for a $15,000  line-of-credit,  which had no
     amount drawn at December 31, 1998.


     The aggregate  gross cost of the  properties  included  above,  for federal
income tax purposes,  approximated $751,142 as of December 31, 1998. The Company
has $51,376 in property under development at December 31, 1998, all of which was
added during 1998 (same basis for federal income tax purposes).

     The  following  table  reconciles  our  historical  cost for the year ended
December 31, 1998 and for the period from November 17, 1997 through December 31,
1997.

<TABLE>
<CAPTION>
                                                                    Period from
                                                                   November 17,
                                                  Year ended       1997 through
                                                 December 31,      December 31,
                                                     1998              1997
                                                 ------------------------------
<S>                                              <C>              <C>
Balance, beginning of period................     $   589,279      $          --
Additions during period.....................         253,752            589,279
Disposals during the period.................              --                 --
                                                 ------------------------------
Balance, close of period....................     $   843,031      $     589,279
                                                 ==============================
</TABLE>
     The following table  reconciles the accumulated  depreciation  for the year
ended  December  31, 1998 and for the period  from  November  17,  1997  through
December 31, 1997.
<TABLE>
<CAPTION>
                                                                    Period from
                                                                   November 17,
                                                  Year ended       1997 through
                                                 December 31,      December 31,
                                                     1998              1997
                                                 ------------------------------
<S>                                              <C>              <C>
Balance at beginning of period..............     $     2,338      $          --
Depreciation and amortization for the
  period....................................          22,418              2,338
Disposals during the period.................              --                 --
                                                 ------------------------------
Balance, close of period....................     $    24,756      $       2,338
                                                 ==============================
</TABLE>
                                      F-31