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, 2002

                                       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
                         (State or other jurisdiction of
                         incorporation or organization)

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


                                   36-4173047
                                (I.R.S. Employer
                               Identification No.)

                                      60601
                                   (Zip Code)
                                 (312) 917-1300
              (Registrant's telephone number, including area code)

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

          Title of each class Name of each exchange 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. [ ]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes_X_ No ___

     The  aggregate  market  value of the  registrant's  common  shares  held by
non-affiliates  as of the last  business day of the  registrant's  most recently
completed second fiscal quarter was approximately  $102,373,845 based on the per
share closing  price on the New York Stock  Exchange for such shares on June 28,
2002.

     The number of the registrant's  common shares outstanding was 15,725,629 as
of March 24, 2003.

                       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 23, 2003.
================================================================================





<PAGE>

<TABLE>
<CAPTION>


                                      INDEX


PART I
                                                                                       PAGE
<S>                                                                                       <C>
Item 1.   Business..........................................................................3
Item 2.   Properties.......................................................................26
Item 3.   Legal Proceedings................................................................29
Item 4.   Submission of Matters to a Vote of Security Holders..............................31

PART II

Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters............................................................31
Item 6.   Selected Financial Data..........................................................33
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations......................................................39
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.......................69
Item 8.   Financial Statements and Supplementary Data......................................69
Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.......................................................69

PART III

Item 10.  Directors and Executive Officers of the Registrant...............................69
Item 11.  Executive Compensation...........................................................69
Item 12.  Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters................................................70
Item 13.  Certain Relationships and Related Transactions...................................70
Item 14.  Controls and Procedures..........................................................70

PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................72

          Signatures.......................................................................84


</TABLE>

<PAGE>


Forward-Looking Statements

     Statements  contained  in this Annual  Report on Form 10-K,  including  the
section entitled  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations,"  include certain  forward-looking  statements within
the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,  which
reflect  management's  current view with respect to future  events and financial
performance.  Such  forward-looking  statements are subject to certain risks and
uncertainties  which could cause actual results to differ  materially from those
anticipated, and include but are not limited to, the effects of future events on
our financial performance;  risks associated with our high level of indebtedness
and our ability to refinance our  indebtedness  as it becomes due; the risk that
we or our  subsidiaries  will  not be able to  satisfy  scheduled  debt  service
obligations or will not remain in compliance with existing loan  covenants;  the
effects of future events,  including tenant bankruptcies and defaults;  the risk
that we may be unable to finance  our  development  and  short-term  operational
activities;  risks  related to the office  and  industrial  markets in which our
properties  compete,  including  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'  systems as well as our tenants and vendors.  Readers are  cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of December 31, 2002.

Among the matters about which we have made assumptions are the following:

o    future  economic  conditions  which may  impact  the  demand for office and
     industrial space either at current or increased levels;
o    the extent of any tenant bankruptcies or defaults that may occur;
o    prevailing interest rates;
o    the effect of inflation on operating expenses;
o    our ability to reduce various expenses as a percentage of revenues; and
o    the availability of financing and capital.

     In addition,  historical results and percentage  relationships set forth in
this  Annual  Report  on Form  10-K are not  necessarily  indicative  of  future
operations.

                                     PART I

ITEM 1.  BUSINESS

Background and General

     We are a self-administered and self-managed Maryland real estate investment
trust that owns and operates 15 office properties and 30 industrial  properties,
located primarily in the Chicago  metropolitan  area. We own one office property
in Cleveland,  Ohio. We are a  fully-integrated  real estate operating  company,
providing  our  own  property  management,   leasing,  marketing,   acquisition,
development, redevelopment, finance and other related functions.

     Our owned and completed  properties  contain  approximately 7.8 million net
rentable square feet of office space and 3.9 million net rentable square feet of
industrial space. This includes our recently  completed Dearborn Center project,
now known as Bank One Corporate  Center,  in downtown  Chicago,  an office tower
containing  1.5  million  rentable  square  feet  which was placed in service in
November  2002.  At December  31,  2002,  we owned in excess of 97% of the joint
venture  that owns this  property  and we  consolidated  our  ownership  of this
property as we had a significant  controlling financial interest in this entity.
On March 19, 2003,  we purchased all of our joint  venture  partner's  ownership
interest in the joint venture that owns this  property  making us the sole owner
of the  property.  The office  properties  also  include  Continental  Towers in
Rolling Meadows, Illinois, on which we own a second mortgage note, and 180 North
LaSalle  Street  in  Chicago,  Illinois,  on which we hold the Class "B" and "R"
REMIC  interests in a first  mortgage  loan and the second  mortgage  note. As a
result of our  interests in the second  mortgage  notes,  we have a  controlling
financial  interest in these  properties  and we  consolidate  both  properties'
operations.

     We also own two venture  interests  which we account for as  investments in
unconsolidated  entities using the equity method.  These consist of a 50% common
interest  in a joint  venture  which owns the 944,556  square foot office  tower
located at 77 West Wacker Drive, Chicago,  Illinois, and a 23.1% common interest
in a venture that owns a 386,048  square foot office  property  located in Mesa,
Arizona.

     We own  202.1  acres of land and  have  rights  to  acquire  31.6  acres of
developable  land. We believe that this land could be developed with 1.2 million
square feet of additional office space and 3.8 million square feet of additional
industrial  space.  However,  we do not anticipate  commencing  new  development
projects in the near future.

     We were formed on July 21, 1997 as a Maryland real estate  investment trust
and completed the initial  public  offering of our common shares on November 17,
1997.  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 sole general  partner of, and currently hold 58.8% of the common
interests  in, Prime Group Realty,  L.P., a Delaware  limited  partnership  (the
"Operating  Partnership").  We conduct substantially all of our business through
the Operating Partnership, except for certain services requested by our tenants,
certain management  contracts and build to suit construction  activities,  which
are conducted through Prime Group Realty Services, Inc., a Maryland corporation,
and its  affiliates  (collectively,  the  "Services  Company"),  which  became a
wholly-owned subsidiary of the Operating Partnership as of January 1, 2001.

Tax Status


     We have  elected to be taxed as a real  estate  investment  trust  ("REIT")
under Sections 856 through 860 of the Internal  Revenue Code of 1986, as amended
(the  "Code").  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 90% of our taxable income (excluding any net capital gain) each year.
Since our  inception,  we believe that we have  complied  with the tax rules and
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 are subject to certain state and local taxes on our
income and property.

Business Strategies

     Our  primary  business  is to  continue  to  operate,  lease and manage our
properties  in an  efficient  and timely  manner,  to maximize  the value of our
portfolio and to address our near-term and long-term liquidity. We also continue
to pursue our ongoing  initiative to identify and complete one or more strategic
transactions  that  would be  beneficial  to our  shareholders.  There can be no
assurance as to the completion, timing or terms of any transaction. As discussed
below,  we may  determine  that  the  continued  implementation  of our  primary
business strategy may be the most desirable course of action.

     Review of Strategic  Alternatives.  On December 18, 2002, we announced that
our Board of Trustees (our "Board")  approved the  engagement of Merrill Lynch &
Company as our  financial  advisor to assist in our  evaluation of our strategic
alternatives,  including,  but not limited to, a sale,  merger or other business
combination  involving us, or a sale of some or all of our assets.  In addition,
on February 6, 2003, we announced that we engaged Wachovia  Securities as one of
our  financial  advisors  in  connection  with this  evaluation.  Our goal is to
achieve a  desirable  result for our  shareholders  that may include one or more
strategic  transactions  and/or  the  continued  implementation  of our  primary
business  strategy  as  discussed  below.  There can be no  assurance  as to the
completion, timing or terms of any strategic transaction.

     Ongoing  Operations.  Our  primary  business  strategy  is to  focus on the
operation,  leasing and management of our existing  office and  industrial  real
estate which is located primarily in the Chicago metropolitan area.

     We are working to enhance our  property-level net operating income and cash
flow by:

o    engaging  in  pro-active  leasing and  marketing  programs,  and  effective
     property management;
o    managing  operating  expenses  through  the  use  of  in-house   management
     expertise;
o    maintaining and developing long-term leases with a diverse tenant group;
o    attracting  and retaining  motivated  employees by providing  financial and
     other incentives; and
o    emphasizing  value-added capital improvements to enhance property level net
     operating  income,  as well as our  properties'  competitive  advantages in
     their submarkets.

     Liquidity  and  Capital  Requirements.  Our  anticipated  cash  flows  from
operations  in 2003 will not be  sufficient  to fund the  payment  of  preferred
dividends  on our  outstanding  Series B preferred  shares or the payment of any
quarterly dividends on our common shares/units.  In 2003, we anticipate the need
to fund  significant  capital  to  retenant  space  that has been  vacated or is
anticipated  to be vacated  during the year.  In addition,  we have funded,  and
anticipate  the continued  funding of our  obligation in connection  with one of
Bank One  Corporate  Center's  anchor  tenant to  reimburse  the  tenant for its
remaining  obligation  under its lease  with its prior  landlord  as more  fully
discussed under "Business - "Recent Developments."

     Our debt obligation with Security  Capital  Preferred  Growth  Incorporated
("SCPG"), totaling $45.9 million at March 26, 2003, matures July 16, 2003 and is
secured by certain  equity  interests of our  Operating  Partnership  in various
properties. The terms of this debt provide for two 180-day extension periods, at
our option, if aggregate outstanding principal is not greater than $40.0 million
at the date of first extension and not greater than $25.0 million at the date of
the  second  extension.  We are  pursuing  various  capital  events,  which,  if
consummated in sufficient  amounts,  would enable us to repay this obligation or
reduce the  outstanding  principal  to a level  which would allow us to elect an
extension of the maturity  date.  However,  there can be no assurances as to our
ability to obtain  funds  necessary  for  required  repayment or that we will be
successful in our efforts to execute capital events yielding proceeds sufficient
to repay part or all of the SCPG debt obligation.  If the SCPG obligation is not
extended,  SCPG's default remedies,  including assuming certain equity interests
of our Operating Partnership in various properties,  may also hinder our ability
to meet the  minimum  quarter end cash  requirements  and other  financial  loan
covenants and could result in cross-defaults under certain of our other loans.

     Any future distributions on our preferred and common shares will be made at
the discretion of our Board. These  distributions will depend on the actual cash
available for distribution,  our financial condition, capital requirements,  the
completion of any capital transactions,  including refinancings and asset sales,
the annual distribution  requirements under the REIT provisions of the Code, and
such other factors as our Board deems relevant. We can give no assurance that we
will be able to complete capital transactions or, if they are completed, whether
they will be on terms that are  favorable to us. We also can give no  assurances
that if capital  events are  completed on terms  favorable  to us or  otherwise,
distributions  on our common  shares and common units will be resumed in 2003 or
thereafter, or that we will be able to pay dividends on our preferred shares.

     Dividends  on our Series B  Cumulative  Redeemable  Preferred  Shares  (the
"Series B Shares")  were paid through and  including  the third quarter of 2002.
Distributions  on our Series B Shares  were not  declared or paid for the fourth
quarter of 2002. The holders of our Series B Shares will have the right to elect
two additional members to our Board if six consecutive  quarterly  distributions
on the Series B Shares  are not made.  The term of any  Trustees  elected by the
Series B  Shareholders  will expire  whenever  all arrears in  dividends  on the
Series B Shares have been paid and current dividends  declared and set apart for
payment.  No  Series B Share  dividends  were  declared  or paid for the  fourth
quarter of 2002.

     Given our current level of debt, limited availability of collateral and our
current  financing  arrangements,  we may not be able to obtain  additional debt
financing  at  interest  rates  that  are  below  the  rates  of  return  on our
properties.  In addition,  any equity  capital we might raise may be dilutive to
our  current  common  shareholders.  There  can be no  assurance  that  we  will
consummate debt, equity or asset sales transactions which would yield sufficient
proceeds in a timeframe  necessary to fund our  projected  operating and capital
needs on a current basis.

     Development Activity.  We commenced  construction of our Bank One Corporate
Center  located  in  downtown  Chicago  in April  2000.  This  state-of-the-art,
technically  advanced  Class A office tower contains  approximately  1.5 million
rentable square feet.  This  development was placed in service in November 2002.
The first tenant lease commenced January 1, 2003 for 603,767 net rentable square
feet. A second lease for 121,728 net rentable  square feet commenced on February
1, 2003,  and a third lease of 274,417 net rentable  square feet is scheduled to
commence April 1, 2003, which will bring total occupancy to 66.6%.

     We do not anticipate  undertaking  any new speculative  office  development
activity in the near future. If we do, any new development  activity will likely
involve  joint  ventures  with other  entities  that would provide a significant
portion of the required  equity capital.  Our Services  Company also may perform
build to suit  development  for sale  which we  anticipate  would be  funded  or
reimbursed by the purchaser.

     Acquisition  Activity.  Given the  scope of our  projects  currently  under
development, general economic conditions and our capital availability, we do not
anticipate any significant  property  acquisitions during the next year. Certain
tax-deferred  exchanges,  however,  may be desirable in connection with property
sales in order to eliminate or minimize any payments required under existing tax
indemnification agreements.

     Financing  Policy.  In December 1998, our Board adopted a financing  policy
with the following targets:  (i) a minimum interest coverage ratio of 2.25, (ii)
a minimum  fixed  coverage  charge ratio of 1.90,  (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 $15.0 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. The above targets do not bind the Board
and do not mean that we will  operate  within each of these ratios at any or all
times.  Our Board has approved in the past,  and has the authority to approve in
the future,  transactions and other actions which will cause non-compliance with
this policy.

     At present we are not in  compliance  with any of the above  targets and do
not anticipate being in compliance during 2003. As a result, both our investment
committee and our Board must approve all material  financing and  acquisition or
disposition  activities  until  the  targets  are met.  Our  Board may alter our
financing policy 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 the funding of property
level capital needs and any development activities. If available,  these capital
sources may include  undistributed  cash flow,  property  specific  non-recourse
and/or recourse debt, proceeds from the issuance of long-term,  tax-exempt bonds
and other  debt or  equity  securities,  bank and  institutional  borrowings  or
proceeds from the sale of assets or joint ventures.


<PAGE>


Recent Developments

     During the period  from  January 1, 2002  through  December  31,  2002,  we
acquired and sold the following  operating  properties  and parcels of land. See
"Liquidity  and Capital  Resources" in  Management's  Discussion and Analysis of
Financial  Condition  and Results of Operations  for a  description  of the debt
terms.


<PAGE>


<TABLE>
<CAPTION>

                                                                  Net
                                                                Square         Acquisition
                                                                Rentable        Cost/Sales     Mortgage      Acquired/
        Property                          Location              Feet/Acres        Price          Debt          Sold
----------------------------------------------------------------------------------------------------------------------------
                                                                       (dollars in thousands)
<S>                                       <C>                    <C>            <C>            <C>            <C>
Acquired
Land:
   Aurora Land (1)                        Aurora, IL              33.0 Acres    $  2,700        $  -          February
   Batavia Land (2)                       Batavia, IL             18.8 Acres       2,400           -           March
   Carol Stream Land (2)                  Carol Stream, IL         6.1 Acres         800           -           March
                                                              -----------------------------------------------
                                                                  57.9 Acres    $  5,900        $  -
                                                              ===============================================

Sold
Land:
   Aurora Land (1)                        Aurora, IL              52.5 Acres    $  7,000        $ 2,800        February
   Aurora Land (3)                        Aurora, IL              19.7 Acres       3,400          2,200        February
                                                              -----------------------------------------------
                                                                  72.2 Acres     $10,400        $ 5,000
                                                              ===============================================
Office:
   2000 York Road (Oak Brook Business
     Center) (4)                          Oak Brook, IL            200,865
   2100 Swift Drive (4)                   Oak Brook, IL             58,000
   6400 Shafer Court (4)                  Rosemont, IL             166,749
   1699 E. Woodfield Road
     (Citibank Plaza) (4)                 Schaumburg, IL           106,003
   3800 and 3850 North Wilke Road and
     3930 Ventura Drive (Commerce Point)  Arlington Heights,       236,771
     (4)                                     IL
   2205-2255 Enterprise Drive (Enterprise
     Office Center) (4)                   Westchester, IL          129,655
   1900 Algonquin Road/2000-2060
     Algonquin Road (Salt Creek Office
     Center/Sun Annex) (4)                Schaumburg, IL           125,963
   1700 East Golf Road
      (Two Century Centre) (4)            Schaumburg, IL           219,842
   850, 860, 870 and 1000 Technology Way
     (Pine Meadows Corporate Center) (4)  Libertyville, IL         203,611                                        June
                                                              -----------------------------------------------
                                                                 1,447,459      $131,156       $113,085
   Centre Square I (5)                    Knoxville, TN             93,711         5,100          9,000         November
                                                              -----------------------------------------------
                                                                 1,541,170      $136,256       $122,085
                                                              ===============================================
   4430 Railroad Avenue (6)               East Chicago, IN          40,000   $       600     $        -         December
                                                              ===============================================
Joint Venture:
   300 West Monroe Street and 25 & 77
     South Wacker Drive (7)               Chicago, IL            1.4 Acres     $  22,900      $  16,500          January
   Pine Meadows Corporate Center
      (Building E) (8)                    Libertyville, IL         90,844               -         9,300          August
                                                              -----------------------------------------------
                                                                               $  22,900      $  25,800
                                                                             ================================


</TABLE>


<PAGE>


(1)  On February 28, 2002, we sold 52.5 acres of vacant land in Aurora, Illinois
     for $7.0 million  resulting  in a loss of $0.2  million.  Approximately  33
     acres of the 52.5 acres were  acquired  by us on  February  28,  2002 for a
     purchase price of $2.7 million.

(2)  These parcels were acquired by our Operating Partnership from affiliates of
     Mr. Stephen J. Nardi, a Trustee and Chairman of our Board,  in exchange for
     344,331  limited  partner  common units.  These  acquisitions  complete our
     obligation  under a contract  entered into with  affiliates of Mr. Nardi as
     part of our initial public offering.

(3)  Our sale of this land  resulted  in a loss of $0.1  million.  Our  Services
     Company agreed to act as the  construction  manager in connection  with the
     construction of a 350,000 square foot industrial  build-to-suit building on
     this property. In connection with this build-to-suit,  our Services Company
     agreed to acquire an  existing  222,840  square  foot  industrial  building
     located  in Aurora,  Illinois  for $10.4  million.  In  October  2002,  our
     Services  Company  bought and then sold the  existing  building  to a third
     party for a sale price of $10.4 million.

(4)  On June 26, 2002, we completed the sale of nine suburban office  properties
     to an affiliate of Blackstone  Real Estate  Advisors,  L.P. for an adjusted
     sales price of $131.2  million,  excluding the assumption of $113.1 million
     of debt related to the properties (the  "Blackstone  Sale").  We recorded a
     $33.6 million provision for asset impairment during the quarter ended March
     31, 2002 related to these properties based upon our revised holding period.
     We recorded an  additional  $3.7 million loss on sale during the year ended
     December 31, 2002,  relating primarily to the write-off of certain deferred
     assets associated with these properties.

(5)  On November 21,  2002,  we sold the office  building  located at 620 Market
     Street,  Knoxville,  Tennessee  for a gross sales price of $5.1 million and
     recorded a gain of $0.1 million in discontinued  operations.  In connection
     with this sale, we redeemed  approximately $3.9 million of the $9.0 million
     of bonds that encumbered the property.  The purchaser assumed the remainder
     of the outstanding bonds. The facility that provided credit enhancement for
     the bonds was terminated in connection with this sale.

(6)  Our  sale of this  property  resulted  in a gain  of  $0.4  million  and is
     reflected in discontinued  operations.  Net proceeds from this sale of $0.6
     million were  deposited  into escrow with the lender that  provides  credit
     enhancement on the bonds relating to this and other properties.

(7)  On January 16, 2002, we assigned our interest in a joint  venture  relating
     to certain  property  located at the  northeast  corner of Wacker Drive and
     Monroe Street in Chicago,  Illinois, to our joint venture partner for $22.9
     million and used a portion of the  proceeds  to repay the $16.5  million we
     borrowed from the joint venture partner in 2001. We also received an option
     which expired,  unexercised, on June 28, 2002 to repurchase our interest in
     the joint venture for $22.9 million plus a 10% compounded return.

(8)  On August 23,  2002,  we  transferred  our 10%  ownership  interest in Pine
     Meadow,  LLC to  our  joint  venture  partner.  In  consideration  of  this
     transfer,  we were  released  of our  obligations  under the joint  venture
     agreement  and the  documents  that  evidenced  and secured a $9.3  million
     construction  mortgage loan  encumbering  the property.  We recorded a $0.5
     million  provision for asset impairment  during the quarter ended March 31,
     2002 related to this ownership interest.

     We have a lease with Citadel Investment Group ("Citadel") for space in Bank
One  Corporate  Center and have agreed to  reimburse  Citadel for the  financial
obligations,  consisting  of base  rent  and the pro  rata  share  of  operating
expenses and real estate taxes, under Citadel's  preexisting lease (the "Citadel
Reimbursement Obligations") for 161,488 square feet of space at One North Wacker
Drive in  downtown  Chicago,  Illinois.  The Citadel  Reimbursement  Obligations
include an estimated  nominal gross rental  obligation of $78.4 million over the
term of the lease.  The  landlord at One North Wacker is obligated to provide us
with $47.50 per square foot in a tenant improvement allowance.  Through February
2003,  we have  executed  subleases at One North Wacker Drive  totaling  135,967
square feet of space to partially mitigate our obligation.

     We are required under one of the subleases for 27,826 square feet to escrow
a total of $1.1 million with the owner of One North Wacker  Drive,  in six equal
monthly increments of $0.2 million which commenced in December 2002, as security
for the payment of the  difference  between the rental amount  payable under the
Citadel  lease and this  sublease.  In  addition,  in  connection  with  another
sublease  for 55,494  square  feet,  we assumed  two lease  obligations,  at two
Chicago office buildings owned by third parties,  with gross rental  obligations
of  approximately  $3.0 million.  We intend to partially  mitigate our financial
obligations under one of these leases by subleasing the space.

     Liabilities  for leases assumed at December 31, 2002 includes $15.5 million
related to the Citadel Reimbursement Obligations,  which represents our estimate
of a  net  obligation  of  $19.4  million  after  actual  and  estimated  future
subleasing,  net of  payments  we  made in 2002  on  these  obligations  of $3.9
million.  The net  obligation  has been recorded as a deferred  leasing cost and
will be amortized on a straight-line basis over the life of the Citadel lease.

     The Bank One  Corporate  Center  construction  and  mezzanine  lenders  had
required us to create and fund an escrow (the "Citadel Escrow") in the amount of
$1.0 million per month beginning January 2003 to collateralize certain potential
costs and  expenses  that may be incurred by us in  connection  with the Citadel
Reimbursement  Obligations.  We have funded $1.0  million per month for January,
February and March 2003. In addition,  in June 2002, we pre-funded  $4.0 million
of these costs into the escrow to be applied to the monthly  payments  for June,
July, August and September of 2003.

     On March 19, 2003, we refinanced  the Bank One Corporate  Center  mezzanine
loan with the proceeds of a $75.0 million loan and $1.5 million of our funds. In
conjunction with this  refinancing,  the  construction  lender and new mezzanine
lender  restructured  our escrow  deposit  obligations  relating  to the Citadel
Reimbursement  Obligations.  Prior to the closing of the new mezzanine loan, the
construction  lender  held $12.6  million in  escrows  relating  to the Bank One
Corporate Center project.  At the closing of the new mezzanine loan, all of such
funds were  deposited  into a new account held by the  construction  lender (the
"New Citadel Escrow").  Additionally, we are required to make additional monthly
deposits  into the New  Citadel  Escrow in the amount of $0.8  million per month
beginning  April 2003 and continuing  through and including  January 2004.  Upon
Citadel's  occupancy at Bank One Corporate Center, the construction  lender will
deposit into the new Citadel  Escrow a $0.5 million  leasing  commission due and
payable to us in connection with the Citadel Lease. Upon satisfaction of certain
conditions contained in the construction and mezzanine loan documents,  funds in
the New  Citadel  Escrow  may be used in the  future to pay for  certain  tenant
improvement and leasing  commission  costs associated with the subleasing of the
Citadel space at One North Wacker Drive and,  after February 1, 2004, to pay for
the Citadel  Reimbursement  Obligations.  The $0.8  million  monthly  deposit is
subject  to  adjustment  as the  Citadel  space  at One  North  Wacker  Drive is
subleased.

     In January  2000,  we entered into an office lease with Bank One, NA ("Bank
One") for 603,767 square feet in our Bank One Corporate Center.  Pursuant to the
terms of the lease,  we, as the landlord  under the lease,  previously  notified
Bank One that rent was expected to commence on the first 237,896  square feet of
the  leased  premises  on  September  26,  2002,  subject  to our  substantially
completing base building construction, and that rent was expected to commence on
an additional 125,212,  188,310 and 66,549 square feet of the leased premises on
or  about   September  26,  2002,   October  22,  2002  and  November  5,  2002,
respectively. Bank One then informed us that it did not agree with the foregoing
commencement  dates.  On November  14,  2002,  we and Bank One  entered  into an
amendment to Bank One's lease, which set the rent commencement date of the lease
at January 1, 2003 for the entire 603,767 square feet. Other than specifying the
rent  commencement  date,  none of the major  business  terms of the lease  were
modified.  The lenders have  consented to the lease  amendment  and Bank One has
commenced paying rent.

     On  January  2,  2002,  we  replaced  previously  issued  letters of credit
totaling  $48.8 million with letters of credit  totaling $25.2 million issued by
LaSalle  Bank,  N.A. The letters of credit  provide  credit  support for certain
Industrial  Development  Revenue  Bonds  ("IDRBs").  The  IDRBs are  secured  by
collateral  consisting  of  2,126,427  square feet of  manufacturing  facilities
located in Chicago,  Illinois and Hammond and East Chicago, Indiana. The letters
of credit have an annual cost of 2.35% and a term of five years. As part of this
transaction,  we purchased $23.3 million of the IDRBs utilizing $23.0 million of
funds from escrows  previously  securing the $48.8 million letters of credit and
$0.3  million  of  cash.  Under  the new  letter  of  credit  facility,  we have
guaranteed all of the borrower's  reimbursement  obligations.  Additionally,  we
pledged the $23.3 million of bonds  purchased,  as well as a 304,506 square foot
industrial facility located in Arlington Heights,  Illinois, as security for our
obligations under the guaranty.

     On January 8, 2002, our joint venture partner in the Pine Meadows Corporate
Center development in Libertyville,  Illinois gave written notice, in accordance
with the terms of the joint  venture  agreement,  of its  intent not to fund its
capital contribution necessary to develop a second office building.

     On January 9, 2002,  we extended  the  maturity  date of the $30.0  million
mortgage note payable  secured by 100% of our  ownership  interest in IBM Plaza,
Chicago,  Illinois, until February 23, 2003 for a fee of $0.2 million. This loan
was refinanced in March 2003.

     On January 16, 2002, we assigned our interest in a joint  venture  relating
to certain  property  located at the northeast corner of Wacker Drive and Monroe
Street in Chicago,  Illinois, to our joint venture partner for $22.9 million and
used a portion of the proceeds to repay the $16.5  million we borrowed  from the
joint  venture  partner  in 2001.  We also  received  an  option  that  expired,
unexercised,  on June 28, 2002 to  repurchase  our interest in the joint venture
for $22.9 million plus a 10% compounded return.

     On January  16,  2002,  due to a number of factors,  including  our capital
resources  and needs,  our Board decided not to declare a dividend on the common
shares/units for the fourth quarter of 2001.

     On February 15, 2002, we extended the maturity date of the letter of credit
enhancing  the  industrial  revenue  bonds for an  office  property  located  in
Knoxville,  Tennessee from May 9, 2002 to November 9, 2002 for a fee of $35,000.
This  letter  of  credit  was  subsequently  extended  and  then  terminated  in
connection with the sale of the property on November 21, 2002.

     On February 22, 2002, we amended the  securities  purchase  agreement  with
SCPG and  agreed to pay a deferral  payment,  as  defined,  of 3.5% of the $40.0
million  aggregate  liquidation  value of our  outstanding  Series A  Cumulative
Convertible Preferred Shares ("Series A Shares"). The deferral payment increased
by 0.50% on May 8, 2002 and compounded  quarterly  beginning March 31, 2002. The
accrued  deferral  payment  was  paid in full  when  our  Operating  Partnership
purchased all of the Series A Shares on July 16, 2002.

     On March 19,  2002,  we  entered  into an  agreement  appointing  Julien J.
Studley, Inc. as our exclusive agent to lease space on our behalf related to the
Citadel Reimbursement Obligations. Julien J. Studley, Inc. earned commissions of
$0.2 million for services provided to us in 2002. Mr. Jacque M. Ducharme, one of
our  Trustees,  is the Vice  Chairman  Western  Region and Director of Julien J.
Studley,  Inc.  Mr.  Ducharme  has  informed  us he will  receive  no portion of
commissions due under the agreement,  other than the compensation he customarily
receives from Julien J. Studley,  Inc.  based on its general  profitability.  On
March 12, 2003, we extended the term of this agreement to September 30, 2003.

     On each of  January  15,  February  15,  March 1, and  March 31,  2002,  we
extended a mortgage  note payable  collateralized  by the land we own in Aurora,
Illinois.  On March 31, 2002,  we extended the loan until May 31, 2002 for a fee
of $30,000, plus expenses of the lender, and agreed that the interest rate would
be 28% per annum for the period  commencing  April 1, 2002. On June 21, 2002, we
repaid the mortgage note payable in full.

     On April 8, 2002, we announced the  resignations  of Mr. Michael W. Reschke
from his  position as  Chairman  of our Board and Mr.  Richard S. Curto from his
position as our Chief  Executive  Officer.  Mr. Reschke  continues to serve as a
member of our Board.  Mr.  Curto's term as a member of our Board  expired on May
31, 2002. Mr. Stephen J. Nardi was appointed as Acting  Chairman of our Board on
April 8, 2002. From 1997 to that date, Mr. Nardi was Vice Chairman of our Board.
Mr. Nardi was  appointed as Chairman of our Board on May 31, 2002.  See "Certain
Relationships and Related Transactions" in "Management's Discussion and Analysis
of Financial  Condition  and Results of  Operations"  for a  description  of Mr.
Reschke and Mr. Curto's separation agreements.

     In April 2002,  we reduced our  corporate  management  and certain  support
staff by  approximately  13%. The reductions  reflect our decision to reduce our
development  activities  and the  elimination of non-core  business  activities,
including  third party brokerage and tenant  construction,  as well as to reduce
our administrative costs.

     On April 12,  2002,  we  announced  that our Board  had  determined  not to
declare the regular quarterly  distributions on our Series A Shares and Series B
Shares for the first  quarter  of 2002.  We also  continued  our  suspension  of
quarterly distributions on our common shares and units.

     On April 30, 2002,  Vornado PS,  L.L.C.  ("Vornado  PS") held a foreclosure
auction of the 7,944,893 common units of the Operating Partnership ("the Pledged
Units") that  Primestone  Investment  Partners  L.P.  ("Primestone")  pledged to
secure  Primestone's  obligations under two loans (the "Vornado PS Loans") owned
by Vornado PS. Primestone is an affiliate of The Prime Group, Inc. ("PGI").  PGI
is a privately held company controlled by Mr. Reschke.  Vornado PS purchased all
of the Pledged Units at the  foreclosure  auction for $8.35 per common unit, the
per share closing  price of our common shares on that date.  According to public
disclosures  previously  made by Vornado PS and Cadim  Acquisition,  LLC ("Cadim
Acquisition")  and Cadim inc. in their  respective  statements  on Schedule  13D
filed with the Securities and Exchange  Commission  ("SEC"),  Cadim  Acquisition
owns a 50%  participation  in the Vornado PS Loans, and has been assigned 50% of
the  Pledged  Units  from  Vornado  PS.  The  Pledged  Units are by their  terms
exchangeable  for our common shares on a one-for-one  basis or, at the option of
our  Independent  Trustees,  cash,  except for the Pledged  Units owned by Cadim
Acquisition, which we have agreed to exchange only for common shares.

     On May 13,  2002,  Vornado PS delivered a letter to us  exercising  Vornado
PS's right under the Consent and  Agreement,  dated as of September 26, 2001, by
us and our Operating Partnership in favor of Vornado PS to receive a position on
our Board. Vornado PS designated Michael Fascitelli, President of Vornado Realty
Trust,  as its nominee to fill this position on our Board.  Mr.  Fascitelli  and
Vornado  PS  subsequently  informed  our  Board  that  they  do not  desire  Mr.
Fascitelli to be named to the Board.

     On May 14, 2002, we extended the maturity date of a $10.5 million  mortgage
loan secured by a property in Libertyville, Illinois, from April 1, 2002 to June
15, 2002. This mortgage was  subsequently  assumed by the buyer of this property
as part of the Blackstone Sale.

     On May 14, 2002, our Board  rejected as inadequate an unsolicited  proposal
from American  Realty  Investors,  Inc.  ("ARL") to acquire (i) our  outstanding
common shares/units for $7.50 in cash and two-tenths of a share of ARL preferred
stock for each  outstanding  common  share/unit and (ii) all of our  outstanding
Series A Shares for $20.00 per share in cash and all of our outstanding Series B
Shares for one share of comparable preferred stock of ARL.

     On May 20, 2002,  we entered into  retention  agreements  with Mr. Louis G.
Conforti and Mr. Jeffrey A. Patterson,  our two Co-Presidents,  and Mr. James F.
Hoffman,  our Executive  Vice  President,  General  Counsel and  Secretary.  The
agreements  provided for a retention  payment for calendar year 2002 of $250,000
for each of Mr.  Conforti and Mr.  Patterson and $100,000 for Mr.  Hoffman.  The
retention  payments  vested on a per diem basis from the  beginning  of calendar
year 2002 so long as the participant  remained employed by us or our affiliates.
Any  unvested  portions of the  retention  payments  were to be forfeited in the
event the  participant  voluntarily  terminated  his  employment.  We paid these
retention payments in January 2003.

     On July 16, 2002,  we and our  Operating  Partnership  closed a transaction
with  SCPG.  Prior to the  closing,  SCPG was the sole  holder  of our  Series A
Shares. At the closing, our Operating  Partnership purchased all of the Series A
Shares for a total redemption price of $42.3 million through the issuance of two
notes payable  described below (which  represents the $40.0 million  liquidation
preference  of the Series A Shares plus  accrued  distributions,  including  the
accrued deferred payment amount, to the date of redemption).

     Our  Operating  Partnership  issued to SCPG (i) an  exchangeable  note (the
"Exchangeable  Note")  in the  principal  amount  of  $37.3  million  and (ii) a
nonexchangeable note (the "$20M Note") in the principal amount of $20.0 million.
Our  Operating  Partnership  purchased  the  Series  A  Shares  by  issuing  the
Exchangeable  Note to SCPG and paying SCPG $5.0 million of the proceeds from the
$20M Note. The principal amount of the Exchangeable  Note is exchangeable by its
terms for our common shares at an exchange price of $20.00 per share, subject to
anti-dilution  adjustments.  Approximately $6.8 million of the proceeds from the
$20M Note were used to fund the payment of  distributions on our Series B Shares
for the  first,  second  and third  quarters  of 2002.  The  balance of the loan
proceeds was used to fund certain escrow accounts  described below, pay expenses
related to the transactions and for general corporate purposes.

     In order to permit the  purchase of the Series A Shares  under our charter,
our Board  conditionally  declared  distributions on our Series B Shares for the
first,  second and third  quarters of 2002, at the quarterly rate of $0.5625 per
share.  This  declaration of dividends  became  effective July 16, 2002 upon the
closing  of the SCPG  transaction.  The  record  date for the first  and  second
quarter 2002 dividends on the Series B Shares was July 31, 2002, and the payment
date was August 15, 2002. The record date for the third quarter dividends on the
Series B Shares was  September  30,  2002,  and the payment date was October 31,
2002.  Except for the above  declaration  on our Series B Shares,  our  existing
suspension  of  quarterly  distributions  on our  preferred  and  common  shares
presently remains unchanged.

     The initial  total  interest rate on the  Exchangeable  Note was 11.50% per
annum,  which  increased  to 12.00% per annum on August 6,  2002,  to 12.50% per
annum on November 4, 2002,  and to 12.75% per annum on February 2, 2003,  and is
compounded  quarterly.  The interest  rate on the $20M Note is 15.00% per annum.
Interest  only  payments  on the  Exchangeable  Note and the $20M  Note are paid
currently on a quarterly basis at a rate of 7.50% per annum, with the balance of
the total  interest  being due at maturity.  Each of the notes also has a fee of
0.75% for any principal  repayments,  whether at maturity or earlier.  The notes
are secured by mortgages on  approximately  123 acres of vacant land owned by us
in  several  Chicago  suburban  areas,  as well as the  pledge by our  Operating
Partnership of certain equity interests in specified property-level subsidiaries
of ours. The equity interests in the property-level subsidiaries pledged consist
of a pledge of (i) 49.9% of the membership interests in 180 N. LaSalle,  L.L.C.,
(ii) 70% of the  membership  interests in each of the  following  entities:  342
Carol Lane,  L.L.C.,  343 Carol Lane,  L.L.C., 370 Carol Lane, L.L.C., 388 Carol
Lane, L.L.C., 200 E. Fullerton, L.L.C., 350 Randy Road, L.L.C., 550 Kehoe Blvd.,
L.L.C., 4160 Madison Street,  L.L.C., 4211 Madison Street,  L.L.C., 4300 Madison
Street, L.L.C., 1051 N. Kirk Road, L.L.C., 1401 S. Jefferson,  L.L.C.,11039 Gage
Avenue,  L.L.C., 11045 Gage Avenue, L.L.C., 4343 Commerce Court, L.L.C., 1301 E.
Tower Road, L.L.C., and 1600 167th Street,  L.L.C., (iii) 100% of the membership
interests in Prime Aurora,  L.L.C.  and (iv) Phoenix  Office,  L.L.C.'s right to
receive  distributions  from  Plumcor/Thistle,   L.L.C.  We  and  our  Operating
Partnership's  affiliates  owning the vacant land  guaranteed the obligations of
our Operating Partnership under the notes and the securities purchase agreement.

     Under the terms of the  Exchangeable  Note and $20M Note,  SCPG may require
repayment of all or a portion of the outstanding principal of the notes upon the
occurrence of certain  change of control events or if our common shares cease to
be listed  for  trading  on a  national  securities  exchange  or  included  for
quotation  on  the  Nasdaq  National  Market.  In  addition,  certain  mandatory
prepayments  of the  notes  will be re quired in the event of the sale of SCPG's
collateral or specified asset sales by us.

     There is a 2.00% prepayment fee on the principal amount being prepaid under
each of the notes in the event of  prepayments  relating to certain  "changes of
control" of Prime Group Realty Trust if the "changes of control" are approved by
our Board.  Any  repayments  of principal on the notes must first be made on the
Exchangeable Note until it is repaid,  and then may be made on the $20M Note. On
January 7, 2003, we repaid $3.0 million of the Exchangeable Note from funds made
available  as a result of the  November  2002 sale of Centre  Square I, a 93,711
square foot office building located in Knoxville,  Tennessee. On March 10, 2003,
we repaid $8.5 million of the  Exchangeable  Note from funds made available from
the refinancing of our IBM Plaza office property.

     The transaction  documents with SCPG contain certain negative,  affirmative
and financial  covenants.  These covenants require,  among other things, that we
will not be permitted to declare and pay any  distributions  on our  outstanding
equity  securities so long as the notes remain  outstanding,  except that we may
pay  distributions on our Series B Shares to the extent that we prepay the notes
in an amount equal to such distributions. In addition, the transaction documents
contain other financial covenants that will become applicable one year after the
closing  of the  transactions,  if any  amounts  evidenced  by the notes  remain
outstanding.

     The Exchangeable Note and the $20M Note each have one year terms, which may
be extended for up to two periods of 180 days each,  provided that,  among other
things, the aggregate  outstanding  principal amount of the notes at the time of
the first  extension  is not greater  than $40.0  million and at the time of the
second extension is not greater than $25.0 million. We must pay an extension fee
of 0.50% of the aggregate outstanding principal amount of the notes each time an
extension option is exercised.

     As part of the  foregoing  transactions,  we  issued  to  SCPG  Series  A-1
warrants to purchase up to 500,000  common  shares at $9.00 per share and Series
A-2  warrants to purchase up to 500,000  common  shares at $7.50 per share.  The
Series A-1 and  Series A-2  warrants  are  structured  so that only a maximum of
500,000 of the warrants may be exercised. The Series A-1 warrants will expire if
the notes are not repaid on or before April 1, 2003, and the Series A-2 warrants
are exercisable only in the event the notes are not repaid on or before April 1,
2003. We have also issued to SCPG  additional  Series B and Series C warrants to
purchase common shares that are exercisable  only in the event the notes are not
repaid on or before April 1, 2003.  If  exercisable,  the Series B warrants will
allow SCPG to purchase  250,000 common shares at $10.00 per share and the Series
C warrants will allow SCPG to purchase up to 250,000 common shares at $12.50 per
share.  The  warrants,  which  have  a  value  of  $0.6  million,  will  contain
antidilution  adjustment  provisions and will expire on the fifth anniversary of
their issuance,  except as specified above. We have also granted to SCPG certain
demand and incidental  registration  rights in respect of any common shares SCPG
may receive upon the exchange of any principal amount of the  Exchangeable  Note
or upon the exercise of any of the warrants.

     We also granted SCPG the right to name a trustee to our Board,  which right
SCPG has informed us it does not presently anticipate exercising.

     Although we have paid  distributions  on our Series B Shares for the first,
second and third quarters of 2002, we currently do not  anticipate  that we will
declare and pay  distributions  on the Series B Shares for the fourth quarter of
2002 or for  calendar  year  2003.  Distributions  on the  Series B  Shares  are
cumulative  and will  continue to accrue to the extent they are not declared and
paid currently.  Except as described above, the existing suspension of quarterly
distributions on our common shares and preferred  shares remains  unchanged and,
as  described  above,  the  terms of the  Exchangeable  Note and $20M  Note will
prohibit payment of distributions on our common shares so long as either or both
of the notes are outstanding.  Any future distributions in respect of the common
shares  may  not  be  paid  unless  all  accrued  but  unpaid   preferred  share
distributions have been or are concurrently satisfied.

     In order to obtain the consent of the  construction  and mezzanine  lenders
financing  our Bank One  Corporate  Center  to close  the SCPG  transaction,  we
agreed, among other things, to make certain escrow deposits,  reallocate certain
line items in the project  budget and make certain  other  revisions to the loan
documents.

     On July 22, 2002, Arthur Andersen, LLP ("Arthur Andersen") notified us that
they will be closing their operations and subsequently  entered into discussions
with us concerning a potential  lease  termination  agreement.  Arthur  Andersen
leased an  aggregate  of 656,831 net  rentable  square feet in two of our office
properties  (579,982 square feet at 33 West Monroe Street and 76,849 square feet
at 330 North Wabash  Avenue),  which  comprise 9.6% of our total revenue for the
year  ended  December  31,  2002.  In  February  2003,  we  entered  into  lease
termination agreements with Arthur Andersen whereby Arthur Andersen was released
from its remaining  lease  obligations  subsequent to December 31, 2002 at these
two properties in exchange for total  termination  payments of $32.4 million for
the 33 West Monroe Street lease and $1.1 million for the 330 North Wabash Avenue
lease. In addition, the agreements provided we could retain previously paid rent
for the month of January  2003.  We were  required by the lenders to deposit the
proceeds into escrow accounts for each property. The $1.1 million escrow for 330
North Wabash  Avenue is available to fund future tenant  improvements  and other
re-leasing  costs at the property.  The $32.4 million  escrow for 33 West Monroe
Street may be utilized as  follows:  (i) up to a maximum of $8.1  million may be
utilized  to fund debt  service  and  operating  deficits  at the 33 West Monroe
Street  property;  (ii) $7.0 million is to be utilized to repay principal on the
loan collateralized by the property ninety-one days following the receipt of the
proceeds;  and (iii) the remainder  (including any remaining portion of the $8.1
million   discussed  under  (i)  above)  is  available  to  fund  future  tenant
improvements  and other  re-leasing  costs at the property.  In connection  with
these  terminations,  we will record termination fee income in the first quarter
of 2003 of $29.7 million which  represents the above  termination  payments less
outstanding  receivables  (including  deferred rent receivable) related to these
leases.

     On July 29, 2002, we amended a mortgage loan collateralized by our property
located at 1455  Sequoia  Drive,  Aurora,  Illinois.  Under the  amendment,  the
maturity  date of the loan was extended  from May 31, 2002 to May 31, 2003,  and
the per annum  interest rate was  increased  from LIBOR plus 2.25% to LIBOR plus
2.5%.

     On August 1,  2002,  we and the City of  Chicago  ("City")  closed  the tax
increment  financing  assistance for our Bank One Corporate Center,  pursuant to
which we may be entitled to receive from the City, depending on the satisfaction
of certain requirements,  up to $10.0 million in tax increment  assistance.  The
obligation  of the  City  is  evidenced  by a  promissory  note  in the  maximum
principal  amount of $10.0  million  (which is subject to  reduction  if certain
requirements  are not  satisfied).  Interest on the note  accrues at the rate of
9.5% per year.  Payments  of the tax  increment  assistance  are to be made each
January 1 after the  project  is  completed,  and are to be made from 50% of the
incremental real estate taxes attributable to our Bank One Corporate Center. The
promissory  note matures on December 31, 2008, and, to the extent any portion of
the note remains  unpaid as of the maturity date, we are required to forego such
amounts.  On November 1, 2002,  upon  satisfaction of the majority of the City's
significant requirements, we recorded a promissory note receivable in the amount
of $9.4 million and related accrued  interest for financial  reporting  purposes
and  correspondingly  reduced  development  costs  related to Bank One Corporate
Center.

     On August 5, 2002, we terminated a tax-deferred  exchange trust relating to
a deposit of a portion of net  proceeds  from a sale of land in  February  2002.
This resulted in $0.6 million of net proceeds being released to us, and resulted
in the accrual of a $0.2  million  payment to Mr.  Nardi and  affiliates  of Mr.
Nardi under a tax  indemnification  agreement  entered into by us at our initial
public  offering.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition  and  Results  of  Operations  -  Certain  Relationships  and  Related
Transactions" for a further discussion of these indemnities.

     On August 9, 2002, the joint venture that owned the Pine Meadows,  Building
E  project  extended  the  maturity  date of a  mortgage  note  payable,  with a
commitment of $9.3 million,  collateralized  by the project from July 1, 2002 to
August 16, 2002 in  anticipation  of finalizing an agreement with us to withdraw
as a partner.  On August 23,  2002,  we  transferred  our  interest  in the Pine
Meadows,  Building E project to our joint venture  partner.  In consideration of
the foregoing  transfers,  we were released from our obligations under the joint
venture agreement and the documents that evidenced and secured the mortgage note
payable.

     On August 12, 2002, our Board  increased the size of the Board from five to
six members by adding one Class II Trustee  position.  The Board  simultaneously
elected Douglas  Crocker II, the Chief  Executive  Officer and a Board member of
Equity Residential  Properties Trust, to fill the Class II Trustee position. The
position has a term expiring at our annual shareholders meeting in 2005.

     On August 21, 2002, we announced that Citadel leased two additional  floors
in our Bank One Corporate Center.  The additional space being leased consists of
68,271 square feet on the 26th and 27th floors of the project. When added to the
space on floors 32  through  37  contained  in the  original  lease,  Citadel is
leasing a total of  approximately  274,000  square  feet on eight  floors in the
1,502,113 square foot office tower.

     On August 29, 2002, 180 Acquisition  Company, LLC ("180 Acquisition") filed
a  complaint  (the  "Complaint")  against  us, our  Operating  Partnership,  our
Services Company, one of our subsidiaries holding our interests in the 180 North
LaSalle Street property in Chicago, Illinois (the "180 Interests"),  and Jeffrey
A. Patterson,  our Co-President and Chief Investment Officer.  The Complaint was
filed in the  County  Department,  Law  Division  of the  Circuit  Court of Cook
County, Illinois.

     In the  Complaint,  180  Acquisition  alleges  that the  defendants  orally
promised to sell the 180 Interests to them, and that 180  Acquisition  relied on
these alleged  promises,  notwithstanding  the facts that (i) a written contract
was not entered into among the parties and (ii) we  terminated  negotiations  to
sell the 180  Interests to 180  Acquisition  in July 2002.  180  Acquisition  is
asking the Court to award it $1.7 million in direct  damages,  $15.7  million in
lost profits and $34.9 million in punitive  damages.  We vigorously  dispute the
allegations contained in the Complaint,  deny making the promises alleged by the
plaintiff and believe that we have valid defenses in this case.  However,  there
can be no assurances that the outcome of this case will be favorable to us.

     On August 29, 2002,  we extended the maturity  date of the letter of credit
enhancing  the  industrial  revenue  bonds for the  office  building  located in
Knoxville,  Tennessee,  from  November 9, 2002 to February 17, 2003 for a fee of
$35,000.  This letter of credit  facility was terminated in connection  with the
sale of the property on November 21, 2002.

     On September  27, 2002,  we terminated  our lease of  approximately  33,690
square feet at our Bank One Corporate Center.

     On October 10,  2002,  Sedgwick,  Detert,  Moran & Arnold  ("SDMA"),  a San
Francisco-based  law firm, signed a sublease for 27,826 square feet at One North
Wacker Drive.  The sublease  expires  August 31, 2012 and mitigates a portion of
the lease  liability we assumed in connection with the Citadel lease at Bank One
Corporate  Center.  The lease term will  commence on June 1, 2003. In connection
with this sublease, we are required to deposit, in escrow, with the owner of One
North Wacker Drive, the sum of $1.1 million,  in six equal monthly  installments
of $0.2 million which  commenced in December,  2002, as security for the payment
of the difference in the rental amount payable by Citadel under its lease at One
North Wacker Drive and the rental amount payable by SDMA under its sublease. The
One North  Wacker  owner is  entitled to draw on this escrow only if the Citadel
lease at One North  Wacker Drive is  terminated  due to a default by Citadel and
the One North Wacker owner and SDMA enter into a direct lease.  Commencing  June
1, 2003,  certain amounts of the funds in the escrow are to be refunded to us on
a monthly basis.

     Our Services  Company agreed to purchase 700  Enterprise  Street in Aurora,
Illinois  ("700   Enterprise")   in  connection  with  Hyundai  Motor  America's
("Hyundai")  purchase of 19.65 acres of vacant land in the Prime Aurora Business
Park and our  Services  Company's  commitment  to develop a 350,000  square foot
industrial  building  on the land.  As part of this  transaction,  our  Services
Company  contracted to purchase 700 Enterprise from Hyundai for a price of $10.4
million and  subsequently  contracted  to sell the property to a third party for
the same price. On October 16, 2002, at the completion of the new building,  our
Services  Company  closed  on the  purchase  and  the  simultaneous  sale of 700
Enterprise.  As the transactions  closed  simultaneously,  title passed directly
from Hyundai to the third party.

<PAGE>


     On October 24, 2002, we executed a lease agreement with a third party for a
ten-year,  four month term on the entire 120,004 square foot industrial building
located at 1051 N. Kirk Road in Batavia,  Illinois,  subject to the execution of
an  acceptable  agreement  with our  lender.  This  agreement  was  subsequently
terminated as an acceptable agreement could not be reached with our lender.

     At our  initial  public  offering  in  November  1997,  we  entered  into a
consulting agreement with Mr. Nardi that had a three-year initial term. The term
of the consulting agreement automatically extended for additional one-year terms
unless  terminated by either party.  In February 2002, and prior to the date Mr.
Nardi became our  Chairman,  our Board  approved a commission  of $75,000 to Mr.
Nardi in connection  with a  build-to-suit  development  (See "Business - Recent
Developments"), which was paid to an affiliate of Mr. Nardi in October 2002.

     Since  the  resignations  of our  former  Chairman  and  our  former  Chief
Executive  Officer on April 8, 2002, Mr. Nardi has devoted  substantially all of
his time and energy toward his duties with our Company. Effective as of November
2002, the consulting agreement between Mr. Nardi and us was mutually terminated,
and  Mr.  Nardi  became  a  full-time  employee.  In  light  of  the  additional
responsibilities  assumed by Mr.  Nardi  since April 8, 2002,  our  Compensation
Committee  met  in  January  2003  and  approved  an  increase  in  Mr.  Nardi's
compensation from $220,000 per year to a total of $400,000 per year, retroactive
to April 8, 2002. Our  Compensation  Committee also approved a bonus of $400,000
for Mr. Nardi for 2002 and awarded Mr. Nardi options to purchase  100,000 common
shares at a purchase  price of $5.02 per share (the closing  price of our common
shares on the New York Stock Exchange on the last trading day immediately  prior
to the award).  These  options vest over three years in one-third  increments on
each annual anniversary of the award.

     On November  1, 2002,  we  notified  the lender on our IBM Plaza,  Chicago,
Illinois  property  that we elected to  exercise  our right to extend the $160.0
million mortgage note payable,  secured by the property (the current outstanding
principal balance is $153.2 million) until December 13, 2003 at an interest rate
of LIBOR plus 1.7%. The terms of the loan agreement  require us to enter into an
interest rate hedge  agreement  indemnifying  the lender  against  interest that
accrues on the loan at an annual rate in excess of 8.0%.  On December  10, 2002,
we entered into an interest rate cap agreement for the period  December 10, 2002
through December 13, 2003 for a notional amount of $153.2 million.  The interest
rate  under  this  agreement  is capped at the LIBOR  index  rate of 4.25%.  The
notional amount automatically reduced to $150.0 million on December 13, 2002. In
addition,  in order to extend the loan,  we were required to meet a debt service
coverage  ratio of 1.4 to 1.0 and to pay an extension  fee of $0.2  million.  We
satisfied both conditions.  Additionally, this loan was repaid on March 10, 2003
with  the  proceeds  of  a  $195.0  million  mortgage  loan  (described   below)
encumbering IBM Plaza.

     On November 14, 2002, we disclosed that Dearborn Center, L.L.C.  ("Dearborn
Center"), our affiliate,  had reached an agreement dated November 14, 2002, with
Bank One to  enter  into a lease  amendment  to Bank  One's  lease  (the  "Lease
Amendment") at our Bank One Corporate Center setting the rent  commencement date
of the lease for the entire leased  premises at January 1, 2003,  subject to the
consent of certain third party lenders, which have since been obtained. Bank One
has commenced paying rent pursuant to the terms of the Lease Amendment.

     On November  21, 2002,  we closed on the sale of Centre  Square I, a 93,711
square foot office building located in Knoxville,  Tennessee,  for $5.1 million.
In connection with this sale, we redeemed approximately $3.9 million of the $9.0
million of bonds that  encumbered the property.  Funds in an escrow account with
the lender were used to redeem the $3.9 million of bonds. The purchaser  assumed
the remainder of the outstanding  bonds.  Additionally,  in connection with this
sale,  the  facility  that  provided  credit   enhancement  for  the  bonds  was
terminated.

     On December 16, 2002, we executed a letter agreement (the  "Confidentiality
Agreement") with Northland Capital Partners,  L.P., Northland Capital Investors,
LLC, NCP, LLC and Northland Investment Corporation (collectively,  "Northland"),
pursuant to which we provided  Northland  and its  advisors and  attorneys  with
certain  confidential  information  relating  to us solely  for the  purpose  of
Northland's  evaluation  of a  possible  negotiated  transaction  between us and
Northland.  We and  Northland  engaged in  preliminary  discussions  regarding a
possible  recapitalization  proposed by Northland. The Confidentiality Agreement
included,  among  other  things,  a one-year  standstill  provision  prohibiting
Northland  from  taking  certain  actions  relating  to us,  subject  to certain
exceptions  in the event that either  party  notifies the other party that it is
ceasing  negotiations  relating to a proposed  negotiated  transaction  with the
other party. We have not in the past announced, and do not currently intend as a
matter of course in the future to announce, our execution of confidentiality and
standstill  agreements or the  commencement of discussions or negotiations  with
any third parties.  We are making this disclosure in light of Northland's public
disclosure  of the  Confidentiality  Agreement in its amended  Schedule  13D. On
February 6, 2003,  we announced  that our Board,  after  evaluating  Northland's
proposal with its financial  advisors,  determined that it was not interested in
pursuing the recapitalization  proposal presented to us by Northland.  Our Board
instead   decided  that  it  would  continue  to  pursue  our  other   strategic
alternatives  including  but not  limited to, a sale,  merger or other  business
combination  involving our entire company.  After our Board's  decision,  senior
management  informed Northland on February 5, 2003 of the Board's  determination
after which  Northland  sent a letter to us on the same day stating  that it was
terminating all discussions and negotiations  relating to a possible  negotiated
transaction.  Northland  publicly  disclosed the foregoing letter pursuant to an
amendment to its Schedule 13D filed with the SEC on February 6, 2003.

     On  December  18,  2002,  we  announced  that our  Board had  approved  our
engagement of Merrill Lynch & Company as our financial  advisor to assist in our
evaluation of our strategic alternatives,  including but not limited to, a sale,
merger or other  business  combination  involving  us. On February  6, 2003,  we
announced that we engaged Wachovia Securities as an additional financial advisor
in connection with our evaluation of our strategic alternatives.

     During the year ended December 31, 2002, we recognized  approximately  $2.3
million of lease termination fees from specific tenants, each of whom paid a fee
to terminate its lease obligation  before the end of the contractual term of the
lease. These fees are included in rental revenue for the year ended December 31,
2002.

     During the year ended  December 31, 2002, our Services  Company  recognized
$1.7 million of net income,  after applicable  income taxes, as the construction
manager in  connection  with the  construction  of an  industrial  build-to-suit
building.

     On March 10, 2003, we obtained a $195.0  million loan (the "Loan")  secured
by a first mortgage  encumbering our IBM Plaza office property (the "Property").
The Loan retired both the existing  senior and mezzanine  loans  encumbering the
Property.  The Loan  has a term of three  years,  with  two  one-year  extension
options  exercisable  for a fee of 0.25% of the Loan amount for each  extension.
The Loan  does not  require  any  scheduled  repayments  of  principal  prior to
maturity.  The Loan has an  interest  rate of 285 basis  points  over  one-month
LIBOR,  provided  that the first  $160.0  million of principal of the Loan has a
minimum LIBOR rate of 2.0% and the  remaining  $35.0 million of principal of the
Loan has a minimum LIBOR rate of 3.0%.  This results in a blended minimum annual
interest rate for the entire Loan of 5.03%.  As required by the Loan  documents,
we obtained an interest  rate cap of LIBOR at 6.6% for the term of the Loan.  At
closing,  we paid Lehman a financing fee of 1.0% of the principal  amount of the
Loan.  The loan may not be prepaid  during the first  twelve  months of the Loan
term, but may be prepaid in whole or in part thereafter,  without any prepayment
penalty.

     We used the net proceeds from the Loan to (i) repay in full a $30.3 million
mezzanine  loan relating to the Property  which  accrued  interest at 11.75% per
year, (ii) repay in full a $150.8 million first mortgage loan (including an exit
fee of $0.8 million)  encumbering  the Property  which  accrued  interest at 170
basis  points  over  one-month  LIBOR per year,  (iii)  fund  real  estate  tax,
insurance and capital  improvement escrows of $2.5 million as required under the
terms  of  the  Loan,  (iv)  pay  $8.5  million  in  partial  repayment  of  the
Exchangeable Note from SCPG plus $0.4 million of accrued interest and $60,000 of
exit fee, with the remainder available for general corporate purposes.

     Our  Operating  Partnership  has  guaranteed  $4.0 million of the principal
amount  of the Loan and the cost of any  remediation  of  asbestos  required  in
connection  with the  leasing  of the  Property  up to a maximum  amount of $6.0
million. We are required under the Loan to place $3.0 million in escrow from the
cash flow from the Property in 24 equal  installments of $125,000  commencing in
January 2004 to secure the cost of any necessary  remediation in the future. The
Property  currently  contains  asbestos  in the  form  of  non-friable  spray-on
insulation  located  on the  decking  and  beams of the  building.  We have been
informed by our  environmental  consultants that the asbestos in the Property is
not friable and no remediation of the asbestos is necessary.

     The parking garage for the Property is located on land which we lease under
a ground lease with a third party. In order to obtain certain  modifications  to
the ground  lease  that were  required  by the lender of the Loan,  we agreed to
increase  the rent under the ground  lease from $10,278 per month to $18,389 per
month for its remaining term which ends in April 2019. One year of this rent was
required to be prepaid at closing.

     Pursuant to the terms of the Loan,  we are required to make monthly  escrow
deposits  for real  estate  taxes,  insurance  and  ground  rent.  In  addition,
commencing in January 2004, the lesser of $450,000 or available cash flow of the
Property  per  month  is to  be  deposited  into  a  tenant  improvement/leasing
commission  reserve account (the "Account").  If there is available cash flow in
excess of  $450,000,  any  amounts  in excess of  $450,000  are  required  to be
deposited into the Account to the extent any prior  month(s)  deposits were less
than  $450,000.  If a  certain  leasing  benchmark  provided  by the Loan is not
satisfied at the Property by August 9, 2005, all net cash flow from the property
is required to be deposited into the Account until an aggregate of $15.0 million
has been deposited in the Account.  However,  in such event,  if an aggregate of
$9.0  million has not been  deposited  in the account by August 9, 2005,  we are
required to deposit any shortfall into the Account at that time. If an aggregate
of $15.0  million has not been  deposited by August 9, 2006,  we are required to
deposit any shortfall into the Account at that time. If the leasing benchmark is
satisfied  by August 9, 2005,  $6.0 million  must have been  deposited  into the
Account and, if not, we are required to deposit any  shortfall  into the Account
at that time.  Letters of credit may be provided in lieu of cash deposits to the
Account.

     On March 19, 2003, we closed a $75.0 million  mezzanine loan provided by an
affiliate of LNR Property  Corporation ("LNR Loan").  The LNR Loan is secured by
an  assignment  of  membership  interests in our  affiliate  owning the Bank One
Corporate Center property.  The LNR Loan,  combined with $1.5 million of our own
funds,  retired an existing  mezzanine  loan related to the property and related
accrued interest.  Our guarantees and financial covenants under the LNR Loan are
substantially  the  same as those  contained  in the  Retired  Loan,  except  as
discussed below.

     The LNR Loan matures on January 5, 2004,  and may be extended for one year,
provided certain conditions are satisfied, including payment of a 0.5% extension
fee and the extension or refinancing of the  construction  loan  encumbering the
Property.  The LNR Loan has a 15% annual  interest  rate with a 10%  current pay
rate,  plus a 1% exit fee.  Commencing  April 1, 2003, and through and including
January 1,  2004,  we are  required  to deposit  $0.8  million  per month into a
reserve  account to fund  commissions  and other  costs  related to the  Citadel
Obligation.  This deposit is subject to adjustment as additional leasing related
to the Citadel  Obligation is achieved.  Additionally,  if certain  requirements
contained in the loan  documents  are not  satisfied by April 9, 2003,  then the
lender  under the LNR Loan will earn an  additional  $1.0  million fee which has
been placed in escrow.

     On March 19,  2003,  simultaneously  with the  closing of the LNR Loan,  we
purchased all of our joint venture  partner's  ownership  interest in the entity
that owns Bank One Corporate Center making us the sole owner of the property. We
paid $9.2 million for the interest,  of which $0.5 million was deposited into an
escrow  account  that is to be released  upon the  satisfaction  of certain post
closing obligations of our joint venture partner (and in all events on the first
anniversary  of the closing  date).  Our joint  venture  partner  also agreed to
continue to provide certain development  services for a period of up to one year
(or a lesser period as determined by us) for a monthly fee.  Simultaneously with
this  transaction  our joint venture  partner paid us in full a loan  previously
made by us to them of $1.0 million plus accrued interest of $0.2 million.

     During 2002, we incurred the following new indebtedness:


<PAGE>


<TABLE>
<CAPTION>



                                                   Original Loan
                                                 Commitment Amount
                                                   (In Millions)
                 Collateral                                              Interest Rate        Maturity Date
--------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>                   <C>
Arlington Heights Enterprise Center, East
   Chicago Enterprise Center, Chicago Enterprise
   Center, Hammond Enterprise Center, Bonds
   relating to Chicago Enterprise Center (1)             $25.2                 2.35% (1)           1/07

Security Capital Preferred Growth (2)                    $57.3                       (2)           7/03



</TABLE>

<PAGE>



(1)      This facility provides credit enhancement for the bonds relating to the
         properties.  This facility  replaced the letter of credit facility with
         Bank One.  The annual  letter of credit fee is 2.35%.  If there are any
         draws under the letter of credit facility,  additional interest charges
         may apply.

(2)      See the description of the SCPG transaction  described above in "Recent
         Developments".

Segment Reporting Data

     See Note 19 - Segment  Reporting to our Consolidated  Financial  Statements
for a discussion of our operating  segment data for the years ended December 31,
2002, 2001 and 2000.

Competition

     We compete with many other owners and  developers of office and  industrial
real estate, some of which may have greater financial and marketing resources or
expertise.  In addition, the amount of available space in 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 and on the
rents charged at our properties.  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.

Services Company

     Our  Services  Company was formed in March 1997 under the laws of the State
of  Maryland.  For the year  beginning  January 1, 2001,  our  Services  Company
elected to be treated as a Taxable REIT Subsidiary (as defined in the Code). Our
Services Company provided certain  corporate  advisory,  tenant  representation,
management,  leasing,  construction  management  and painting  services to third
parties.  The Services  Company's leasing division provided leasing services for
third-party property owners. Our Services Company's tenant improvements division
provided construction  management services for tenant improvements,  renovations
and other construction related services in connection with our owned,  acquired,
developed or managed  properties.  In the first  quarter of 2002,  we decided to
eliminate the Services Company's  divisions which provided  corporate  advisory,
third party leasing,  tenant improvement  construction and tenant representation
services as part of our strategy to  concentrate on our core business of leasing
and managing real estate.  We continue to provide certain services  requested by
tenants through our Services Company. As a Taxable REIT Subsidiary, our Services
Company can provide services to tenants of our properties, even if such services
are not considered services customarily  furnished in connection with the rental
of real estate property,  without causing the rental income from such properties
to be treated as other than rents from real property. In addition,  the Services
Company holds the management  contracts for the Continental Towers and 180 North
LaSalle Street properties.

Government Regulations

     Environmental  Matters.  Phase I or similar environmental  assessments have
been  performed  by  independent   environmental   consultants  on  all  of  our
properties.  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 a  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 to us as an equity contribution by The Prime
Group, Inc. ("PGI") at the time of our initial public offering. These properties
are in remediation  programs  sponsored by the appropriate  state  environmental
agencies.  PGI agreed to retain  liability,  and  indemnify us, for the costs of
environmental  remediation  with regard to these  industrial  properties,  which
environmental   consultants   have   estimated  will  cost,  in  the  aggregate,
approximately  $3.2  million.  During 1997,  PGI initiated  lawsuits  against an
environmental  consultant  to cover the cost of the remedial  action  plans.  In
1998,  PGI sued a then current (and now former)  tenant of one of the properties
to recover the cost of certain remedial action plans.

     The above  lawsuits have been pursued by PGI in the names of our affiliates
under an agreement entered into with PGI at our initial public offering.  PGI is
entitled to retain any of the proceeds  from these  lawsuits and PGI is required
to undertake the  environmental  cleanup of the property.  We are relying on the
credit of PGI under the  indemnification  for the cleanup costs and any proceeds
from the lawsuits against the environmental  consultant and former tenant, which
based on the advice of outside legal counsel,  we believe have value  sufficient
to fund the cost of cleanup.

     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. The previous owner
and other third parties have placed approximately $0.8 million in escrow to fund
the  clean-up  of the  property.  In  November  2002,  we  received a no further
remediation  letter  for this site from the  Illinois  Environmental  Protection
Agency approving the completion of the remediation work.

     In  November  2001,  at the  request of the  Department  of the Army of the
United  States of America (the  "DOA"),  we granted the DOA a right of entry for
environmental  assessment and response in connection  with our property known as
the Atrium at 280 Shuman Boulevard in Naperville,  Illinois (the "Atrium").  The
DOA  informed us that the  property  was located  north of a former Nike Missile
Base and that the DOA was investigating  whether certain regional  contamination
of the groundwater by  trichloethene  ("TCE") emanated from the base and whether
the DOA would be required to restore the  environmental  integrity of the region
under the Defense  Environmental  Restoration  Program for Formerly Used Defense
Sites. In December 2001, the results from the tests of the groundwater  from the
site indicated  elevated levels of TCE. It is currently our understanding  based
on information provided by the DOA and an analysis prepared by our environmental
consultants that (i) the source of the TCE contamination did not result from the
past or current activities on the Atrium property, (ii) the TCE contamination is
a regional  problem that is not confined to the Atrium and (iii) the DOA has not
yet  identified  the  source of the TCE in the  groundwater.  Our  environmental
consultants  have  advised us that the United  States  Environmental  Protection
Agency (the "EPA") has issued a Statement of Policy  towards  owners of property
containing  contaminated  acquifers.  According to this policy,  it is the EPA's
position that where  hazardous  substances have come to be located on a property
solely as a result of subsurface migration in an aquifer from an offsite source,
the EPA will not take enforcement actions against the owner of the property. The
groundwater  underneath  this  property is  relatively  deep,  and the  property
obtains its potable  water  supply  from the City of  Naperville  and not from a
groundwater well. Accordingly, we do not anticipate any material liability to us
because of this TCE contamination.

     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 our properties  have revealed any  environmental  liability that,
after giving effect to the contractual  indemnities and escrows described above,
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  financial  condition  could be further
adversely affected.

     Costs of Compliance with Americans with Disabilities Act (the "ADA"). 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 that we currently anticipate, our ability to make
distributions to shareholders could be further 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 net income and our ability
to make distributions to our shareholders.

Insurance

     In the regular course of our business, we maintain comprehensive  liability
and all  risk  property  insurance  with  respect  to our  properties.  Prior to
September 11, 2001,  insurance  policies  generally  did not  expressly  exclude
coverage for hostile  acts,  except for acts of war,  military  action,  nuclear
hazards and other standard insurance exclusions.

     After  September  11,  2001,  insurance  policies  generally  have added an
express exclusion for terrorist acts from all risk coverage.  On March 22, 2002,
upon the  expiration of the insurance  policies we previously  obtained prior to
September 11, 2001, we obtained new property  insurance  policies  consisting of
(i) a primary policy covering the first $100.0 million of physical damage to the
properties in our portfolio ("Primary Policy") and (ii) several layers of excess
property  insurance  policies in an aggregate  amount of $400.0 million covering
physical  property  damages to our  portfolio  in excess of our  Primary  Policy
("Excess Policies").  Our Primary Policy includes insurance for "Terrorism" as a
covered loss although the word  "Terrorism" is not expressly  defined.  However,
our Primary Policy expressly contains other standard  exclusions such as acts of
war, military action and nuclear hazards.  Our Excess Policies expressly exclude
terrorism as a covered loss and contain other standard insurance exclusions such
as acts of war, military action and nuclear hazards.

     In addition to the  foregoing  policies,  on August 16, 2002 we obtained an
additional  terrorism insurance policy with an aggregate limit of $130.0 million
which  provides  additional  terrorism  coverage  in excess of the limits of our
Primary Policy with respect to three of our downtown Chicago properties: 77 West
Wacker Drive, an  unconsolidated  joint venture  property,  330 North Wabash and
Bank One Corporate Center.

     Effective  November 26, 2002, the United States federal  government  passed
the Terrorism  Risk Insurance Act of 2002 ("Act").  This law provides  insurance
companies with a government sponsored financial backing for "acts of terrorism".
This new law requires  insurance carriers to provide as a covered loss, "acts of
terrorism" as defined in the Act.

     The Act defines the term "act of terrorism" as any act that is certified by
the Secretary of the Treasury,  in concurrence  with the Secretary of State, and
the Attorney General of the United States; to be a violent act or an act that is
dangerous to human life, property or infrastructure;  to have resulted in damage
within the United  States,  or outside  the United  States in the case of an air
carrier or vessel or the  premises of a United State  mission;  and to have been
committed by an individual or individuals acting on behalf of any foreign person
or foreign interest,  as part of an effort to coerce the civilian  population of
the United States or to influence the policy or affect the conduct of the United
States Government by coercion.  The Act also provides that no terrorist act that
is part of the course of war, as declared by  Congress,  will be certified as an
"act of terrorism".

     The Act provides  that prior  terrorism  exclusions  in property  insurance
policies  became  null  and  void to the  extent  of the  definition  of "act of
terrorism".  Under  the  Act,  insurance  carriers  have  the  right  to  charge
additional  premiums for terrorism insurance by notifying insureds in writing of
the cost of the additional coverage.

     We are at risk for  financial  loss,  which could be material,  relating to
terrorist  acts not  covered  under the Act,  our  Primary  Policy or our Excess
Policies and for losses in excess of our policy limits.  In addition,  we are at
risk under our insurance  policies for losses of any amount relating to standard
coverage exclusions of acts of war, military action,  nuclear hazards, and other
standard insurance exclusions (such as governmental action,  illegal acts of the
insured and pollution), which in the event of such losses could be material.

     Our all risk property  policies  include  coverage for flood and earthquake
losses.  In certain instances our policy sub-limits for these losses may be less
than the value of specific properties.  Our properties are not generally located
in geographical areas typically subject to flood or earthquake losses.  However,
we may be at risk of financial  losses  resulting  from losses that exceed these
policy sub-limits.

     We maintain  liability  insurance  including  but not limited to commercial
general  liability,  auto liability,  garage  liability and commercial  umbrella
insurance  in amounts and limits that are  similar to other  property  owners in
similar  geographic areas of our properties.  Additionally,  we maintain workers
compensation  and employers  liability  insurance in compliance  with  statutory
limits and  requirements.  These policies contain  standard  exclusions that are
typical of liability insurance policies.  We may be at financial risk for losses
that exceed our limits of liability or which may be excluded  from the insurance
policies, which could be material.

     Under  environmental  laws,  there may be  certain  regulations  that would
require us to expend funds for  environmental  remediation of our properties and
adjacent properties.  Certain environmental exposures are excluded from coverage
under some of our insurance policies. These costs could be material, which could
adversely  affect our financial  condition.  We are unable to predict changes in
future  environmental  law and the  financial  impact  we may incur as result of
these changes.

Employees

     As of December 31, 2002, we had approximately 176 full-time  employees.  We
believe that our relations with our employees are satisfactory.

Website

     We  make  our  periodic  and  current  reports  available  on our  website,
www.pgrt.com,   as  soon  as  reasonably   practicable  after  the  reports  are
electronically filed with the United States Securities and Exchange Commission.


<PAGE>


ITEM 2.  PROPERTIES

General

     We own 15 office properties and 30 industrial properties. This includes our
recently  completed Bank One Corporate Center in downtown  Chicago.  At December
31, 2002, we owned in excess of 97% of the joint venture that owns this property
and we  consolidated  the  operations  of this  property as we had a significant
controlling  financial  interest in this entity. On March 19, 2003, we purchased
all of our joint venture partner's  ownership interest in the joint venture that
owns this property  making us the sole owner of the  property.  Also included is
Continental Towers, Rolling Meadows, Illinois, on which we own a second mortgage
note and 180 North LaSalle Street, Chicago, Illinois, on which we hold the Class
"B" and "R" REMIC  interests in a first  mortgage  loan and the second  mortgage
note. As a result, we have a controlling  financial interest in these properties
and we  consolidate  both  properties'  operations.  Our  properties are located
primarily in the Chicago  metropolitan  area.  In addition,  we own a 50% common
interest  in a joint  venture  which owns the 944,556  square foot office  tower
located at 77 West Wacker Drive in downtown  Chicago and a 23.1% common interest
in a venture which owns a 386,048 office property located in Mesa, Arizona.  Our
properties located in the Chicago  metropolitan area accounted for approximately
89.6% of our rental revenue and 97.4% of our tenant  reimbursements  revenue for
the year  ended  December  31,  2002.  We own one  office  property  located  in
Cleveland, Ohio.

     Our management  team has developed or  redeveloped a significant  number of
office  properties,  such as 77 West Wacker Drive, 180 North LaSalle Street, and
Bank One Corporate  Center,  all located in downtown  Chicago.  In the course of
such activities, we have acquired experience across a broad range of development
and  redevelopment  projects.  In November  2002,  we placed Bank One  Corporate
Center in service. Bank One Corporate Center,  located in downtown Chicago, is a
Class A office tower containing an aggregate of 1,502,113  rentable square feet.
The building is 66.6% leased to three anchor tenants including Bank One, Citadel
and Holland & Knight.  As an  inducement  to consummate  the Citadel  lease,  we
agreed to reimburse Citadel for its financial  obligations  related to a 161,488
square foot lease obligation at a recently  constructed  office tower located at
One North Wacker Drive in downtown Chicago.  We are in the process of mitigating
this  obligation by subleasing the space at One North Wacker Drive.  The related
estimated  incentive to the lessee has been  capitalized  as a deferred  leasing
cost and will be amortized on a straight-line basis over the life of the Citadel
lease.  The deferred  leasing cost and related  liability for leases assumed are
periodically  adjusted  to reflect the effects  signed  subleases  have upon our
estimates. See additional discussion under "Business - Recent Developments."

     We own  approximately  202.1 acres of land.  We also have rights to acquire
approximately 31.6 acres of developable land. We believe that this land could be
developed to have  approximately  1.2 million  square feet of additional  office
space and approximately 3.8 million square feet of additional  industrial space.
However,  we do not anticipate  commencing any new  development  projects in the
near future.

     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"). In
the latter  cases 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 (i) a net basis,  with  tenants  paying  their
proportionate share of real estate taxes, insurance, utility and other operating
expenses as additional  rent or (ii) a 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, 2002,  unless  indicated  otherwise.  Through the
Operating  Partnership and other subsidiaries,  we own a 100% interest in all of
the office  and  industrial  properties,  except  for the  unconsolidated  joint
venture  properties  identified  below,  Continental  Towers  (we own the second
mortgage note on this  property)  and 180 North  LaSalle  Street (we own (i) the
Class "B" and "R" REMIC  interests  relating to the first mortgage loan and (ii)
the second mortgage note and have an option to purchase the property).


<PAGE>





<TABLE>
<CAPTION>





                                                                                       Net        Percentage
                                                                    Year Built/     Rentable     Leased as of
                                                  Location           Renovated     Square Feet   12/31/02(%)
                                      ---------------------------------------------------------------------
<S>                                       <C>                         <C>           <C>               <C>
Office Properties:
131 South Dearborn Street
  (Bank One Corporate Center) (1)         Chicago, IL                 2002         1,502,113          66.6
330 North Wabash Avenue (IBM Plaza)       Chicago, IL                 1971         1,358,913          97.1
1701 Golf Road (Continental Towers) (2)   Rolling Meadows, IL         1977 thru      925,091          78.0
                                                                      1981, 2001
33 West Monroe Street                     Chicago, IL                 1980           846,759          90.7
208 South LaSalle Street                  Chicago, IL                 1914/1956/     863,756          91.9
                                                                      1982/1991
1900 East Ninth Street (National City
Center)                                   Cleveland, OH               1980           767,181         100.0
180 North LaSalle Street (3)              Chicago, IL                 1982/1999      758,478          89.7
800-810 Jorie Boulevard                   Oak Brook, IL               1961/1992      191,666          97.3
4343 Commerce Court (The Olympian Office
Center)                                   Lisle, IL                   1989           165,619          88.9
740-770 Pasquinelli Drive (Brush Hill
Office Center)                            Westmont, IL                1986           109,877          97.9
1600-1700 167th Street (Narco River
Business Center)                          Calumet City, IL            1981            65,386          79.6
280 Shuman Blvd. (Atrium)                 Naperville, IL              1979            65,361          87.4
Enterprise Center II                      Westchester, IL             1999            62,619          86.7
1301 E. Tower Road (Narco Tower)          Schaumburg, IL              1992            50,400         100.0
7100 Madison Avenue                       Willowbrook, IL             1999            50,157         100.0
                                                                                 ------------------------------
Office properties subtotal                                                         7,783,376          86.8
                                                                                 ------------------------------



</TABLE>


(1)      At December  31, 2002,  we owned in excess of 97% of the joint  venture
         that owns and developed this office  property and we  consolidated  our
         ownership  of this  property.  The  building  was  placed in service in
         November  2002,  with tenants  occupying  space in the first quarter of
         2003.  On  March  19,  2003,  we  purchased  all of our  joint  venture
         partner's  ownership  interest  in the  joint  venture  that  owns this
         property making us the sole owner of the property.

(2)      We hold a mortgage  note  receivable  on this office  property and have
         consolidated  the  underlying  property  operations  because we receive
         substantially   all  of  the  economic   benefits  of  the   property's
         operations.

(3)      We hold (i) the Class "B" and "R" REMIC interests relating to the first
         mortgage loan and (ii) the second mortgage note receivable on, and have
         an option to purchase,  this office property and have  consolidated the
         underlying property  operations as we receive  substantially all of the
         economic benefits of the property's operations.


<PAGE>


<TABLE>
<CAPTION>




                                                                                   Net        Percentage
                                                                Year Built/     Rentable     Leased as of
                                               Location          Renovated     Square Feet   12/31/02(%)
                                        -------------------------------------------------------------------
<S>                                        <C>                     <C>           <C>        <C>
Industrial Properties:

Warehouse/Distribution Facilities:
  425 E. Algonquin Road                    Arlington Heights,      1978             304,506    100.0
                                           IL
  1455 Sequoia Drive                       Aurora, IL              2000             257,600     83.9
  11045 Gage Avenue                        Franklin Park, IL       1970/1992        136,600    100.0
  4248, 4250 and 4300 Madison Street       Hillside, IL            1980             127,129     81.3
  1051 N. Kirk Road                        Batavia, IL             1990             120,004    100.0
  4211 Madison Street                      Hillside, IL            1977/1992         90,344    100.0
  4160-4190 W. Madison Street              Hillside, IL            1974/1992         79,532    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
  555 Kirk Road                            St. Charles, IL         1990              62,400    100.0
  370 Carol Lane                           Elmhurst, IL            1977/1994         60,290    100.0
  550 Kehoe Blvd.                          Carol Stream, IL        1997              44,575    100.0
  1543 Abbott Drive                        Wheeling, IL            1983              43,930    100.0
  388 Carol Lane                           Elmhurst, IL            1979              40,502    100.0
  343 Carol Lane                           Elmhurst, IL            1989              30,084      0.0
  350 Randy Road                           Carol Stream, IL        1974              25,200     87.5
  11039 Gage Avenue                        Franklin Park, IL       1965/1993         21,935    100.0
  1401 S. Jefferson Street                 Chicago, IL             1965/1985         17,265    100.0
  200 S. Mitchell                          Addison, IL             1981             152,200    100.0

Overhead Crane/Manufacturing Facilities:
Chicago Enterprise Center                  Chicago, IL             1916/1991-1996

  13535-A S. Torrence Avenue                                                         385,345   100.0
  13535-B S. Torrence Avenue                                                         242,199    33.8
  13535-C S. Torrence Avenue                                                          99,333   100.0
  13535-D S. Torrence Avenue                                                          77,325   100.0
  13535-E S. Torrence Avenue                                                          50,983   100.0
  13535-F S. Torrence Avenue                                                          56,486   100.0
  13535-G S. Torrence Avenue                                                          55,213     0.0
  13535-H S. Torrence Avenue                                                          73,442    95.8
East Chicago Enterprise Center             East Chicago, IN        1917/1991-1997

  Building 2 (4407 Railroad Avenue)                                                  169,435    17.1
  Building 3 (4407 Railroad Avenue)                                                  291,550    52.9
  Building 4 (4407 Railroad Avenue)                                                   87,484    98.1
  4635 Railroad Avenue                                                                14,070   100.0
Hammond Enterprise Center                  Hammond, IN             1920-1952
  4507 Columbia Avenue                                                               256,595   100.0
  4527 Columbia Avenue (4)                                                            16,701    66.4
  4531 Columbia Avenue                                                               250,266    99.2
                                                                                  -------------------------
Industrial properties subtotal                                                      3,874,712   84.4
                                                                                  -------------------------
Portfolio total                                                                    11,658,088   86.0
                                                                                   =========================

Unconsolidated Joint Venture Properties:
77 West Wacker Drive (5)                   Chicago, IL             1992               944,556   97.7
Thistle Landing (6)                        Phoenix, AZ             1999               386,048   57.1


</TABLE>


<PAGE>



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

(5)  We own a 50% common  ownership  interest in a joint  venture that owns this
     office  property and account for our  ownership  in the property  using the
     equity method.

(6)  We own a 23.1% common ownership  interest in a joint venture that owns this
     office  property and account for our  ownership  in the property  using the
     equity method.

ITEM 3. LEGAL PROCEEDINGS

     Except  as  described  below,  neither  we nor  any of our  properties  are
presently subject to any material  litigation or legal  proceeding,  nor, to our
knowledge,  is any material or other litigation or legal  proceeding  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.

     In January  2000, we entered into an office lease with Bank One for 603,767
square  feet in our Bank One  Corporate  Center.  Pursuant  to the  terms of the
lease,  we, as the landlord under the lease,  previously  notified Bank One that
rent was  expected to commence  on the first  237,896  square feet of the leased
premises on September 26, 2002,  subject to our  substantially  completing  base
building  construction,  and that rent was expected to commence on an additional
125,212,  188,310  and 66,549  square  feet of the leased  premises  on or about
September 26, 2002,  October 22, 2002 and November 5, 2002,  respectively.  Bank
One then  informed  us that it did not  agree  with the  foregoing  commencement
dates.  On November 14, 2002, we and Bank One entered into a lease  amendment to
Bank One's lease, which amendment set the rent commencement date of the lease at
January 1, 2003 for the entire  603,767 square feet.  Other than  specifying the
rent  commencement  date,  none of the major  business  terms of the lease  were
modified.  The lenders have  consented to the lease  amendment  and Bank One has
commenced paying rent.

     On August 29,  2002,  180  Acquisition  filed a  Complaint  against us, our
Operating Partnership,  our affiliated Services Company, one of our subsidiaries
holding the 180 interests,  and Jeffrey A. Patterson, our Co-President and Chief
Investment  Officer.  The  Complaint  was filed in the  County  Department,  Law
Division of the Circuit Court of Cook County, Illinois.

     In the  Complaint,  180  Acquisition  alleges  that the  defendants  orally
promised to sell the 180 Interests to them, and that 180  Acquisition  relied on
these alleged  promises,  notwithstanding  the facts that (i) a written contract
was not entered into among the parties and (ii) we  terminated  negotiations  to
sell the 180  Interests to 180  Acquisition  in July 2002.  180  Acquisition  is
asking the Court to award it $1.7 million in direct  damages,  $15.7  million in
lost profits and $34.9 million in punitive  damages.  We vigorously  dispute the
allegations contained in the Complaint,  deny making the promises alleged by the
plaintiff and believe that we have valid defenses in this case.  However,  there
can be no assurances the outcome of this case will be favorable to us.

     The Internal  Revenue  Service (the "Service") has conducted an examination
of the federal  income tax returns filed by certain of our  affiliated  entities
for the taxable year ended December 31, 1999. The Service's examination included
the review of certain  transactions  involving our  acquisition of the IBM Plaza
office property located in Chicago, Illinois, which was reported on the examined
returns  as  acquired  in  connection  with a  non-taxable,  like-kind  exchange
involving  an interest in the 77 West Wacker Drive  office  property  located in
Chicago,  Illinois  (the "1999  transaction").  On March 13,  2003,  the Service
issued preliminary  reports proposing that the 1999 Transaction  constituted the
taxable sale of an interest in 77 West Wacker  Drive.  According to the Service,
the nature of the 1999 Transaction  required  recognition of a long-term capital
gain in the approximate amount of $94.6 million,  of which  approximately  $12.1
million  would be allocated to us, and the remainder of which would be allocated
to the other parties who were partners in our Operating  Partnership  during the
taxable year ended  December 31, 1999.  The Service's  preliminary  reports also
proposed  the  imposition  of an  accuracy-related  penalty  equal to 20% of the
additional tax due in this matter.

     The 1999  Transaction  was  structured  in a  conventional  manner with the
advice of our legal and  accounting  advisors.  We,  based upon  advice from our
outside  counsel and advisors,  believe that the  Service's  position is without
merit  and is based on a  misinterpretation  of the law.  We  disagree  with the
proposed  adjustments set forth in the Service's  preliminary reports and intend
to seek  administrative  relief by  appealing  the  findings of the  preliminary
reports (or any final examination  reports issued in this matter) to the Appeals
Office  of  the  Service.  We  intend  to  vigorously   challenge  any  proposed
adjustments that cannot be resolved.  At this time, we are not able to determine
or to predict with any degree of certainty whether the issues will be agreed and
resolved.  It is  possible  that  the  issues  will  be the  subject  of a final
administrative  notice  asserting  liability,  which would  likely  result in us
filing a petition or complaint for relief in either the United States Tax Court,
the United States Court of Federal Claims, or a United States District Court.


<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 2002.

                                     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 24,  2003,  the reported
closing  sale price on the NYSE was  $5.28,  and there  were  15,725,629  common
shares outstanding held by approximately  3,100 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 years ended December 31, 2002
and 2001:


<PAGE>



                                                                 Cash
                                                             Distributions
                              High              Low            Paid (1)
                        -----------------------------------------------------

Fiscal Year 2002
First quarter                 $ 9.85         $ 6.80           -     (2)
Second quarter                  8.36           4.05           -     (2)
Third quarter                   6.66           4.10           -     (2)
Fourth quarter                  5.30           4.26           -     (2)

Fiscal Year 2001
First quarter                 $14.75         $13.88             $0.3375
Second quarter                 13.95          12.70              0.3375
Third quarter                  14.56          11.73              0.3375
Fourth quarter                 13.45           8.42           -     (2)




<PAGE>



(1)  All distributions are per common share and common unit.

(2)  No distributions were declared or paid for the four quarters of 2002 or for
     the 4th quarter of 2001.

     Distributions  on our  common  shares and  common  units are not  permitted
unless all current and any accumulated  distributions on our Series B Shares and
the related preferred units in the Operating  Partnership have been paid in full
or  declared  and set aside for  payment.  We made  quarterly  distributions  to
holders of our common shares and Operating  Partnership common units through the
third  quarter of 2001.  Due to a number of factors  and in light of our current
capital  resources and needs, our Board decided not to pay a distribution on the
common  shares and units during  2002.  (See  "Business - Business  Strategies -
Liquidity and Capital  Requirements.")  Any future  distributions  on our common
shares will be made at the  discretion of our Board.  These  distributions  will
depend on the actual cash available for distribution,  our financial  condition,
capital requirements,  the completion of capital events,  including refinancings
and asset sales, the annual distribution  requirements under the REIT provisions
of the Code, and such other factors as our Board deems relevant.  We can give no
assurance  that we will be able to  complete  capital  events  or,  if they  are
completed,  whether they will be on terms that are  favorable to us. We also can
give no assurances that if capital events are completed on terms favorable to us
or  otherwise,  distributions  on our common  shares  and  common  units will be
resumed in 2003 or thereafter.  In addition,  we can give no assurances  that we
will  continue  to be able to make  distributions  on our  preferred  shares  of
beneficial interest.

     Concurrently  with the  completion  of our  initial  public  offering,  the
Operating  Partnership  issued an aggregate  of  9,994,310  common units to PGI,
Primestone  (a joint  venture of PGI) and a third party (See  "Business - Recent
Developments"),  contributors  and certain members of management in exchange for
property contributions and cash. In addition,  since our initial public offering
through December 31, 2001, the Operating  Partnership has issued 449,931 limited
partner common units as partial  consideration  for its acquisition of the first
and second  mortgage  notes of 180 North LaSalle  Street (See "Business - Recent
Developments") and 751,929 limited partner common units as partial consideration
for property acquisitions,  in accordance with a contractual arrangement entered
into in November 1997, from affiliates of Mr. Nardi. Holders of common units may
exchange,  after the lock-up  period that is generally one year from the date of
issuance, if applicable,  part or all of the common units for common shares on a
one-for-one basis or, at our Independent  Trustees' option,  cash (see exception
discussed below) equal to the fair market value of a common share at the time of
exchange.  During  2003 to  date,  36,006  limited  partner  common  units  were
exchanged for common shares.  During 2002,  none of these limited  partner units
were exchanged for common shares.  During 2001,  33,085 of these limited partner
common units were exchanged for common shares and  subsequently  acquired by our
Operating  Partnership  for cash.  During 2000,  90,460 of these limited partner
common units were exchanged for common shares and 45,287 limited  partner common
units were redeemed and  cancelled.  On April 30, 2002,  Vornado PS acquired the
7,944,893  common  units  held  by  Primestone  in a  foreclosure  auction.  See
"Business - Recent  Developments"  for a discussion of the  foreclosure of these
common units.

     As of December 31, 2002, and subject to our 9.9% ownership  limitation (and
the  limited  waivers  of  such  limitation  granted  to  Vornado  PS and  Cadim
Acquisition),  all of the remaining outstanding limited partner common units are
exchangeable  for common  shares or at the option of the  Independent  Trustees,
cash,  except for the Pledged  Units owned by Cadim  Acquisition,  which we have
agreed to exchange only for common shares.

     Also  concurrently  with the completion of our initial public offering,  we
issued 2,000,000 of our Series A Shares, $0.01 par value per share, in a private
placement to SCPG for an aggregate purchase price of $40.0 million.  On February
22, 2002, we amended the securities  purchase  agreement with SCPG and agreed to
pay a deferral payment, as defined, of 3.5% calculated on the outstanding Series
A Shares.  This payment  accrued from February 8, 2002 to July 16, 2002, the day
our Operating Partnership purchased the Series A Shares from SCPG for a purchase
price of $40.0 million plus accrued  dividends,  including  the deferral  amount
(See "Business - Recent  Developments").  Under the terms of the amendment,  the
deferral payment increased by 0.50% on May 8, 2002.

     On March 25, 1998,  we issued  2,579,994 of our common  shares in a private
placement to several  institutional  investors.  We granted no common  shares in
2002.  During 2001 and 2000, we granted 72,672 and 5,000,  respectively,  of our
common shares to certain of our officers and Board members.

     The  issuance  of  2,579,994  of our common  shares  and the  common  units
described  above  and our  previously  outstanding  Series A Shares  constituted
private  placements  of  securities  which  were  exempt  from the  registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.



<PAGE>


     On April 25, 2001, our Operating  Partnership acquired 33,085 of our common
shares  from  one of our  former  employees  for a price of  approximately  $0.5
million,  or $14.45 per share.  The  acquired  shares  have been  pledged to the
lenders under the Bank One Corporate  Center  mezzanine  loan as collateral  for
certain obligations under the loan agreement. In connection with the acquisition
of these shares, the former employee agreed to cancel all of his options granted
pursuant to our 1997 Share  Incentive Plan and an award agreement dated December
17, 1998 between us and the former  employee in exchange for a payment  equal to
the net value of the options.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth our  consolidated  financial data and should
be read in  conjunction  with our  consolidated  financial  statements  included
elsewhere in this Form 10-K.


<PAGE>

<TABLE>
<CAPTION>



                                                             Year ended December 31
                                             2002         2001        2000        1999         1998
                                         ---------------------------------------------------------------
<S>                                        <C>         <C>         <C>          <C>          <C>
                                                (Dollars in thousands, except per share amounts)
 Statements of Operations Data (1)
 Revenue:
 Rental.................................    $ 110,009 $ 108,466   $ 114,944   $ 105,540    $  80,107
 Tenant reimbursements..................       58,465    59,064      56,171      41,088       31,077
 Other property revenues................        6,664     7,264       7,855       10,853       3,485
 Mortgage note interest.................            -     -           4,864       6,926        5,866
 Services Company revenue...............        7,366     7,219       -           -            -
                                         ---------------------------------------------------------------
 Total revenue..........................      182,504   182,013     183,834     164,407      120,535

 Expenses:
 Property operations....................       47,270    48,252      47,185      38,973       25,826
 Real estate taxes......................       37,436    35,340      34,203      29,450       20,990
 Depreciation and amortization..........       32,374    31,256      28,329      27,244       21,546
 General and administrative.............        9,794     9,085      10,359       7,565        5,712
 Services Company operations............        4,811     6,898        -           -            -
 Provision for asset impairment.........       30,095    20,337       1,000        -            -
 Severance costs........................        2,525      -           -           -            -
 Strategic alternative costs............        1,561     3,289         717        -            -
 Other expense..........................          189     1,191        -           -            -
 Loss on land development option........            -         -        -           600          -
                                         ---------------------------------------------------------------
 Total expenses.........................      166,055   155,648     121,793    103,832        74,074
                                         ---------------------------------------------------------------

 Operating income.......................       16,449    26,365      62,041     60,575        46,461
 Other income...........................        2,190     4,587       7,513      1,569         2,874
 Interest:
       Expense..........................      (40,212)  (43,214)    (47,174)   (37,018)      (27,826)
       Amortization of deferred
        financing costs.................       (4,359)   (3,919)     (6,172)    (4,214)       (3,341)
                                         ---------------------------------------------------------------
 (Loss) income from continuing
    operations before minority interests      (25,932)  (16,181)     16,208     20,912        18,168
 Minority interests.....................       16,517    10,363      (1,551)    (3,394)       (4,169)
                                         ---------------------------------------------------------------
 Income (loss) from continuing
    operations..........................       (9,415)   (5,818)     14,657     17,518        13,999
 Discontinued operations, net of
    minority interests of $14,196,
    $(1,002), $(1,452), $(4,444) and
    $(4,321) in 2002, 2001, 2000, 1999
    and 1998, respectively..............      (20,263)    1,467       2,346      6,375         6,246
                                         ---------------------------------------------------------------
 (Loss) income before (loss) gain on
   sales of real estate and cumulative
   effect of change in accounting
   principles...........................      (29,678)   (4,351)     17,003     23,893        20,245
 (Loss) gain on sales of real estate,
    net of minority interests of $660,
    $(118), $786 and $(22,095) in 2002,
    2001, 2000 and 1999, respectively...         (943)      174      (1,271)    30,955          -
 Cumulative effect of change in
    accounting principles, net of
    minority interests of $218 in 2001
    and $1,140 in 2000 (2)..............            -      (321)     (1,843)        -           -
                                         ---------------------------------------------------------------
 Net (loss) income......................      (30,621)   (4,498)     13,889     54,848       20,245
 Net income allocated to preferred
    shareholders........................      (11,280)  (12,150)    (12,147)   (12,103)      (7,971)
                                         ---------------------------------------------------------------
 Net (loss) income available to common
    shareholders........................    $ (41,901) $(16,648) $    1,742  $  42,745    $  12,274
                                         ===============================================================

</TABLE>


<PAGE>


<TABLE>
<CAPTION>


                                                            Year ended December 31
                                             2002        2001        2000        1999         1998
                                         --------------------------------------------------------------

<S>                                        <C>         <C>          <C>          <C>           <C>

Basic earnings available to common
  shares per weighted-average common
  share (3)
(Loss) income from continuing operations  $ (1.32)    $ (1.15)     $ 0.16       $ 0.35        $ 0.41
Discontinued operations, net of minority
  interests.............................    (1.29)       0.09        0.15         0.42          0.42
(Loss) gain on sales of real estate, net
  of minority interests.................    (0.06)       0.01       (0.08)        2.05            -
Cumulative effect of change in
  accounting principles, net of minority
  interests (1).........................        -       (0.02)      (0.12)          -             -
                                         --------------------------------------------------------------
Net (loss) income available per
  weighted-average common share of
  beneficial interest -basic............ $ (2.67)     $ (1.07)     $ 0.11       $ 2.82        $ 0.83
                                         ==============================================================
Diluted earnings available to common
  shares per weighted-average common
  share (3)
(Loss) income from continuing operations   $ (1.32)    $ (1.15)     $ 0.16       $ 0.35        $ 0.41
Discontinued operations, net of minority
  interests.............................    (1.29)       0.09        0.15          0.42          0.42
(Loss) gain on sales of real estate, net
  ofminority interests..................    (0.06)       0.01       (0.08)         2.04            -
Cumulative effect of change in
  accounting principles, net of minority
  interests (1).........................        -       (0.02)      (0.12)          -             -
                                         --------------------------------------------------------------
Net (loss) income available per
  weighted-average common share of
  beneficial interest-diluted...........   $ (2.67)    $ (1.07)     $ 0.11       $ 2.81        $ 0.83
                                         ==============================================================


</TABLE>

<PAGE>



<TABLE>
<CAPTION>


                                                            Year ended December 31
                                             2002        2001        2000        1999         1998
                                         --------------------------------------------------------------
                                                            (Dollars in thousands)
<S>                                        <C>        <C>         <C>          <C>        <C>
Balance Sheet Data
Real estate assets, exclusive of
  property held for or under development
  and property held for sale and before
  accumulated depreciation..............  $1,338,325  $1,206,516  $1,180,206  $1,151,094  $   843,031
Total assets............................   1,408,598   1,527,649   1,439,093   1,444,175    1,164,514
Mortgage notes payable, credit
  facilities, construction financing and
  bonds payable.........................     904,438     925,136     799,171     799,171      593,168
Total liabilities.......................   1,062,516   1,076,737     924,124     901,767      668,728
Minority interests......................     100,643     128,806     153,206     169,070      145,781
Series A Preferred Shares...............           -      40,000      39,850      39,703            -
Shareholders' equity......................   245,439     282,106     321,913     333,635      350,005



</TABLE>


<PAGE>


<TABLE>
<CAPTION>






                                                                     Year ended December 31
                                                  --------------------------------------------------------------
                                                     2002         2001         2000        1999        1998
                                                  ------------ ------------ ----------- ----------- ------------
<S>                                                <C>            <C>          <C>         <C>         <C>

Funds from operations (4)....................     $  28,279  $  17,450       $ 40,462   $  52,295   $ 45,865

Cash flow provided by (used in):
   Operating activities......................        42,320     52,810         64,393     106,296     53,525
   Investing activities......................       (75,951)  (144,744)       (26,248)   (439,793)  (361,384)
   Financing activities......................        42,849     73,248        (32,787)    306,907    342,390
   Ratio of earnings to combined fixed charges
   and preferred share distributions (5).....             -          -              -        1.01       1.19
Office Properties:
   Square footage............................     7,806,799  7,807,576      7,955,524   8,049,941  5,833,280
   Occupancy (%).............................          73.9       92.0           95.7        95.0       89.9

Industrial Properties:
   Square footage............................     3,874,712  3,914,712      4,187,030   5,146,668  5,834,974
   Occupancy (%).............................          84.4       81.7           93.2        84.3       90.5

Unconsolidated Joint Venture Properties:
   Square footage............................     1,330,604  1,421,658      1,330,604   1,330,604          -
   Leased (%)................................          85.9       81.9           90.3        70.5          -

</TABLE>

(1)  Information for the years ended December 31, 2001, 2000, 1999 and 1998 have
     been restated for the effect of adopting SFAS No. 144,  "Accounting for the
     Impairment  or  Disposal  of  Long-Lived  Assets"  ("SFAS  144"),  for  the
     reclassification  of the  operations  of  properties  sold during 2002 from
     continuing operations to discontinued operations.

     Amortization  of deferred  financing costs for the years ended December 31,
     2001,  2000,  1999 and 1998 have been  restated for the effects of adopting
     SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
     FASB No. 13, and Technical  Corrections" ("SFAS 145") by $0.2 million, $3.5
     million,   $1.8   million   and  $2.1   million,   respectively,   for  the
     reclassification of extinguishment of debt from extraordinary to continuing
     operations.

(2)  In December  1999, the SEC issued Staff  Accounting  Bulletin No. 101 ("SAB
     101"),  "Revenue  Recognition in Financial  Statements." SAB 101 summarizes
     certain  of the  SEC's  views in  applying  generally  accepted  accounting
     principles  to revenue  recognition  in  financial  statements.  We granted
     permanent  property  easements on portions of certain of our  properties in
     1999 for which we recorded  all of the  revenue in 1999 when the  easements
     were granted. In addition,  the Services Company previously recognized 100%
     of leasing commissions at the time of lease signing.  However,  half of the
     commission amounts are subject to the tenant occupying the space. Under SAB
     101,  revenue  should be recognized  over the  anticipated  period that the
     easement would be used and lease commissions  should be recognized when all
     conditions  related to  earning  the  commission  have been  settled  which
     usually  occurs within twelve months of the lease  signing.  In determining
     the periods over which we would  recognize  revenue  under SAB 101, we took
     into consideration factors such as the expected life of physical structures
     constructed  on easement  sites at our  properties  and other  factors that
     provided an indication of the periods of active use of the easements by the
     respective grantees. These periods range from five to ten years. We adopted
     SAB 101  retroactive  to January 1, 2000 and recorded a charge to income of
     $1.8 million,  net of minority interests of $1.1 million,  representing the
     cumulative effect of adopting SAB 101 as of January 1, 2000. The cumulative
     effect  represents  income  recognized in 1999 and relates to the permanent
     property  easements and to leasing activity  described above.  During 2002,
     2001 and 2000,  respectively,  we recognized $0.3 million, $0.3 million and
     $0.5  million  of other  income (a portion  of which is  included  in other
     property revenues in the consolidated  statement of operations)  previously
     recorded in 1999.

     On January 1, 2001, we adopted Statement of Financial  Accounting Standards
     ("SFAS")  No.  133,  "Accounting  for  Derivative  Instruments  and Hedging
     Activities"  ("SFAS  133"),  as amended by SFAS No.  138,  "Accounting  for
     Certain  Derivative  Instruments  and Certain  Hedging  Activities"  ("SFAS
     138"). SFAS 133, as amended, established accounting and reporting standards
     for  derivative  instruments.  Specifically  SFAS 133 requires an entity to
     recognize all  derivatives as either assets or liabilities in the statement
     of  financial  position  and to measure  those  instruments  at fair value.
     Additionally,  the fair value adjustments will affect either  shareholders'
     equity  or net  income  depending  on  whether  the  derivative  instrument
     qualifies as a hedge for accounting  purposes and, if so, the nature of the
     hedging activity.  Upon adoption of SFAS 138 and SFAS 133, we recorded as a
     cumulative  effect  of an  accounting  change a net  transition  adjustment
     (unrealized  loss)  of  $0.5  million  in  net  income,  and  a  transition
     adjustment   of  $3.2   million  as  an  increase  in   accumulated   other
     comprehensive  loss.  Adoption of the standard resulted in a net transition
     adjustment of $3.8 million on the balance sheet reflected as a $0.5 million
     reduction in deferred  costs,  a $1.4 million  reduction in  investment  in
     unconsolidated  entities and a deferred hedge liability of $1.9 million. In
     August 2001, the Financial Accounting Standards Board ("FASB") issued final
     guidance on the  accounting for options used as hedges under SFAS 133. This
     guidance is pursuant to Derivatives  Implementation Group ("DIG") Issue No.
     G20 ("G20").  Provided  certain criteria are met, options can be considered
     fully effective hedging  vehicles,  with gains and losses due to changes in
     market  value  recorded in other  accumulated  comprehensive  income on the
     balance  sheet.  On September 1, 2001, we adopted G20 for its interest rate
     hedge instruments. Any subsequent unrealized gains or losses due to changes
     in market value of options, such as interest rate caps, will be recorded in
     the other accumulated comprehensive income.

(3)  Net  income  available  per  weighted-average  common  share of  beneficial
     interest-basic  equals  net  income  divided  by  15,673,544,   15,630,586,
     15,408,822,  15,141,630  and  14,862,958  common shares for the years ended
     December 31, 2002,  2001,  2000,  1999 and 1998,  respectively.  Net income
     available per weighted-average share of beneficial  interest-diluted equals
     net income divided by 15,673,544,  15,630,586,  15,539,337,  15,208,911 and
     14,875,035, common shares for the year ended December 31, 2002, 2001, 2000,
     1999 and 1998, respectively.

(4)  We compute Funds from Operations in accordance  with standards  established
     by the Board of Governors of National Association of Real Estate Investment
     Trust's)  ("NAREIT"),  in its April 2002 White  Paper.  In addition to this
     presentation, we also present funds from operations excluding straight-line
     rental revenue (i.e.,  rental  revenues based on contractual  lease terms),
     which we believe  results  in a more  accurate  presentation  of our actual
     operating  activities.  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 (loss) income, as an indication of our performance or to
     cash flows as a measure of  liquidity  or the ability to pay  dividends  or
     make distributions.

(5)  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  interests,  plus  combined  fixed  charges.
     Combined fixed charges consist of interest  incurred,  amortization of debt
     issuance costs and preferred share  distributions.  Our 2002, 2001 and 2000
     earnings were insufficient to cover fixed charges by approximately $67,158,
     $52,205 and $10,171 for the years ended  December 31, 2002,  2001 and 2000,
     respectively.



<PAGE>


     The following is our consolidated quarterly summary of operations:

<TABLE>
<CAPTION>



                                                                         Year ended December 31, 2002 (1)
                                                        --------------------------------------------------------------------
                                                                        Fourth        Third       Second         First
                                                            Total       Quarter      Quarter      Quarter       Quarter
                                                        --------------------------------------------------------------------
                                                                     (In thousands, except per share amounts)

<S>                                                       <C>            <C>          <C>         <C>           <C>

Total revenue..........................................    $  182,504    $   45,026   $   46,408  $   45,488    $   45,582
Total expenses.........................................       166,055        57,740       34,037      36,311        37,967
                                                        --------------------------------------------------------------------
Operating income (loss)................................        16,449       (12,714)      12,371       9,177         7,615
Other income...........................................         2,190           450          493         410           837
Interest:
   Expense.............................................       (40,212)      (10,721)     (10,749)     (9,250)       (9,492)
   Amortization of deferred financing costs............        (4,359)       (1,839)      (1,016)       (765)         (739)
                                                        --------------------------------------------------------------------
(Loss) income from continuing operations before
  minority interests...................................       (25,932)      (24,824)       1,099        (428)       (1,779)
Minority interests.....................................        16,517        11,184          583       1,525         3,225
                                                        --------------------------------------------------------------------
Income from continuing operations......................        (9,415)      (13,640)       1,682       1,097         1,446
Discontinued operations, net of minority interests in
  the amount of $(243) in the fourth quarter, $62 in
  the third quarter, $1,135 in the second quarter and
  $13,242 in the first quarter.........................       (20,263)          385          (10)     (1,400)      (19,238)
                                                        --------------------------------------------------------------------
(Loss) income before (loss) gain on sales of real             (29,678)      (13,255)       1,672        (303)      (17,792)
  estate  .............................................
Loss on sales of real estate, net of minority interest
  of $34 in the fourth quarter, $408 in the
  second quarter and $218 in the first quarter.........          (943)          (48)           -        (580)         (315)
                                                        --------------------------------------------------------------------
Net (loss) income......................................       (30,621)      (13,303)       1,672        (883)      (18,107)
Net income allocated to preferred shareholders.........       (11,280)       (2,250)      (2,450)     (3,381)       (3,199)
                                                        --------------------------------------------------------------------
Net (loss) income available to common shareholders.....    $  (41,901)    $ (15,553)$       (778) $   (4,264)  $   (21,306)
                                                        ====================================================================

Basic and diluted earnings available to common shares
  per weighted average common share
 Loss from continuing operations.......................  $     (1.32)   $    (1.01)   $   (0.05) $     (0.15) $      (0.11)
 Discontinued operations, net of minority interests....        (1.29)         0.02         -           (0.09)        (1.22)
 (Loss) gain on sales of real estate, net of minority
   interests...........................................        (0.06)         -            -           (0.04)        (0.02)
                                                        --------------------------------------------------------------------
Net loss available per weighted-average common share of
  beneficial interest - basic and diluted..............   $    (2.67)  $     (0.99)   $   (0.05) $     (0.28) $      (1.35)
                                                        ====================================================================
Weighted average common shares--basic and diluted             15,674        15,675       15,675       15,674        15,664
                                                        ====================================================================
Distributions paid per common share.................... $          -  $          -    $       - $          -  $          -
                                                        ====================================================================

</TABLE>


<PAGE>





     The following is our consolidated quarterly summary of operations:


<PAGE>

<TABLE>
<CAPTION>



                                                                         Year ended December 31, 2001 (1)
                                                        --------------------------------------------------------------------
                                                                        Fourth        Third       Second         First
                                                            Total       Quarter      Quarter      Quarter       Quarter
                                                        --------------------------------------------------------------------
                                                                     (In thousands, except per share amounts)
<S>                                                        <C>           <C>          <C>         <C>           <C>

Total revenue..........................................    $  182,013    $   43,969   $   46,508  $   44,853    $   46,683
Total expenses.........................................       155,648        49,806       38,990      33,295        33,557
                                                        --------------------------------------------------------------------
Operating income (loss)................................        26,365        (5,837)       7,518      11,558        13,126
Other income...........................................         4,587         1,164          668       1,391         1,364
Interest:
   Expense.............................................       (43,214)      (10,175)     (10,747)    (11,205)      (11,087)
   Amortization of deferred financing costs............        (3,919)       (1,089)        (853)     (1,150)         (827)
                                                        --------------------------------------------------------------------
(Loss) income from continuing operations before
  minority interests...................................       (16,181)      (15,937)      (3,414)        594         2,576
Minority interests.....................................        10,363         6,509        2,640       1,004           210
                                                        --------------------------------------------------------------------
Income (loss) from continuing..........................        (5,818)       (9,428)        (774)      1,598         2,786
Discontinued operations, net of minority interests in
  the amount of $(504) in the fourth quarter, $(445) in
  the third quarter, $(328) in the second quarter and
  $275 in the first quarter............................         1,467           738          655         476          (402)
                                                        --------------------------------------------------------------------

(Loss) income before (loss) gain on sales of real
   estate and  cumulative  effect
  of change in accounting
  principles...........................................        (4,351)       (8,690)        (119)      2,074         2,384
(Loss) gain on sales of real estate, net of minority
  interest of $991 in the third quarter, $(771) in the
  second quarter and $(338) in the first quarter.......           174             -       (1,453)      1,131           496
Cumulative effect of change in accounting principle,
  net of minority interests of $218 (2)................          (321)            -            -           -          (321)
                                                        --------------------------------------------------------------------
Net (loss) income......................................        (4,498)       (8,690)      (1,572)      3,205         2,559
Net income allocated to preferred shareholders.........       (12,150)       (3,041)      (3,036)     (3,037)       (3,036)
                                                        --------------------------------------------------------------------
Net (loss) income available to common shareholders.....    $  (16,648)   $  (11,731) $    (4,608)   $    168         $ (477)
                                                        ====================================================================

Basic and diluted earnings available to common shares
  per weighted average common share
 Loss from continuing operations.......................    $    (1.15)   $    (0.80)  $    (0.24)   $  (0.09)   $     (0.02)
 Discontinued operations, net of minority interests....          0.09          0.05         0.04         0.03         (0.03)
 Gain (loss) gain on sales of real estate, net of
   minority interests..................................          0.01             -        (0.09)        0.07          0.03
Cumulative effect of change in accounting
   principle, net of minority interests................         (0.02)            -            -            -         (0.02)
                                                        --------------------------------------------------------------------
Net loss available per weighted-average common share of
  beneficial interest - basic and diluted..............    $    (1.07)   $    (0.75) $     (0.29)$       0.01   $     (0.04)
                                                        ====================================================================
Weighted average common shares--basic and diluted.......       15,631        15,641       15,641       15,635        15,604
                                                        ====================================================================
Distributions paid per common share....................      $1.0125     $        -   $   0.3375    $  0.3375    $    .3375
                                                        ====================================================================

</TABLE>


<PAGE>




(1)  Information  for the year ended December 31, 2001 has been restated for the
     effect of adopting SFAS 144 for the  reclassification  of the operations of
     properties  sold during 2002 from  continuing  operations  to  discontinued
     operations.

     Amortization  of deferred  financing  costs for the year ended December 31,
     2001 has been restated for the effects of adopting SFAS 145 by $0.2 million
     for the  reclassification  of extinguishment of debt from  extraordinary to
     continuing operations.

(2)  On January 1, 2001,  we adopted SFAS 133, as amended by SFAS 138. SFAS 133,
     as amended,  established  accounting and reporting standards for derivative
     instruments.  Specifically  SFAS 133  requires an entity to  recognize  all
     derivatives  as either assets or  liabilities in the statement of financial
     position and to measure those instruments at fair value. Additionally,  the
     fair value  adjustments  will  affect  either  shareholders'  equity or net
     income depending on whether the derivative  instrument qualifies as a hedge
     for  accounting  purposes  and, if so, the nature of the hedging  activity.
     Upon adoption of SFAS 138 and SFAS 133, we recorded as a cumulative  effect
     of an accounting  change a net transition  adjustment  (unrealized loss) of
     $0.5 million in net income, and a transition  adjustment of $3.2 million as
     an  increase  in  accumulated  other  comprehensive  loss.  Adoption of the
     standard  resulted in a net  transition  adjustment  of $3.8 million on the
     balance sheet  reflected as a $0.5 million  reduction in deferred  costs, a
     $1.4  million  reduction in  investment  in  unconsolidated  entities and a
     deferred hedge  liability of $1.9 million.  In August 2001, the FASB issued
     final guidance on the accounting for options used as hedges under SFAS 133.
     This guidance is pursuant to DIG G20.  Provided  certain  criteria are met,
     options can be considered fully effective hedging vehicles,  with gains and
     losses  due to  changes  in  market  value  recorded  in other  accumulated
     comprehensive income on the balance sheet. On September 1, 2001, we adopted
     G20 for its interest  rate hedge  instruments.  Any  subsequent  unrealized
     gains or losses due to changes in market value of options, such as interest
     rate caps, will be recorded in the other accumulated comprehensive income.

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 related notes thereto included elsewhere
in this Form 10-K.

     We are a fully-integrated,  self-administered, and self-managed real estate
investment trust (REIT) which owns, manages,  leases,  develops,  and redevelops
office and industrial real estate,  primarily in the Chicago  metropolitan area.
Our  portfolio of completed  properties  as of December 31, 2002  consists of 15
office  properties,  containing an aggregate of 7.8 million net rentable  square
feet, and 30 industrial  properties,  containing an aggregate of 3.9 million net
rentable  square feet.  This includes our recently  completed Bank One Corporate
Center in downtown Chicago, a 1.5 million rentable square foot office tower that
was placed in service in November 2002. At December 31, 2002, we owned in excess
of 97% of the joint  venture  that owns this  property and we  consolidated  our
ownership of this  property.  On March 19, 2003,  we purchased  all of our joint
venture  partner's  ownership  interest  in the  joint  venture  that  owns this
property  making us the sole owner of the  property.  We also own joint  venture
interests in two office  properties  containing  an aggregate of 1.3 million net
rentable square feet. The portfolio also includes  approximately  202.1 acres of
developable  land and  rights to  acquire  more than  31.6  additional  acres of
developable land which management believes could be developed with approximately
5.0 million rentable square feet of office and industrial space.  However, we do
not anticipate commencing new development projects in the near future.

     As  of  December  31,  2002,   in  terms  of  net  rentable   square  feet,
approximately  90.2%  of  our  office  properties  and  all  of  our  industrial
properties  were  located in the  Chicago  metropolitan  area in prime  business
locations within established business communities. Our properties located in the
Chicago  metropolitan  area  accounted  for  approximately  89.6% of our  rental
revenue  and  97.4% of our  tenant  reimbursements  revenue  for the year  ended
December 31, 2002. We own one office property located in Cleveland, Ohio.

     Our income is derived  primarily  from  rental  revenue  (including  tenant
reimbursements) from our properties.  We expect that any revenue growth over the
next several years will come from revenue generated through increased rental and
occupancy rates in the current portfolio.

<PAGE>


     Results of Operations

     As reflected in the table below, property revenues include rental revenues,
tenant reimbursements and other property operating revenues.  Property operating
expenses  include real estate  taxes,  utilities  and other  property  operating
expenses.

     Comparison of the Year ended  December 31, 2002 to the Year Ended  December
31, 2001

     The table below  represents  selected  operating  information for the Total
Portfolio and for the Same Store  Portfolio  consisting of 14 Office  Properties
and 29  Industrial  Properties  acquired  or  placed in  service  on or prior to
January 1, 2001.


<PAGE>


<TABLE>
<CAPTION>




                                                  Total Portfolio                                      Same Store Portfolio
                                 ---------------------------------------------------    --------------------------------------------
                                                             Increase/       %                                 Increase/         %
(Dollars in thousands)              2002         2001      (Decrease)     Change         2002        2001      (Decrease)     Change
-------------------------------- ----------- ------------ ----------- -----------  ----------- ------------ ------------------------
<S>                               <C>        <C>          <C>            <C>       <C>          <C>          <C>          <C>
Property revenues                $ 175,138  $  174,794   $      344        0.2%    $ 174,898   $ 174,893            5           -%

Services Company revenues            7,366       7,219          147        2.0             -          --            -           -
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ----------
 Total revenues                    182,504     182,013          491        0.3       174,898     174,893            5             -

Property operating expenses         84,706      83,592        1,114        1.3        84,415      82,272       2,143           2.6
Depreciation and amortization       32,374      31,256        1,118        3.6        31,643      30,505       1,138           3.7
General and administrative           9,794       9,085          709        7.8             -          -            -              -
Services Company operations          4,811       6,898       (2,087)     (30.3)            -          -            -              -
Provision for asset impairment      30,095      20,337        9,758       48.0        23,891          -       23,891              -
Severance costs                      2,525           -        2,525        -               -          -            -              -
Strategic alternative costs          1,561       3,289       (1,728)     (52.5)            -          -            -              -
Other expense                          189       1,191       (1,002)     (84.1)            -          -            -              -
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ----------

 Total expenses                    166,055     155,648       13,137        8.4       139,949     112,777      27,172          24.1
Operating income                    16,449      26,365       (9,916)     (37.6)       34,949      62,116     (27,167)        (43.7)
Other income                         2,190       4,587       (2,397)     (52.3)            -          -            -             -
Interest:
 Expense                           (40,212)    (43,214)       3,002       (6.9)      (34,853)    (41,630)      6,777          16.3
 Amortization of deferred
    financing costs                 (4,359)     (3,919)        (440)      11.2        (2,893)     (2,191)       (702)         32.0
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ----------
(Loss) income from continuing
 operations before minority
 interests                         (25,932)    (16,181)      (9,751)      60.3     $  (2,797)   $  18,295    $(21,092)      (115.3)%

                                                                                   =========== ============ ============= ==========

Minority interests                  16,517      10,363        6,154       59.4
                                 ----------- ------------ ----------- -----------

Income (loss) from continuing
 operations                         (9,415)     (5,818)      (3,597)      61.8
Discontinued operations, net of
 minority interests                (20,263)      1,467      (21,730)  (1,481.3)
                                 ----------- ------------ ----------- -----------

Loss before (loss) gain on sales
 of real estate and cumulative
 effect of change in accounting
 principle                         (29,678)     (4,351)     (25,327)     582.1
(Loss) gain on sales of real
estate, net of minority interest      (943)        174       (1,117)    (642.0)
Cumulative effect of change in
 accounting principles, net of
 minority interest                       -        (321)         321     (100.0)
                                 ----------- ------------ ----------- -----------

Net loss                         $ (30,621) $   (4,498)  $  (26,123)     580.8%

                                 =========== ============ =========== ===========

</TABLE>

<PAGE>



     Property  Revenues.  The increase in property revenues  resulted  primarily
from an increase of $1.9  million in lease  termination  income to $2.3  million
from $0.4  million  for the twelve  months  ended  December  31,  2002 and 2001,
respectively, and the increase of straight-line rent in 2002 in conjunction with
the bankruptcy of a tenant at an industrial  property in 2001.  These  increases
were partially offset by a decrease in average  occupancy of the total portfolio
to 89.6% in 2002 from 92.3% in 2001 due to tenant rollover at various properties
where  the space was not  re-leased  due to the  current  slowdown  in  economic
activity.  The leading  contributor  to the  decrease  was the  expiration  of a
tenant's lease in September 2001 at a suburban  office  property.  Even though a
portion  of this  space was  subsequently  re-leased  in 2002,  this 2001  lease
expiration  accounted for a $1.5 million  decrease in property  revenues  during
2002.  We expect that future  property  revenues  may continue to be affected by
early  lease  terminations  if  economic  conditions  do not  improve or if they
worsen.  There is no way to  predict  the  timing or  amounts  of  future  lease
terminations.

     Services Company Revenues. The increase in Services Company revenues during
2002 was  primarily due to our  recognition  of  development  fee income of $4.2
million, which we recognized on a percentage of completion method throughout the
year (the project was started and completed in 2002), related to the development
of a build-to-suit  industrial  building.  This increase was partially offset by
decreased   leasing  and  consulting   income  of  $1.4  million  and  decreased
construction  and  painting  revenue  of $2.5  million  during  2002  due to the
Company's   discontinuance   of  providing  third  party  brokerage  and  tenant
construction services.

     Property Operating  Expenses.  The main factor responsible for the increase
in property  operating  expenses during 2002 was a $3.1 million increase in real
estate taxes principally  resulting from the change in the assessed valuation of
two  Chicago  office  and  two  industrial  properties.  In  addition,  property
insurance  for our total  portfolio has increased by $1.2 million from 2001 as a
result of the events of  September  11, 2001.  We believe  that these  increased
costs will remain higher than similar costs incurred in previous periods for the
foreseeable  future.  We have also  experienced  an  increase  in the  amount of
uncollectible  tenant  receivables  relating to tenant  bankruptcies and tenants
that are  having  financial  difficulties.  As a  result,  we may not be able to
collect the full amount of rent  specified in the affected  leases and may incur
additional  costs in  re-leasing  the  space.  The  amount  of bad debt  expense
increased  by $0.3  million to $1.8 million in 2002 from $1.5 million in 2001. A
lthough we hold security  deposits and/or letters of credit securing  payment of
rent from many of our tenants,  additional  write-offs  may occur in  subsequent
periods.  These increases were partially  offset by lower utilities  expenses in
our  office  properties  primarily  as a result of lower  occupancy  levels  and
efficiencies  achieved from changes in service providers.  In addition,  general
and  administrative  expenses  for our same store  portfolio  decreased  by $1.0
million  from 2001 as a result of  reallocations  of staff  responsibilities  in
conjunction with staffing reductions.

     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 (i) a net basis,  with tenants paying their  proportionate  share of real
estate taxes, insurance, utility and other operating expenses as additional rent
or (ii) a triple net lease basis, with the tenants paying all of the real estate
taxes,  insurance,  utility and other  operating  expenses for the property.  We
believe a portion of any increase in these operating  expenses will be offset by
expense reimbursements from our tenants.

     Depreciation and Amortization. The increase of $1.1 million in depreciation
and  amortization  during 2002  compared to 2001 was primarily due to additional
tenant  improvements  and lease  commissions  associated with new leasing at our
properties  offset by the write-off of  undepreciated  tenant  improvements  and
unamortized  lease  commissions in 2001  associated with a bankrupt tenant at an
industrial property.

     General and  Administrative.  For the twelve months ended December 31, 2002
compared to 2001, our general and administrative expenses increased $0.7 million
primarily due to an increase in professional fees and corporate  insurance costs
which were partially offset by a decrease in salaries and benefits.

     Services  Company  Operations.  The  decrease  in  the  Services  Company's
operating  expenses  was  primarily  due to the  elimination  of the expenses of
operating  non-core  business  activities  of third party  brokerage  and tenant
construction  services  which was  partially  offset by an  increase in expenses
related to the  development  services  provided to a third  party  relating to a
build-to-suit industrial building.

     Provision  for Asset  Impairment.  Provision for asset  impairment  for the
twelve  months ended  December 31, 2002 and 2001  represents  the  write-down of
certain  operating  properties,   development   properties  and  investments  in
unconsolidated  entities to current estimated fair value. In 2002, we recorded a
$22.1  million asset  impairment  related to an office  property  based upon our
decision to exit a non-core market and a $1.7 million asset  impairment  related
to an other asset  associated  with an industrial  property as it was determined
that the asset no longer had value. In 2002, we also transferred our interest in
a joint venture to our joint venture partner and recorded an asset impairment of
$0.5  million  related  to our  investment  in this  unconsolidated  entity.  We
recorded a $15.1 million  asset  impairment in 2001 to reflect the affect of the
then impending  assignment of our interest in a development to our joint venture
partner based upon our decision not to participate in the development.

     Severance Costs. For the twelve months ended December 31, 2002, we recorded
severance costs of $2.5 million  resulting from the  resignations of Mr. Reschke
and Mr. Curto and the reduction of corporate management and support staff.

     Other Income.  The decrease in other income during 2002 of $2.4 million was
primarily  due to a  decrease  of $1.9  million  in  interest  income  earned on
restricted cash due to lower interest rates and lower  restricted cash balances.
A decrease  during 2002 in income earned from an  unconsolidated  entity of $0.5
million also contributed to the overall decrease in other income.

     Interest  Expense.  The decrease in interest expense of $3.0 million in the
total  portfolio  is  primarily  due to a decrease in  interest  expense of $4.2
million  due to a decrease  in  interest  rates on our  variable  rate  debt,  a
decrease of $4.3 million relating to loan repayments, a decrease of $2.1 million
due to the refinancing of several office and industrial properties, offset by an
increase of $3.7 million for a reduction  in the amount of interest  capitalized
for projects under  development  and an increase of $4.1 million  related to the
notes  payable  to SCPG.  The  decrease  in  interest  expense in the same store
portfolio resulted primarily from a decrease in interest expense of $1.1 million
due to the  refinancing of a Cleveland,  Ohio office  property and a decrease of
$4.8 million due to the decrease in interest rates on our variable rate debt.

     Strategic  Alternative Costs. These costs consist primarily of professional
and  investment  banking  fees.  For the twelve  months ended  December 31, 2002
compared to 2001, we incurred fewer  expenses in connection  with our continuing
review of strategic alternatives.

     Discontinued  Operations.  In  accordance  with  SFAS  144,  effective  for
financial  statements issued for fiscal years beginning after December 15, 2001,
net  income  and  (loss)/gain  on  sales  of real  estate  for  properties  sold
subsequent to December 31, 2001 are reflected in the consolidated  statements of
operations as "Discontinued  Operations" for both periods presented.  Impairment
losses  included in  discontinued  operations  during 2002 include $33.6 million
related to assets  sold  during the second  quarter  when the  anticipated  hold
period was reduced  based upon our  decision to sell certain  non-core  suburban
office properties and $0.8 million related to an office property sold during the
fourth  quarter  based  upon our  decision  to exit  the  Tennessee  market  (an
impairment  loss of $1.5 million  related to this office property was recognized
during the fourth  quarter of 2001 and the related assets were shown as property
held for sale at December 31, 2001).


<PAGE>


Comparison  of the Year ended  December 31, 2001 to the Year Ended  December 31,
2000

     As reflected in the table below, property revenues include rental revenues,
tenant reimbursements and other property operating revenues.  Property operating
expenses include real estate taxes and other property operating expenses.

     The table below  represents  selected  operating  information for the Total
Portfolio and for the Same Store  Portfolio  consisting of 12 Office  Properties
and 26  Industrial  Properties  acquired  or  placed in  service  on or prior to
January 1, 2000.


<PAGE>

<TABLE>
<CAPTION>



                                                   Total Portfolio                                      Same Store Portfolio
                                 ----------------------------------------------------  --------------------------------------------
                                                              Increase/       %                               Increase/        %
(Dollars in thousands)              2001          2000      (Decrease)     Change       2001        2000      (Decrease)    Change
-------------------------------- ----------- ------------ ----------- -----------  ----------- ------------ ------------- ---------
<S>                              <C>          <C>          <C>         <C>         <C>          <C>          <C>          <C>
Property revenues               $  174,794  $  178,970   $   (4,176)      (2.3%)    $  153,792    $151,294  $    2,498       1.7%
Services Company revenues            7,219           -        7,219        -                 -           -           -
Mortgage note interest                   -       4,864       (4,864)    (100.0)              -           -           -
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ---------
 Total revenues                    182,013     183,834       (1,821)      (1.0)        153,792     151,294       2,498       1.7

Property operating expenses         83,592      81,388        2,204        2.7          73,031      66,832       6,199       9.3
Depreciation and amortization       31,256      28,329        2,927       10.3          26,453      23,363       3,090      13.2
General and administrative           9,085      10,359       (1,274)     (12.3)              -          -            -       -
Services Company operations          6,898           -        6,898        -                 -          -            -       -
Provision for asset impairment      20,337       1,000       19,337    1,933.7               -          -            -       -
Severance costs                          -           -            -        -                 -          -            -       -
Strategic alternative costs          3,289         717        2,572      358.7               -          -            -       -
Other expense                        1,191           -        1,191        -                 -          -            -       -
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ---------

 Total expenses                    155,648     121,793       33,855       27.8%       99,484      90,195       9,289        10.3

Operating income                    26,365      62,041      (35,676)     (57.5)       54,308      61,099      (6,791)      (11.1)
Other income                         4,587       7,513       (2,926)     (38.9)            -            -           -        -
Interest:
 Expense                           (43,214)    (47,174)       3,960       (8.4)      (36,199)    (38,256)      2,057        (5.4)
 Amortization of deferred
   financing costs                  (3,919)     (6,172)       2,253      (36.5)       (1,596)      (2,970)      1,374       (46.3)
                                 ----------- ------------ ----------- -----------  ----------- ------------ ------------- ---------

(Loss) income from continuing
 operations before minority
 interests                         (16,181)     16,208      (32,389)    (199.8)     $  16,514  $  19,873      (3,360)       (16.9)%
                                                                                   =========== ============ ============= =========

Minority interests                  10,363      (1,551)      11,914     (768.1)
                                 ----------- ------------ ----------- -----------

(Loss) income from continuing
 operations                         (5,818)     14,657      (20,475)    (139.7)
Discontinued operations, net of
 minority interests                  1,467       2,346         (879)     (37.5)
                                 ----------- ------------ ----------- -----------

(Loss) income before gain
 (loss) on sales of real
  estate and  cumulative
  effect
 of change in
 accounting principle               (4,351)     17,003      (21,354)    (125.6)
Gain (loss) on sales of real
 estate, net                           174      (1,271)       1,445     (113.7)
 of minority interests
Cumulative effect of change in
 accounting principles, net of
 minority interest                    (321)     (1,843)       1,522      (82.6)
                                 ----------- ------------ ----------- -----------
Net (loss) income                $  (4,498)  $  13,889    $ (19,909)    (143.3)
                                 =========== ============ =========== ===========

</TABLE>

<PAGE>



     Property Revenues. The decrease in property revenues in the total portfolio
was primarily due to the sale of two Chicago office  properties  during 2001 and
the  related  recognition  of  only  a  partial  year  of  revenues  from  these
properties.  The  increase  in  property  revenues  in the same store  portfolio
resulted primarily from an increase in reimbursable property operating expenses,
most notably real estate  taxes,  which  generated  significantly  higher tenant
reimbursements.  Same store  portfolio  property  revenues  also  increased as a
result of the renewal of various tenant leases at one Chicago office property in
which the leases were  renewed as "net" leases for expense  reimbursements  from
"gross"  leases.  These  decreases were  partially  offset by a decrease of $1.0
million in lease termination  income in the same store portfolio to $0.4 million
from $1.4  million  for the twelve  months  ended  December  31,  2001 and 2000,
respectively, and the decrease of straight-line rent in 2001 in conjunction with
the bankruptcy of a tenant at an industrial property in 2001.

     Services  Company  Revenues.  The twelve  months  ended  December  31, 2001
included  $7.2  million of revenues  from the Services  Company,  a taxable REIT
subsidiary, which we began to consolidate as of January 1, 2001.

     Mortgage Note Interest.  Mortgage note interest  decreased $4.9 million for
the year ended  December 31, 2001, as compared to the same period in 2000 due to
the  acquisition of the second  mortgage note  encumbering  the office  property
known  as 180  North  LaSalle  Street  on  August  1,  2000  and the  property's
operations being consolidated as of that date.

     Property Operating  Expenses.  The main factor responsible for the increase
in property  operating  expenses was  primarily  associated  with a $2.3 million
increase  in real  estate  taxes  resulting  from  the  change  in the  assessed
valuation of various office properties. In addition, property operating expenses
increased due to higher HVAC repairs and maintenance  costs, which also resulted
in increased utilities expenses.  We also experienced a $0.9 million increase in
the amount of uncollectible tenant receivables associated with a bankrupt tenant
at an industrial  property.  Overall, the amount of bad debt expense in our same
store  portfolio  increased  by $0.5  million to $1.2  million in 2001 from $0.7
million in 2000.

     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 (i) a net basis,  with tenants paying their  proportionate  share of real
estate taxes, insurance, utility and other operating expenses as additional rent
or (ii) a triple net lease basis, with the tenants paying all of the real estate
taxes,  insurance,  utility and other  operating  expenses for the property.  We
believe a portion of any increase in these operating  expenses will be offset by
expense reimbursements form our tenants.

     Depreciation and Amortization. The increase of $2.9 million in depreciation
and  amortization  during 2001  compared to 2000 was primarily due to additional
tenant  improvements  and lease  commissions  associated with new leasing at our
properties,  additional  building  improvements  in conjunction  with a suburban
office   property   renovation  and  the  write-off  of   undepreciated   tenant
improvements and unamortized lease commissions associated with a bankrupt tenant
at an industrial property.

     General and  Administrative.  General and administrative  expense decreased
$1.3 million during the year ended December 31, 2001 primarily due to a decrease
in professional fees in 2001.

     Services  Company  Operations.  The twelve  months ended  December 31, 2001
included  $6.9  million of expenses  from the Services  Company,  a taxable REIT
subsidiary, which we began to consolidate as of January 1, 2001.

     Provision  for Asset  Impairment.  Provision for asset  impairment  for the
twelve  months ended  December 31, 2001  represents  the  write-down  of certain
development  properties and an investment in an unconsolidated entity to current
estimated  fair value.  For the year ended  December 31, 2000, the provision for
asset impairment  represents the write-down of a development  project to current
estimated fair value.

     Other  Income.  Other  income  decreased  $2.9  million  for the year ended
December  31, 2001 as compared to the same  period in 2000.  This  decrease  was
primarily  due to decreased  leasing  commission  income from Bank One Corporate
Center,  decreased interest income due to lower interest rates and cash reserves
and decreased  leasing income due to the  consolidation  of the office  property
known as 180 North LaSalle Street commencing August 1, 2000.

     Interest  Expense.  The decrease in interest expense of $4.0 million in the
total  portfolio  is  primarily  due to a decrease in  interest  expense of $3.4
million for an increase in the amount of interest capitalized for projects under
development.  The decrease in interest expense of $2.1 million in the same store
portfolio resulted primarily from a decrease in interest expense of $1.5 million
due to the  refinancing of a Chicago office  property and a decrease in interest
rates on our floating rate industrial development revenue bonds.

     Strategic Alternative Costs. For the years ended December 31, 2001 and 2000
we incurred expenses consisting primarily of professional and investment banking
fees in connection with our continuing review of strategic  alternatives,  which
include portfolio asset sales and joint ventures,  as well as merger and Company
sale possibilities.

     Discontinued  Operations.  In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective for financial statements
issued for fiscal  years  beginning  after  December  15,  2001,  net income and
(loss)/gain on sales of real estate for properties  sold  subsequent to December
31,  2001  are  reflected  in  the  consolidated  statements  of  operations  as
"Discontinued Operations" for both periods presented.

Liquidity and Capital Resources

     Recent  Developments.  On December  18, 2002,  we announced  that our Board
approved the  engagement of Merrill Lynch & Company as our financial  advisor to
assist in our  evaluation  of our  strategic  alternatives,  including,  but not
limited to, a sale, merger or other business combination  involving the Company,
or a sale of some or all of our  assets.  In  addition,  on  February 6, 2003 we
announced that we engaged Wachovia  Securities as one of our financial  advisors
in connection with this  evaluation.  Our goal is to achieve a desirable  result
for our  shareholders  which may include a strategic  transaction(s)  and/or the
continued  implementation of our primary business strategy,  as discussed below.
We have received several  expressions of interest from third parties,  including
interest in pursuing a sale or merger of the Company,  asset  sales,  as well as
joint  venture  and  recapitalization  possibilities;  however,  there can be no
assurances  that any  transaction  or  transactions  will occur.  We  anticipate
utilizing net proceeds from any transaction to repay debt and/or  repurchase our
shares and common units of our Operating  Partnership  and/or distribute them to
our  shareholders and the common unit holders of our Operating  Partnership.  We
may also utilize a portion of any proceeds for general and  corporate  operating
needs and to  consummate  tax-deferred  exchanges  to minimize  any tax exposure
under existing tax indemnification agreements.

     Liquidity.  Net cash provided from operations represents our primary source
of liquidity to fund distributions, debt service and recurring capital costs. In
order to qualify as a REIT for federal income tax purposes,  we must  distribute
90% of our taxable income (excluding capital gains) annually.  From our issuance
of our Series B Shares in June 1998 through the third  quarter of 2001,  we paid
an annual dividend of 9% per annum ($2.25 per share) on each Series B Share. Due
to a number of factors,  including our current capital  resources and needs, our
Board  decided  not to pay a  distribution  on our common  shares/units  for the
fourth quarter of 2001 and on our common or preferred shares/units for the first
two  quarters  of 2002.  Dividends  on our Series B Shares  for the first  three
quarters of 2002 were subsequently declared and paid in connection with the SCPG
transaction.  See "Business - Recent  Developments" for a discussion of the SCPG
transaction.  Under the terms of our  indebtedness to SCPG, we are not permitted
to declare and pay any  distributions  on our outstanding  equity  securities so
long as the SCPG notes remain outstanding,  except that we may pay distributions
on our Series B Shares to the extent  that we prepay the SCPG notes in an amount
equal to such distributions.  Any additional  distributions on our preferred and
common shares have  currently  been suspended by our Board and will only be made
at our Board's  discretion.  We currently do not anticipate  declaring or paying
distributions  on our  common or  preferred  shares/units  during  2003.  In the
future,  distributions  on our common  shares may not be made until all  accrued
distributions  on our  preferred  shares are  declared and paid or set apart for
payment.  Future  distributions  will  depend on the actual cash  available  for
distribution,  our financial condition, capital requirements,  the completion of
any capital  transactions,  including  refinancings  and asset sales, the annual
distribution  requirements under the REIT provisions of the Code, and such other
factors as our Board deems  relevant.  We can give no assurances that we will be
able to complete capital events or, if they are completed,  whether they will be
on terms  that are  favorable  to us.  We also  can give no  assurances  that if
capital   events  are   completed  on  terms   favorable  to  us  or  otherwise,
distributions  on our  common  shares and  common  units will be resumed  either
during  2003 or  thereafter,  or that  we will be able to pay  dividends  on our
Series B Shares.

     Our  anticipated  cash flows from operations will not be sufficient to fund
our  anticipated  short and long-term  capital  needs,  the payment of preferred
distributions,  and  the  payment  of  quarterly  distributions  on  our  common
shares/units.  In 2003, we anticipate  the need to fund  significant  capital to
retenant  space that has been  vacated or is  anticipated  to be vacated  during
2003.  In addition,  we have  incurred and paid,  and  anticipate to continue to
incur and pay,  certain  costs and  expenses  related to our Bank One  Corporate
Center  consisting  principally  of the  funding  of a  sublease  obligation  in
connection  with one of the anchor  tenant  leases.  As noted above,  if capital
events are not completed on  satisfactory  terms, we can give no assurances that
we will be able to fund our anticipated capital needs.

     Under  the  terms  of  certain  debt  instruments  we  executed  to  obtain
modifications to certain loan covenants, we are obligated to fund certain escrow
accounts  to our  lenders.  See Note 6 -Debt  Covenants  to  these  Consolidated
Financial Statements for a detailed discussion of these escrow obligations.

     The  financial  covenants  contained  in many of our  loan  agreements  and
guarantee  agreements  with our lenders  include minimum ratios for debt service
coverage and liabilities as a percentage of total assets, as well as minimum net
worth  levels,  limits as to recourse  indebtedness,  minimum  quarter-end  cash
balance  requirements  and numerous other financial  covenants.  Compliance with
these covenants in 2003 is highly dependent on our financial results  (including
but not  limited to a failure of one or more of our  significant  tenants to pay
rent when due) and could be  impacted  by future  capital  events  such as asset
sales, debt refinancings and new debt or equity transactions and is not assured.
In some past  quarters,  we have failed to meet certain of these  covenants  and
after negotiations with our lenders (and in certain instances, after agreeing to
post additional cash collateral,  provide other security and/or otherwise modify
the  terms  of  the  relevant   loans)  we  have  obtained  the  necessary  loan
modifications  and/or  waivers.  We anticipate that as a result of our financial
results for the quarter ending March 31, 2003, we may not be in compliance  with
financial  covenants  contained  in  certain of our debt  facilities  related to
minimum  quarter-end cash balance  requirements of $7.5 million.  Our ability to
meet these  covenants  in the  future is  contingent  on our  ability to execute
certain capital events and on our future financial results. In addition,  if the
SCPG obligation is not extended, SCPG's default remedies, including assuming our
Operating Partnership's equity interests in various properties,  may also hinder
our  ability  to meet the  minimum  quarter  end  cash  requirements  and  other
financial loan covenants.  We are pursuing  various  capital  events,  which, if
consummated in sufficient amounts,  would provide the necessary cash proceeds to
meet these covenant  requirements in addition to the repayment of part or all of
the SCPG debt.  If the capital  events are not  consummated,  or the proceeds of
capital  events are not  sufficient to allow us to meet the minimum cash balance
covenants,  we intend to seek waivers or modifications  from the lenders.  There
can be no assurances that our financial  results will be sufficient to enable us
to meet these covenants in the future and, if we do not meet a covenant, whether
appropriate  loan  modifications  or  waivers  can be  obtained  or if they  are
obtained, whether they are granted on terms that are favorable to us.

     Given our  current  level of debt,  limited  availability  of  unencumbered
collateral and our current financing arrangements,  we may not be able to obtain
additional  debt  financing at interest rates that are below the rates of return
on our  properties.  In  addition,  any  equity  capital  we might  raise may be
dilutive to our current  shareholders.  There can be no assurances  that we will
consummate debt, equity or asset sales transactions which would yield sufficient
proceeds in a timeframe  necessary to fund our  projected  operating and capital
needs on a current  basis.  We are highly  dependent on the completion of future
capital  transactions  such as these to fund both our  short-term  and long-term
liquidity needs. There can be no assurance as to the completion, timing or terms
of any such transactions.

     The following  tables disclose our  contractual  obligations and commercial
commitments as of December 31, 2002:


<PAGE>

<TABLE>
<CAPTION>




                                                                       Payments Due by Period
                                                                       (dollars in thousands)
                                                       --------------------------------------------------------
                                                                           2004-        2006-
      Contractual Obligations(A)            Total            2003          2005         2007      Thereafter
---------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>             <C>         <C>           <C>
Mortgages and notes payable(B)           $   671,683     $ 280,897       $ 138,574   $   68,971    $ 183,241
Bonds payable(C)                              24,900             -               -       24,900            -
Construction financing                       208,198             -         208,198            -            -
Capital lease obligations                        569           275             294            -            -
Operating leases                              15,118         2,907           4,587        4,163        3,461
Tenant improvement allowances (D)(E)
                                              33,172        33,172               -            -            -
Liabilities for leases
   assumed and lease reimbursement
   obligations(F)                             89,380        10,878          21,631       17,934       38,937
Land acquisition contract(G)                   2,433         2,433               -            -            -
Deferred interest and loan exit fees
                                              18,854         4,993          12,861        1,000            -
                                      -------------------------------------------------------------------------
Total contractual cash
   obligations                           $ 1,064,307     $ 335,555       $ 386,145   $  116,968    $ 225,639
                                      =========================================================================


</TABLE>

<PAGE>



(A)  We anticipate funding these obligations from operations and the proceeds of
     equity, debt or asset sale(s) transaction(s) as discussed in "Liquidity and
     Capital Resources".

(B)  The total  contractual  obligation for mortgages and notes payable does not
     reflect unamortized debt discount of $0.3 million as of December 31, 2002.

(C)  The scheduled  maturity date for the bonds is 2022. The earlier payment due
     shown here  reflects  the 2007  scheduled  expiration  of letters of credit
     which credit  enhance the bonds,  which if not extended or replaced,  would
     accelerate the maturity of the bonds.

(D)  We  have  escrows  of $6.2  million  that  may be  utilized  to fund  these
     obligations.

(E)  Tenant  improvement  allowances  of $27.7  million  correspond  to Bank One
     Corporate  Center and will be funded  through  its  construction  loan.  We
     anticipate this obligation will be funded in 2003.

(F)  These  obligations  would be offset by any receipts from  subleasing of the
     related space.  We currently have executed  subleases that we estimate will
     provide  subleasing  receipts of $61.5 million  consisting of base rent and
     the pro-rata  share of operating  expenses and real estate  taxes.  We were
     obligated,  beginning January 2003, to make monthly escrow payments of $1.0
     million  per  month to an  account  used to pay the costs  associated  with
     Citadel's  lease of space in Bank  One  Corporate  Center.  We also in 2002
     pre-funded $4.0 million of these costs into the escrow to be applied to the
     monthly payments for June, July, August and September of 2003. On March 19,
     2003, we refinanced  the Bank One Corporate  Center  mezzanine  loan and in
     conjunction   with  such   refinancing,   our   escrow   obligations   were
     restructured.  See  "Recent  Developments"  in Item 1 - Business  above for
     further discussion relating to our restructured escrow obligations.

(G)  We have a contract  to acquire  30.3 acres of land for  approximately  $2.4
     million.  These acres must be  purchased  by June 2003.  We are required to
     make periodic installment  payments, of which $0.3 million and $0.6 million
     was paid in 2002 and 2001  (amount  included in property  held for or under
     development), respectively.


<PAGE>


<TABLE>
<CAPTION>



                                                                          Amount of Commitment
                                                                          Expiration Per Period
                                                                         (dollars in thousands)

                                                           ----------- ------------ ------------ --------------
                 Other                         Total
               Commercial                     Amounts                     2004-        2006-
              Commitments                    Committed        2003        2005         2007       Thereafter
----------------------------------------- ---------------- ----------- ------------ ------------ --------------
<S>                                        <C>              <C>        <C>            <C>         <C>
Standby letters of credit                  $  25,468          $   226   $       -     $ 25,242    $       -

Guarantees (A)                               129,392           49,833      63,125       13,400        3,034
Unconsolidated joint ventures (B)             78,750            5,000      73,750            -            -
Tax indemnifications (C)                      73,740              189         (C)          (C)          (C)
Series B preferred shares (D)                    (D)           11,250      18,000       18,000          (D)
                                          ---------------- ----------- ------------ ------------ --------------
Total commercial commitments                $307,350          $66,498    $154,875      $56,642       $3,034
                                          ================ =========== ============ ============ ==============

</TABLE>

<PAGE>



(A)  Included in the total is our guarantee of $60.0 million related to the Bank
     One Corporate Center construction loan balance of $208.2 million,  having a
     maturity  date of January 5, 2004.  Also  included is a guarantee  for $4.5
     million  to  ensure  certain  tenant  improvement  and  leasing  commission
     payments with respect to an  unconsolidated  real estate joint venture that
     owns an office tower  located at 77 West Wacker Drive,  Chicago,  Illinois.
     (See footnote (B) below).

(B)  We have a 50%  common  interest  in an  unconsolidated  real  estate  joint
     venture that owns an office tower located at 77 West Wacker Drive, Chicago,
     Illinois.  The amount  shown  represents  50% of the  balance of the $157.5
     million  mortgage  note payable  secured by the  property.  On November 10,
     1999, the joint venture entered into an interest rate collar  agreement for
     the period from October 1, 2002 through September 30, 2004 with a financial
     institution for an original notional amount of $157.5 million. The interest
     rate  ceiling  under the  agreement is based on a LIBOR index rate of 7.75%
     and the interest floor is based on a LIBOR index rate of 6.10%.  The $157.5
     million  collar  agreement  required the joint  venture to make cash escrow
     deposits to the extent that the instrument's  valuation decreases more than
     $5.0 million.  As of December 31, 2002, $7.5 million was escrowed  relating
     to the  $157.5  million  collar  agreement.  On March 12,  2001,  our joint
     venture partner became the guarantor to the counterparties related to these
     collar  agreements.  If our  joint  venture  partner,  as  guarantor,  were
     required  to pay  either  of the  counterparties  under  the  terms  of the
     interest  rate collar  agreements,  we have agreed to  reimburse  our joint
     venture  partner our fifty percent share of any amount paid. On January 16,
     2003,  the $157.5  million  collar  agreement  was  assigned to a different
     financial  institution for a fee of $0.1 million and modified such that the
     joint  venture  would need to make cash escrow  deposits only to the extent
     that the  instrument's  valuation  decreases more than $20.0 million.  As a
     result, funds previously escrowed were returned to the joint venture.

     In addition,  we have a 23.1% interest in a real estate  venture,  which we
     account  for using the  equity  method,  which owns an office  property  in
     Phoenix,  Arizona.  While we are not a guarantor or responsible  party, the
     venture  has a $22.0  million  loan  secured by the  property.  We have not
     included any amounts related to this loan in this table.

(C)  In February  2002,  we sold vacant land in Aurora,  Illinois,  a portion of
     which was covered by the tax indemnity with certain  principals  affiliated
     with Mr. Nardi (the "NAC Contributors"),  and deposited the proceeds into a
     tax deferred  exchange  trust.  In August  2002,  we elected not to use the
     proceeds to acquire a replacement property, thereby triggering the tax gain
     on sale. As a result, we have accrued indemnity payments of $0.2 million to
     the NAC Contributors.

         We estimate our maximum possible exposure on tax indemnifications to be
     $73.6 million if all  remaining  indemnity  properties  had been sold as of
     December 31, 2002. The amount of certain indemnities  decreases by 10% each
     calendar  year on each  anniversary  date of our  November 17, 1997 initial
     public offering.  See "Tax Indemnity Agreements" and "Certain Relationships
     and Related  Transactions  - Tax  Indemnification  Agreements"  for further
     discussion of these indemnities.

(D)  Dividends  are  cumulative  and payable at a 9.0% annual rate each  quarter
     that the  Series B Shares  remain  outstanding.  The  Series B Shares  rank
     senior to the common  shares as to the  payment of  dividends.  No Series B
     Shares dividend was declared or paid for the fourth quarter of 2002. On and
     after June 5, 2003,  the Series B 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 our sale of
     other capital shares of beneficial interest.

     Tenant Concentration.  The following represents our five largest tenants in
2002  based on gross  revenue  (excluding  discontinued  operations)  recognized
during 2002 (in thousands of dollars):


<PAGE>



                  Gross % Of Total Company
                       Tenant Revenue
                    Tenant                  Revenue
        -----------------------------------------------------------------------
        Arthur Andersen                     $ 17,499               9.6%
        Jenner & Block                        13,726               7.5
        National City Bank                     9,771               5.4
        IBM Corporation                        8,512               4.7
        Trizec Properties, Inc.                6,332               3.5
                                       ----------------------------------------
                                            $ 55,840              30.7%
                                       ========================================


<PAGE>



     On July 22,  2002,  Arthur  Andersen  notified us that they will be closing
their operations and subsequently  entered into discussions with us concerning a
potential lease  termination  agreement.  Arthur Andersen leased an aggregate of
656,831 net rentable square feet in two of our office properties (579,982 square
feet at 33 West  Monroe  Street  and  76,849  square  feet at 330  North  Wabash
Avenue),  which  comprise 9.6% of our total revenue for the year ended  December
31, 2002. In February 2003, we entered into lease  termination  agreements  with
Arthur  Andersen  whereby Arthur  Andersen was released from its remaining lease
obligations  subsequent to December 31, 2002 at these two properties in exchange
for total  termination  payments of $32.4  million for the 33 West Monroe Street
lease and $1.1 million for the 330 North Wabash Avenue lease.  In addition,  the
agreements  provided  we could  retain  previously  paid  rent for the  month of
January  2003.  We were  required by the lenders to deposit  the  proceeds  into
escrow accounts for each property.  The $1.1 million escrow for 330 North Wabash
Avenue is  available to fund future  tenant  improvements  and other  re-leasing
costs at the property. The $32.4 million escrow for 33 West Monroe Street may be
utilized as follows: (i) up to a maximum of $8.1 million may be utilized to fund
debt service and operating deficits at the 33 West Monroe Street property;  (ii)
$7.0 million is to be utilized to repay principal on the loan  collateralized by
the property  ninety-one  days following the receipt of the proceeds;  and (iii)
the remainder  (including  any remaining  portion of the $8.1 million  discussed
under (i)) is available to fund future tenant  improvements and other re-leasing
costs at the property.  In connection  with these  terminations,  we will record
termination  fee  income in the first  quarter  of 2003 of $29.7  million  which
represents  the  above   termination   payments  less  outstanding   receivables
(including deferred rent receivable) related to these leases.

     If one or more of the other  tenants  listed were to  experience  financial
difficulties  and cease paying rent,  our cash flow and earnings would likely be
negatively  impacted  in the near  term.  The extent and length of this would be
impacted by several factors, including:

o    the nature of the financial difficulties;
o    our ability to obtain control of the space for releasing;
o    market conditions;
o    the length of time it would  require for us to release the tenant's  space;
     and
o    whether the tenant's rent was above or below market.

     Property  Sales.  During  the year ended  December  31,  2002,  we sold two
parcels of land totaling 72.2 acres,  nine suburban office  properties  totaling
approximately  1.4 million square feet, an office building located in Knoxville,
Tennessee totaling 93,711 square feet and an industrial property located in East
Chicago,  Indiana  totaling  40,000  square feet. We used net proceeds to retire
debt,  and to fund future and current  operations,  property  capital  needs and
development  activity.  We also deposited a portion of the net proceeds from the
sale of land into a tax-deferred  exchange trust, which was terminated on August
5, 2002. This resulted in $0.6 million of net proceeds being released to us, and
resulted in the accrual of a $0.2 million payment to Mr. Nardi and affiliates of
Mr.  Nardi,  under a tax  indemnification  agreement  entered  into by us at our
initial public  offering.  In connection with the Knoxville,  Tennessee sale, we
redeemed approximately $3.9 million of the $9.0 million of bonds that encumbered
the property.  The purchaser assumed the remainder of the outstanding bonds. The
proceeds from the East Chicago, Indiana sale were deposited into escrow with the
lender that  provides the credit  enhancement  for bonds related to the property
and other properties.

     Preferred Shares. Our anticipated cash flows from operations in 2003 is not
anticipated  to be  sufficient  to fund  distributions  on our  Series B Shares.
Payment of these  distributions  may be  dependent  on our  ability to defer the
funding of our capital  requirements  and/or to obtain additional  financing and
equity  capital or to sell  assets.  The holders of our Series B Shares have the
right to elect two additional members to our Board if six consecutive  quarterly
distributions  on the  Series B Shares  are not made.  The term of any  Trustees
elected by the Series B  Shareholders  will expire  whenever the total  dividend
arrearage  on the Series B Shares has been paid and current  dividends  declared
and set apart for payment. Under the terms of the SCPG transaction,  we will not
be  permitted to declare and pay any  distributions  on our  outstanding  equity
securities so long as the SCPG notes remain outstanding,  except that we may pay
distributions  on our Series B Shares to the extent  that we prepay the notes in
an amount equal to such distributions.

     Tax Indemnity  Agreements.  In connection with the  contribution of certain
properties   during  our  initial   public   offering,   we  entered   into  tax
indemnification  agreements  with certain  principals  affiliated with Edward S.
Hadesman, a former executive officer, and certain principals affiliated with Mr.
Nardi. The terms of these agreements are discussed in "Certain Relationships and
Related Transactions - Tax Indemnification Agreements".

     On  December  12,  1997,   we  purchased  and  amended  the  mortgage  note
encumbering the property known as Continental Towers located in Rolling Meadows,
Illinois.  As part of this  transaction,  we agreed to indemnify the two limited
partners (the  "Principals") of the limited  partnership which owns the property
for, among other things, the federal and applicable state income tax liabilities
that result from the income or gain which they recognize upon refinancing, sale,
foreclosure  or other  action  taken by us with  respect to the  property or the
mortgage  note  (a  "Tax  Event").  Under  the  terms  of the  agreement,  if an
Indemnification  Event,  as defined,  results in a Tax Event, we are required to
immediately  pay to the Principals the amount of any resulting  federal or state
tax,  including any interest and penalties,  as well as a "gross up" amount that
effectively results in the Principals receiving this indemnity payment on a net,
after tax basis.

     However,  if a legal opinion is obtained from  independent tax counsel that
the Indemnification  Event "should" not trigger a Tax Event resulting in taxable
income or gain to the Principals,  no indemnity payment is immediately required.
If the legal  opinion  obtained  from  independent  tax counsel  states that the
Principals  have a "reasonable  basis" for reporting the  Indemnification  Event
without   including  any  taxable  income  or  gain,  no  indemnity  payment  is
immediately required. In either case, the indemnity payment would be required if
a Tax Event occurred.  If a "reasonable  basis" opinion is received regarding an
Indemnification  Event  and if our  equity  market  capitalization  is less than
$400.0 million (but more than $200.0 million), we are required to deposit 50% of
the  total  indemnity  amount  into  an  escrow  in  cash  or in the  form  of a
letter-of-credit.  If (i) an Indemnification  Event occurs and our equity market
capitalization  falls below $200.0 million for more than 30 consecutive  trading
days or (ii)  immediately  after we sell or  otherwise  dispose of the lesser of
$100.0  million  or 33% of our gross  assets  within a twelve  month  period ("a
Trigger  Disposition"),  we  desire  to cause an  Indemnification  Event and our
equity  market  capitalization  is less  than  $200.0  million,  then we will be
required to deposit  100% of the total  indemnity  amount  into the  escrow.  In
addition,   in  the  case  of  a  Trigger  Disposition  and  our  equity  market
capitalization  falls  below  $200.0  million,  the  Principals  may acquire the
general  partnership  interest in the limited partnership that owns the property
for $1,000 and be able to prevent the Indemnification Event from occurring.  The
tax indemnity  obligation  expires January 5, 2013. We estimate that our maximum
possible exposure at December 31, 2002 is $57.1 million.

     As discussed  above,  sales of properties which result in taxable income to
parties  covered by tax  indemnification  agreements  would  create an indemnity
obligation  on our part to the  indemnified  party.  In order to  mitigate  this
obligation,  we may enter into tax deferred exchange  transactions,  which would
defer the tax sale and related indemnity  obligation.  Proceeds  available to us
from sales of  properties  covered by tax  indemnification  agreements  would be
reduced by the amount  necessary  to fund any  indemnity  payment or to purchase
properties to satisfy tax deferred exchange transactions.

     Indebtedness. Our aggregate indebtedness was $904.4 million at December 31,
2002. This  indebtedness  had a weighted average maturity of 2.99 years and bore
interest at a weighted average interest rate of 7.03% per annum. At December 31,
2002,  $348.0  million,  or 38.5%,  bore  interest at a fixed  rate,  and $556.4
million,  or 61.5% of such  indebtedness,  including $24.9 million of tax-exempt
bonds,  bore interest at variable  rates. Of the $556.4 million of variable rate
debt, $456.9 million was subject to various interest rate cap agreements.

     Interest  Rate  Protection  Agreements.  We have entered into the following
interest rate protection agreements:

     On January 31, 1999, we entered into an interest rate collar agreement with
respect to our  property  known as 33 West  Monroe  Street,  for the period from
January 31, 1999 through January 31, 2002,  with a financial  institution for an
original  notional amount of $65.0 million.  The interest rate ceiling under the
agreement  was based on a LIBOR index rate of 7.50% and the interest  rate floor
is based on a LIBOR index rate of 3.73%.  On November 15, 2000,  the  underlying
note was refinanced with the proceeds of a $67.0 million  mortgage note payable.
The collar  agreement  remained in place and was  designated  to the new loan in
conjunction  with an  additional  interest rate cap  agreement.  On November 15,
2000,  we also entered into an interest  rate cap  agreement for the period from
November  15,  2000,  through  January 31,  2002.  The  interest  rate under the
agreement  is capped at the LIBOR index rate of 6.50%.  Included in the interest
rate cap agreement was the sale of an interest rate cap based on the LIBOR index
rate of 7.50% for the period from  November 15, 2000  through  January 31, 2002,
for a notional amount of $65.0 million.  This agreement allowed us to reduce the
cost  of this  hedge  instrument  and  take  advantage  of the  existing  collar
agreement  originally  entered into on January 31, 1999. On December 6, 2001, we
extended the interest rate cap agreement through January 31, 2003 for a notional
amount of $67.0 million.  An additional  hedge agreement is required by February
1, 2003,  covering the period from  February 1, 2003  through  debt  maturity of
November 15, 2005.  On January 29,  2003,  we entered into an interest  rate cap
agreement  for the period  January  31,  2003  through  October  31,  2004 for a
notional amount of $67.0 million that will reduce over the term of the agreement
to $65.5  million.  The interest rate under this  agreement is capped at a LIBOR
index rate of 6.50%.

     On November 1, 1999, we entered into an interest rate collar agreement with
respect  to our  property  known as 77 West  Wacker  Drive for the  period  from
November 1, 1999 through September 30, 2002 with a financial  institution for an
original  notional amount of $170.0  million.  The interest rate ceiling and the
interest  rate floor under the agreement is based on a LIBOR index rate of 7.75%
and a LIBOR  index rate of 5.62%,  respectively.  On  November  22,  1999,  this
agreement was assigned to an unconsolidated joint venture which owns the related
property and indebtedness.  On November 10, 1999, the joint venture entered into
an additional interest rate collar agreement for the period from October 1, 2002
through September 30, 2004 with a financial institution for an original notional
amount of $157.5 million. The interest rate ceiling and the interest floor under
the agreement are based on a LIBOR index rate of 7.75% and a LIBOR index rate of
6.10%, respectively. On March 12, 2001, our joint venture partner replaced us as
the guarantor to the  counterparties  related to these agreements.  If our joint
venture partner, as guarantor, were required to pay either of the counterparties
under the terms of the interest  rate collar  agreements,  we would be liable to
reimburse  our joint  venture  partner for our fifty percent share of any amount
paid. On January 16, 2003, the $157.5 million collar agreement was assigned to a
different financial institution for a fee of $0.1 million and modified such that
the joint  venture  would need to make cash escrow  deposits  only to the extent
that the instrument's  valuation decreases more than $20.0 million. As a result,
funds previously escrowed were returned to the joint venture.

     On December 10, 1999, we entered into an interest rate swap  agreement with
respect to our  property  known as 330 North  Wabash  Avenue (IBM Plaza) for the
period from December 10, 1999 through December 10, 2002 for an original notional
amount of $160.0  million that  decreased to $158.4 million on December 10, 2000
and $155.2  million on December  10,  2001,  based on a LIBOR index rate of 6.3%
that effectively fixed the interest rate on a variable rate mortgage at 8.0%. We
provided a guaranty to the counterparty  related to this agreement to the extent
of any  decrease  in  value in the  swap  agreement.  In  accordance  with  this
guarantee,  the swap agreement  required cash escrow deposits to the extent that
the instrument's  valuation decreased more than $0.5 million. As of December 31,
2001  we had  deposited  $5.6  million  pertaining  to the  interest  rate  swap
agreement.  On December 10, 2002, we entered into an interest rate cap agreement
for the period December 10, 2002 through December 13, 2003 for a notional amount
of $153.2 million. The interest rate under this agreement is capped at the LIBOR
index rate of 4.25%. The notional amount automatically reduced to $150.0 million
on December 13, 2002.

     On July 11,  2000,  we entered  into an interest  rate cap  agreement  with
respect to our property  known as 180 North  LaSalle  Street for the period from
July 11, 2000 through August 1, 2001 for a notional amount of $52.0 million. The
interest  rate under this  agreement is capped at the LIBOR index rate of 7.25%.
The  agreement  was  subsequently  extended to January 15, 2004 and the notional
amount was increased to $60.0 million.

     On November 15, 2000, we entered into a second  interest rate cap agreement
with respect to our property  known as 33 West Monroe Street for the period from
November  15, 2000  through  November  15,  2003 for a notional  amount of $12.5
million. The interest rate under the agreement is capped at the LIBOR index rate
of 8.35%, 8.75% and 9.0% for loan years one, two and three, respectively.

     On April 2, 2001,  we entered  into an  interest  rate cap  agreement  with
respect to the property at 208 South LaSalle Street in Chicago Illinois, for the
period  from  April 2, 2001  through  June 30,  2003 with  respect  to the $20.0
million  variable  rate not  payable  secured  by the 208 South  LaSalle  Street
property.  The  interest  rate under the  agreement is capped at the LIBOR index
rate of 7.5%. No amounts were received  under the terms of the agreement  during
2002 and 2001.

     On August 22, 2001,  we entered into an interest  rate cap  agreement  with
respect to our property  known as Bank One Corporate  Center for the period from
January 22, 2002 through  January 5, 2004.  The interest rate under the terms of
the agreement is capped at the LIBOR index rate of 4.25% increasing to 7.4% over
the term of the cap  agreement.  The notional  amount of the cap begins at $81.0
million and increases  over the term of the cap agreement to a maximum of $230.0
million  based  on  increases  anticipated  in the  Bank  One  Corporate  Center
construction  loan.  As of December  31, 2002,  the  notional  amount was $204.0
million capped at the LIBOR index rate of 6.75%.

     Debt  Repayments.  In  connection  with  the sale of nine  suburban  office
properties  the  purchaser  assumed  $113.1  million  of  debt  related  to  the
properties.  We purchased  $23.3 million of our Industrial  Development  Revenue
Bonds as a result of our debt refinancing  activity. In connection with the sale
of an office building located in Knoxville, Tennessee, we redeemed approximately
$3.9  million of the $9.0 million of bonds that  encumbered  the  property.  The
purchaser assumed the remainder of the outstanding  bonds.  Scheduled  principal
payments were made  totaling  $35.3  million  bringing the total debt  assigned,
purchased or repaid for 2002 to $180.7 million.

     Future Debt and Equity Offerings.  We filed a shelf registration  statement
on Form S-3 with the  Securities  and  Exchange  Commission,  which was declared
effective  on June 8, 1999,  to register up to $500.0  million of our equity and
debt  securities  for future sale at prices and on terms to be determined at the
time of  offering.  Concurrent  with the  filing  of this Form  10-K,  our shelf
registration  is no  longer  effective  and we will no  longer  be able to offer
securities  for sale  thereunder as we are not paying  dividends on our Series B
Shares.


<PAGE>


     Capital  Improvements.  Our  properties  require  periodic  investments  of
capital for  tenant-related  capital  improvements.  During  2002 and 2001,  our
tenant  improvements  and  leasing  commissions   averaged  $26.94  and  $31.16,
respectively,  per square foot of newly-leased  office space totaling 70,969 and
338,013 square feet, respectively,  $13.18 and $9.09,  respectively,  per square
foot of office leases renewed by existing tenants,  totaling 277,248 and 309,685
square feet, respectively, and $0.00 and $3.83, respectively, per square foot of
newly-leased   industrial  space  totaling  154,275  and  160,085  square  feet,
respectively.  Our total cost of general capital  improvements to our properties
historically  averages $5.0 million annually based upon an estimate of $0.41 per
square foot.  Due to current  economic and market  conditions and the forecasted
leasing activity in our portfolio,  however, we are budgeting over $11.9 million
of capital expenditures for 2003. See "Business - Business Strategies--Liquidity
and Capital Requirements."



<PAGE>


Historical Cash Flows


<PAGE>


<TABLE>
<CAPTION>



                                                                 Year ended December 31
                                            -----------------------------------------------------------------
                                                                               Increase/
                                                  2002           2001          (Decrease)       % Change
                                            -----------------------------------------------------------------
                                                                 (dollars in thousands)
<S>                                         <C>              <C>                <C>              <C>
Operating Activities
Net loss                                    $ (30,621)   $    (4,498)    $  (26,123)              (580.8)%
Amortization of discount on notes payable         290              -            290                100.0
Amortization of costs for leases assumed          836            767             69                  9.0
   Net equity in income of unconsolidated
     investments                                 (810)        (1,770)           960                 54.2
   Depreciation and amortization               39,295         42,047         (2,752)                (6.5)
   Unrealized loss on derivatives                   -            230           (230)              (100.0)
   Provision for asset impairment              64,525         21,837         42,688                195.5
   Loss (gain) on sales of real estate          4,814           (292)         5,106              1,748.6
   Minority interests                         (31,373)        (9,461)       (21,912)              (231.6)
   Cumulative effect of change in
     accounting principle                           -            539           (539)              (100.0)
   Changes in operating assets and
     liabilities                               (4,636)         3,411         (8,047)              (235.9)
                                            -----------------------------------------------------------------

Net cash provided by operating
activities                                  $  42,320       $ 52,810     $  (10,490)               (19.9)%
                                            =================================================================


Investing Activities
   Expenditures for real estate and
     equipment                              $(124,054)    $ (146,423)   $    22,369                 15.3%
   Proceeds from sales of real estate          26,596         25,413          1,183                  4.7
   Leasing costs                              (13,770)        (9,239)        (4,531)               (49.0)
   Decrease (increase) in restricted
     cash escrows                              13,187        (14,496)        27,683                191.0
   Proceeds from joint ventures                22,969              -         22,969                100.0
   (Distributions from) investment in
     unconsolidated entities                     (879)             1           (880)              (100.0)
                                            -----------------------------------------------------------------
Net cash used in investing activities       $ (75,951)    $ (144,744)   $    68,793                 47.5%
                                            =================================================================

Financing Activities
   Financing costs                          $  (2,950)    $   (4,714)   $     1,764                 37.4%
   Proceeds from mortgages and notes
     payable                                   20,448        136,237       (115,789)               (85.0)
   Repayment of mortgages and notes
     payable                                  (35,310)      (115,909)        80,599                 69.5
   Repayment of bonds payable                 (27,150)             -        (27,150)              (100.0)
   Proceeds from construction financing       102,561        105,637         (3,076)                (2.9)
   Series A preferred share and common
     share repurchases                         (5,000)          (456)        (4,544)              (996.5)
   Distributions to minority interest -
     operating partnership                          -        (14,485)        14,485                100.0
   Dividends paid to Series B preferred
     shareholders                              (9,000)        (9,000)             -                    -
   Dividends paid to Series A preferred
     shareholder                                 (750)        (3,000)         2,250                 75.0
   Dividends paid to common
     shareholders                                   -        (21,062)        21,062                100.0
                                            -----------------------------------------------------------------
Net cash provided by financing activities   $  42,849       $ 73,248     $  (30,399)               (41.5)%
                                            =================================================================



</TABLE>


<PAGE>





     Impairment  losses during 2002 include $33.6 million related to assets sold
during the second  quarter when the  anticipated  hold period was reduced  based
upon our decision to sell certain  non-core  suburban office  properties,  $22.1
million related to a Cleveland,  Ohio office property and certain of its related
assets to reflect  their fair  market  values at  December  31,  2002,  and $0.8
million  related to an office property sold during the fourth quarter based upon
our decision to exit the Tennessee  market (an  impairment  loss of $1.5 million
related to this office property was recognized during the fourth quarter of 2001
and the  related  assets were shown as  property  held for sale at December  31,
2001).  The  balance  of $5.7  million  in  impairments  is  related  to various
properties under development which we are no longer pursuing. See Note 3 - Asset
Impairments to these Consolidated Financial Statements for further explanation.

     The net decrease in operating  assets and  liabilities  is primarily  due a
decrease of $9.2 million in accounts  payable,  offset by an increase in accrued
interest  payable  primarily  due to SCPG in the  amount  of $2.6  million.  See
"Business - Recent Developments" for a description of the SCPG transaction.

     During 2001 we executed 1,252,971 square feet of leases compared to 658,886
square feet in 2002.  The  decrease in leasing  activity was a result of general
economic  conditions  and the sale to  Blackstone  and  resulted in a decline in
expenditures  for tenant and building  improvements  of $11.5 million in 2002 as
compared to 2001.  Expenditures  for projects under  development  also decreased
$8.5 million relating primarily to our Aurora Land development (decrease of $1.5
million) and Bank One Corporate  Center due to its substantial  completion as of
November 1, 2002 (decrease of $6.1 million).

     Leasing costs  increased by $1.3 million due to  re-leasing of  Continental
Towers with two major tenants  combined with $3.2 million of pre-leasing at Bank
One Corporate Center.

     Proceeds from  mortgages and notes payable  decreased in 2002 in the amount
of $115.8 million due to reduced refinancing  activity.  During 2002 we incurred
new   indebtedness   of  $20.0  million  from  SCPG.   See  "Business   --Recent
Developments" for a description of the SCPG transaction.

     Repayment of mortgages and notes payable decreased in 2002 in the amount of
$80.6  million.  Two notes  payable were paid off in 2002 in the amount of $24.5
million  combined  with  principal  paydowns  for  2002 in the  amount  of $10.5
million.

     The decrease in the restricted escrow balance and the increase in repayment
of bonds payable is primarily due to the use of the escrows to fund our purchase
of certain  industrial  bonds for $23.3 million.  Additionally,  we retired $3.9
million in bonds as a result of the sale of our Tennessee property. See Note 5 -
Mortgages and Notes Payable,  Bonds Payable and Construction  Financing to these
Consolidated Financial Statements.

     Proceeds  from  construction   financing  decreased  $3.0  million  due  to
substantial  completion  of Bank One  Corporate  Center as of  November 1, 2002,
which  resulted in decreased  real estate  expenditures  of $6.1  million.  This
decrease of real estate  expenditures was offset by an increase in leasing costs
of $3.2 million.

     The increase in proceeds  from joint  ventures is due to the  assignment of
our  interest in a joint  venture  relating to certain  property  located at the
northeast corner of Wacker Drive and Monroe Street in Chicago,  Illinois, to our
joint venture partner for $22.9 million.

     The decrease in distributions to minority  interest--operating  partnership
and dividends paid to common  shareholders is due to the suspension of quarterly
dividends/distributions on our common shares and units. Funds from Operations

     Industry analysis generally  consider Funds from Operations,  as defined by
the  National  Association  of Real  Estate  Investment  Trusts  ("NAREIT"),  an
alternative  measure of performance of an equity REIT.  Funds from Operations is
defined by NAREIT as net  income  (loss)  determined  in  accordance  with GAAP,
excluding gains (or losses) from sales of depreciable  operating 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.  Non-recurring items, other than
those considered  "extraordinary"  under GAAP, are not adjustments to funds from
operations.  While FFO is a  relevant  and  widely  used  measure  of  operating
performance of equity REIT's, it does not represent cash flow from operations or
net income as defined by GAAP, and it should not be considered as an alternative
to these  indicators in evaluating  our liquidity or operating  performance.  We
believe  that in order  to  facilitate  a clear  understanding  of our  combined
historical  operating  results,  Funds from  Operations  should be  examined  in
conjunction  with net income  (loss) as  presented  in the  unaudited  financial
statements  included elsewhere in this form 10-K. The following tables represent
the unaudited  calculation of our consolidated  quarterly  summary of Funds from
Operations for the years ended December 31, 2002, 2001 and 2000:



<PAGE>



<TABLE>



                                                               Year ended December 31, 2002
                                          -----------------------------------------------------------------------
                                                            Fourth        Third         Second        First
                                              Total        Quarter       Quarter       Quarter       Quarter
                                          -----------------------------------------------------------------------
<S>                                          <C>           <C>             <C>           <C>         <C>
                                                                  (dollars in thousands)
Net income allocated to common
   shareholders........................      $(41,901)     $ (15,553)  $     (778)    $  (4,264)    $ (21,306)
Adjustments to reconcile Funds from
   Operations:
Real estate depreciation and
   amortization (1)....................        31,978          8,169        7,982         8,100         7,727
Straight-line rental revenue ..........        (4,298)          (637)        (893)       (1,247)       (1,521)
Straight-line rental revenue from
   joint ventures......................          (311)           (65)         (44)          (96)         (106)
Straight-line rental revenue from
   discontinued operations.............           127              7           12            61            47
Amortization of costs for
   leases assumed......................           836            266          250           157           163
Joint venture adjustments..............         3,386            853          846           844           843
Adjustment for provision for asset
   impairment..........................        23,892         23,892            -             -             -
Adjustment for sale of operating
   property ...........................           655            (32)           -           580           107
Adjustment for discontinued
   operations (2)......................        25,950           (247)          91         3,986        22,120
Minority interests.....................       (16,517)       (11,184)        (583)       (1,525)       (3,225)
                                          -----------------------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue(4) (5).        23,797          5,469        6,883         6,596         4,849
Straight-line rental revenue...........         4,298            637          893         1,247         1,521
Straight-line rental revenue from
   joint ventures......................           311             65           44            96           106
Straight-line rental revenue from
   discontinued operations.............          (127)            (7)         (12)          (61)          (47)
                                          -----------------------------------------------------------------------
Funds From Operations, including
   straight-line rental revenue (3)
   (4) (5)............................       $ 28,279       $  6,164    $   7,808     $   7,878    $    6,429
                                          =======================================================================

Other data:
   Net cash provided by operating
     activities.........................     $ 42,320      $  2,670     $  16,921      $ 15,734    $    6,995
   Net cash (used in) provided by
     investing activities...............      (75,951)      (20,988)      (36,089)      (29,052)       10,178
   Net cash provided by (used in)
     financing activities...............       42,849        14,950        24,257        18,680       (15,038)



</TABLE>

<PAGE>






<TABLE>
<CAPTION>


                                                           Year ended December 31, 2001
                                      -----------------------------------------------------------------------
                                                        Fourth        Third         Second        First
                                          Total        Quarter       Quarter       Quarter       Quarter
                                      -----------------------------------------------------------------------
                                                              (dollars in thousands)
<S>                                    <C>            <C>          <C>           <C>            <C>
Net income allocated to common
   shareholders.....................   $  (16,648)    $  (11,731)  $   (4,608)   $      168     $    (477)
Adjustments to reconcile to Funds
   from Operations:
Real estate depreciation and
   amortization (1).................       30,728          7,552        7,906         7,981         7,289
Straight-line rental revenue........       (4,761)        (1,314)      (1,150)           44        (2,341)
Straight-line rental revenue from
   joint ventures...................         (535)          (112)        (109)         (153)         (161)
Straight-line rental revenue from
   discontinued operations..........         (282)            20          (49)          (74)         (179)
Amortization of costs for
   leases assumed...................          767            182          193           196           196
Joint venture adjustments...........        3,351            842          838           836           835
Adjustment for sale of operating
   property.........................          231              -        1,451        (1,135)          (85)
Adjustment for discontinued
   operations(2)....................        9,063          2,019        2,072         2,080         2,892
Minority interests..................      (10,363)        (6,509)      (2,640)       (1,004)         (210)
Cumulative effect of change in
   accounting principle (4).........          321              -             -             -          321
                                      -----------------------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue (4)
   (5)..............................       11,872         (9,051)       3,904         8,939         8,080
Straight-line rental revenue........        4,761          1,314        1,150           (44)        2,341
Straight-line rental revenue from
   joint ventures...................          535            112          109           153           161
Straight-line rental revenue from
   discontinued operations..........          282            (20)          49            74           179
                                      -----------------------------------------------------------------------
Funds from operations,
   including straight-line rental
   revenue (3) (4) (5)..............   $   17,450     $   (7,645)   $   5,212      $  9,122      $ 10,761
                                      =======================================================================

Other data:
   Net cash provided by operating
     activities.....................   $   52,810     $  10,325     $  20,221     $  18,459     $   3,805
   Net cash used in investing
     activities.....................     (144,744)      (28,392)      (45,859)      (29,820)      (40,673)
   Net cash provided by financing
     activities.....................       73,248         5,231        16,527        17,338        34,152



</TABLE>
<PAGE>




<TABLE>
<CAPTION>


                                                           Year ended December 31, 2000
                                      -----------------------------------------------------------------------
                                                        Fourth        Third         Second        First
                                          Total        Quarter       Quarter       Quarter       Quarter
                                      -----------------------------------------------------------------------
                                                              (dollars in thousands)
<S>                                    <C>            <C>            <C>            <C>          <C>
Net income allocated to common
   shareholders .....................  $    1,742     $   (5,239)  $    6,015   $      (700)  $     1,666
Adjustments to reconcile to Funds
   from Operations:
Real estate depreciation and
   amortization (1)..................      27,823          7,290        6,750         7,046         6,737
Straight-line rental revenue.........      (8,437)        (2,246)      (2,039)       (2,136)       (2,016)
Straight-line rental revenue from
   joint ventures....................        (751)          (277)        (158)         (158)         (158)
Straight-line rental revenue from
   discontinued operations...........        (921)          (237)        (250)         (196)         (238)
Amortization of costs for
   leases assumed....................         833            210          206           255           162
Joint venture adjustments............       3,291            701          865           862           863
Adjustment for sale of operating
   property..........................      (4,181)        (2,532)      (5,129)        2,893           587
Adjustment for discontinued
   operations (2)....................       7,560          1,915        1,851         1,866         1,928
Minority interests...................       1,551         (1,240)         782           523         1,486
Cumulative effect of change in
   accounting principle(3)...........       1,843              -            -             -         1,843
                                      -----------------------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue (4)        30,353         (1,655)       8,893        10,255        12,860
   (5)...............................
Straight-line rental revenue.........       8,437          2,246        2,039         2,136         2,016
Straight-line rental revenue from
   joint ventures....................         751            277          158           158           158
Straight-line rental revenue from
   discontinued operations...........         921            237          250           196           238
                                      -----------------------------------------------------------------------
Funds from operations, including
   straight-line rental revenue(4) (5)  $  40,462     $    1,105   $   11,340    $   12,745   $    15,272
                                      =======================================================================

Other data:
   Net cash provided by operating
     activities......................    $ 64,393      $ 33,637    $    7,882      $ 14,611      $  8,263
   Net cash (used in) provided by
     investing activities............     (26,248)      (14,942)       28,354        (8,961)      (30,699)
   Net cash (used in) provided by
     financing activities............     (32,787)      (20,637)      (36,460)        6,046        18,264

</TABLE>

(1)  Excludes the  amortization of deferred  financing costs and non-real estate
     related depreciation.

(2)  In accordance with SFAS 144, effective for financial  statements issued for
     fiscal years  beginning after December 15, 2001, net income and gain/(loss)
     on sales of real estate for properties sold subsequent to December 31, 2001
     are reflected in our Consolidated Statements of Operations as "Discontinued
     operations" for all periods presented.

(3)  During the fourth  quarter of 2000, we changed our method of accounting for
     revenue  recognition in accordance with SAB 101. Effective January 1, 2000,
     we recorded a charge to income of $1.8 million,  net of minority  interests
     of $1.1 million,  representing the cumulative effect of adopting SAB 101 as
     of January 1, 2000. Pursuant to FASB Statement No. 3, "Reporting Accounting
     Changes in Interim Financial Statements," the previously reported quarterly
     information for the first three quarters of 2000 has been restated. The net
     quarterly  effect in 2000 was a decrease in net income (loss)  available to
     common  shares of $1.9  million  and $0.2  million for the first and second
     quarters,  respectively,  and an  increase  of $0.2  million  for the third
     quarter of 2000,  a decrease in funds from  operations  of $42,000 and $0.4
     million for the first and second quarters, respectively, and an increase in
     funds from  operations of $0.4 million for the third  quarter.  Included in
     the above four  quarters  for the year ended  December 31, 2000 are revenue
     adjustments  of $0.3 million,  $0.1 million,  $0.1 million and $0.1 million
     for the first, second, third and fourth quarters,  respectively, of revenue
     previously  recorded in 1999. Included in the above revenue adjustments for
     both 2002 and 2001 is $0.3 million of revenue previously recorded in 1999.

(4)  In accordance with SFAS 145, gains or losses from  extinguishments  of debt
     would seldom, if ever, result in extraordinary  item  classification of the
     gain or loss associated with the  extinguishment.  Our adoption of SFAS 145
     during the second quarter of 2002 reflects the reclassification of the loss
     on extinguishments  of debt previously  classified as an extraordinary item
     to expense  resulting  in a reduction of funds from  operations  previously
     reported in 2001 and 2000. The net quarterly  effect in 2001 was a decrease
     in funds from operations of $0.1 million and $0.1 million for the first and
     second  quarters,  respectively.  In 2000,  the net quarterly  effect was a
     decrease in funds from  operations of $0.7  million,  $1.5 million and $1.4
     million for the second, third and fourth quarters, respectively.

     On January 1, 2001,  we adopted SFAS 133, as amended by SFAS 138. SFAS 133,
     as amended,  established  accounting and reporting standards for derivative
     instruments.  Specifically,  SFAS 133 requires an entity to  recognize  all
     derivatives  as either assets or  liabilities in the statement of financial
     position and to measure those instruments at fair value. Additionally,  the
     fair value  adjustments  will  affect  either  shareholders'  equity or net
     income depending on whether the derivative  instrument qualifies as a hedge
     for  accounting  purposes  and, if so, the nature of the hedging  activity.
     Upon adoption of SFAS 138 and SFAS 133, we recorded as a cumulative  effect
     of an accounting  change a net transition  adjustment  (unrealized loss) of
     $0.5 million in net income, and a transition  adjustment of $3.2 million as
     an  increase  in  accumulated  other  comprehensive  loss.  Adoption of the
     standard  resulted in a net  transition  adjustment  of $3.8 million on our
     balance sheet  reflected as a $0.5 million  reduction in deferred  costs, a
     $1.4  million  reduction in  investment  in  unconsolidated  entities and a
     deferred  hedge  liability of $1.9 million.  In August 2001,  the Financial
     Accounting  Standards  Board issued final  guidance on the  accounting  for
     options  used as hedges  under SFAS 133.  This  guidance is pursuant to DIG
     G20.  Provided  certain  criteria are met,  options can be considered fully
     effective hedging vehicles,  with gains and losses due to changes in market
     value  recorded in other  accumulated  comprehensive  income on our balance
     sheet.  On  September 1, 2001,  we adopted G20 for its interest  rate hedge
     instruments.  Any subsequent  unrealized  gains or losses due to changes in
     market value of options,  such as interest  rate caps,  will be recorded in
     the other accumulated comprehensive income.

(5)  We compute Funds from Operations in accordance  with standards  established
     by the Board of  Governors  of NAREIT in its April  2002  White  Paper.  In
     addition  to this  presentation,  we also  present  funds  from  operations
     excluding  straight-line  rental  revenue (e.g.,  rental  revenues based on
     contractual  lease  terms),  which we believe  results  in a more  accurate
     presentation  of our  actual  operating  activities.  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.



<PAGE>


Certain Relationships and Related Transactions

     On March 19,  2002,  we  entered  into an  agreement  appointing  Julien J.
Studley, Inc. as our exclusive agent to lease space on our behalf related to the
Citadel Reimbursement  obligation.  Mr. Jacque M. Ducharme, one of our Trustees,
is the Vice  Chairman  Western  Region and Director of Julien J.  Studley,  Inc.
Julien J. Studley, Inc. earned commissions of $0.2 million for services provided
to us in 2002.  On March 12,  2003,  we extended  the term of this  agreement to
September 30, 2003.

     On April 8, 2002, we announced the  resignations  of Mr. Michael W. Reschke
from his  position as  Chairman  of our Board and Mr.  Richard S. Curto from his
position as our Chief  Executive  Officer.  Mr. Reschke  continues to serve as a
member of our Board.  Mr.  Curto's term as a member of our Board  expired on May
31,  2002.  We appointed  Mr. Nardi as Acting  Chairman of our Board on April 8,
2002.  Prior to that date,  Mr. Nardi was Vice Chairman of our Board since 1997.
We appointed Mr. Nardi as Chairman of our Board on May 31, 2002.

     Mr. Reschke and Mr. Curto each entered into a separation  agreement with us
in connection with their resignations.  The separation  agreement  applicable to
Mr. Reschke provided for among other things,  severance compensation of $625,000
and other accrued compensation of $42,000.  The termination  compensation to Mr.
Reschke was paid in part in six monthly  installments  of $19,000 each, with the
balance, with interest thereon determined in accordance with the agreement, paid
on November 8, 2002.  In addition,  Mr.  Reschke's  unvested  stock  options and
restricted stock awards were cancelled pursuant to his separation agreement. The
separation  agreement  applicable  to Mr. Curto  provided,  among other  things,
severance  compensation  of $935,000 and other accrued  compensation of $90,000.
The  termination  compensation  to Mr.  Curto  was  paid in part in six  monthly
installments of $32,000 with the balance,  with interest  thereon  determined in
accordance  with the  agreement,  paid on November  8, 2002.  In  addition,  Mr.
Curto's  unvested stock options and restricted  stock awards became fully vested
pursuant to his separation  agreement in exchange for certain other  concessions
from Mr. Curto.  Finally, on April 18, 2002, Mr. Curto voluntarily forfeited his
options to acquire  175,000 of our common shares,  which options were granted to
him at the time of our initial public offering.

     On August 5, 2002, we terminated a tax-deferred  exchange trust relating to
a deposit of a portion of net  proceeds  from a sale of land in  February  2002.
This resulted in $0.6 million of net proceeds being released to us, and resulted
in the accrual of a $0.2  million  payment to Mr.  Nardi and  affiliates  of Mr.
Nardi under a tax  indemnification  agreement  entered into by us at our initial
public offering.

     On September  27, 2002,  we terminated  our lease of  approximately  33,690
square feet at Bank One Corpora*te Center.

     As of December 31, 2002, we have a receivable of approximately $0.7 million
from Mr. Nardi and certain of his  affiliates,  representing  rent receivable on
our 1051 Kirk Road property due under a master lease  agreement  with us for the
period  from  October  2001  through  December  2002.  Payments  of rent per the
agreement  are to be deducted from common unit  distributions  made to Mr. Nardi
and his  affiliates.  Because there were no common unit  distributions  for this
period,  no payments were applied to the outstanding  balance and rent continued
to accrue under the master lease at the rate of approximately $48,000 per month.
The term of the master lease  expires on March 31, 2003.  We have  recorded this
rent as a reduction of our basis in the property.

     At our  initial  public  offering  in  November  1997,  we  entered  into a
consulting  agreement with Mr. Nardi having an initial three-year term. The term
of the consulting agreement automatically extended for additional one-year terms
unless  terminated by either party.  In February 2002, and prior to the date Mr.
Nardi became our  Chairman,  our Board  approved a commission  of $75,000 to Mr.
Nardi in connection  with a  build-to-suit  development  (See "Business - Recent
Developments"), which was paid to an affiliate of Mr. Nardi in October 2002.

     Since  the  resignations  of our  former  Chairman  and  our  former  Chief
Executive  Officer on April 8, 2002, Mr. Nardi has devoted  substantially all of
his time and energy  toward his  duties.  Effective  as of  November  2002,  the
consulting agreement between Mr. Nardi and us was mutually  terminated,  and Mr.
Nardi became a full-time employee.  In light of the additional  responsibilities
assumed by Mr.  Nardi since April 8, 2002,  our  Compensation  Committee  met in
January 2003 and approved an increase in Mr. Nardi's  compensation from $220,000
per year to a total of  $400,000  per year,  retroactive  to April 8, 2002.  Our
Compensation  Committee also approved a bonus of $400,000 for Mr. Nardi for 2002
and awarded Mr.  Nardi  100,000  stock  options at $5.02 per share (the  closing
price of the common  shares on the New York Stock  Exchange on the last  trading
day  immediately  prior to the award).  These  options  vest over three years in
one-third increments on each annual anniversary of the award.

     On March 25, 2003, we and PGI and one of PGI's  affiliates  entered into an
amendment to the environmental  remediation and indemnity  agreement  previously
entered into by PGI and us in November 1997. Pursuant to the existing agreement,
PGI has agreed to indemnify us against certain environmental liabilities related
to our  Chicago,  Hammond  and  East  Chicago  Industrial  parks.  The  existing
agreement  also  provides  that PGI is entitled to use the proceeds from certain
pending litigation we have against third parties relating to these environmental
liabilities.  The amendment to the agreement provides,  among other things, that
all of the  proceeds  from  the  litigation  will  not be  funded  to PGI or its
affiliate, but instead that if any proceeds are recovered in connection with the
litigation,  sufficient  proceeds  (if  recovered)  will instead by placed in an
escrow to be used to fund the environmental remediation costs.

     Agreements to Purchase Certain Properties.  We have an option to purchase a
parking  garage  located at 300 North  LaSalle  Street in Chicago from PGI which
option has  approximately  four and one-half  years  remaining on its term.  300
North LaSalle Street contains  approximately 58,000 square feet of land suitable
for development. We have an option to purchase the property at 95.0% of its then
fair market value.

     We also have  approximately nine and one-half years remaining on a right of
first offer to develop (or develop and acquire an ownership  interest in) all or
any portion of approximately 360 acres of undeveloped office and industrial land
in Huntley, Illinois. The right of first offer will apply to the extent that PGI
determines  that a parcel will be utilized for the  construction of an office or
industrial  facility  to be owned and leased to third  parties by PGI or held by
PGI for sale to a third party.  The site is subject to a participation  interest
held by an unaffiliated  third-party lender. The option and right of first offer
may be exercised only with the approval of our Independent Trustees.

     PGI leases  22,620  square  feet of space at 77 W. Wacker  Drive,  Chicago,
Illinois,  an office  building  owned by one of our  unconsolidated  real estate
joint  ventures that we own a 50% common  ownership  interest in and account for
our  ownership  using the equity  method.  PGI paid rent and  operating  expense
escalations  to the joint venture  totaling  approximately  $1.0 million for the
year ended  December  31,  2002.  PGI's lease  expires  October 31, 2007 with an
option, effective April 30, 2002, to terminate the lease upon six months written
notice.  PGI currently  owes the  unconsolidated  real estate joint venture $0.2
million  representing rent and related operating expense  reimbursements for the
months of February and March 2003.

     During  2002,  we  subleased  a  portion  of  PGI's  space  pursuant  to  a
month-to-month lease for a total rent of $35,600.  This sublease arrangement was
terminated on February 28, 2002.

     Issuance of Limited Partner Common Units to Affiliates of Stephen J. Nardi.
We and  certain  affiliates  of the  Nardi  Group  entered  into a  vacant  land
agreement in  connection  with the  contribution  of certain  properties  to our
Operating  Partnership at the time of our initial public  offering.  Pursuant to
the  agreement,  we were  obligated  to purchase,  over a five-year  period that
commenced in November 1997, an aggregate of  approximately  95.0 acres of vacant
land in Carol  Stream and Batavia,  Illinois  for a purchase  price of $3.00 per
square  foot,  which  was  to be  paid  for in  common  units  in our  Operating
Partnership.  Under the agreement,  we acquired approximately 40.5 acres of such
land in 1999 for a purchase  price of  approximately  $5.4 million  (paid for in
359,252 common units and $0.1 million cash). In March 2000, we acquired  another
29.6 acres of land under this  agreement for a purchase  price of  approximately
$3.8 million (paid for in 272,126 common units).  Further,  under the agreement,
in March 2002, we acquired  approximately 24.9 acres of such land for a purchase
price of  approximately  $3.3 million (paid for in 344,331  common  units).  Our
obligations under this contract have been satisfied.

     Tax Indemnification  Agreements.  The Operating  Partnership entered into a
tax indemnification  agreement with certain principals affiliated with Edward S.
Hadesman, a former executive officer,  which contributed properties to us during
our initial public  offering (the "IBD  Contributors")  pursuant to which the we
are required to indemnify the IBD  Contributors  for,  among other  things,  the
income  tax  liability  that  would  result  from the  income or gain which they
recognize upon the  refinancing  or repayment by us of their  liabilities or the
sale or other  disposition by us of the properties they  contributed.  Under the
terms of the  agreement,  we will  indemnify  the IBD  Contributors  for certain
income tax liabilities  based on income or gain which the IBD  Contributors  are
required  to  include in their  gross  income  for  federal or state  income tax
purposes as a result of such an event. This indemnity covers these income taxes,
interest and  penalties  and is required to be made on a "grossed up" basis that
effectively results in the IBD Contributors receiving the indemnity payment on a
net, after-tax basis. The percentage of the tax liabilities that we are required
to  indemnify  is 60% for the  taxable  year ending on December  31,  2002,  and
declines  by 10% each  year  thereafter  until  December  31,  2007.  We are not
required to indemnify the IBD  Contributors  for income or gain realized by them
after the taxable year ended December 31, 2007. We estimate our maximum possible
exposure at December 31, 2002 is $4.3 million.

     We entered into a tax  indemnification  agreement  with certain  principals
affiliated with Mr. Nardi (the "NAC Contributors") who contributed properties to
us during our initial  public  offering,  pursuant  to which we are  required to
indemnify the NAC Contributors for, among other things, the income tax liability
that  would  result  from the  income  or gain  which  they  recognize  upon the
refinancing  or  repayment  by us of  their  liabilities  on the  sale or  other
disposition by the us of the properties they contributed. Under the terms of the
agreement,  we will indemnify the NAC  Contributors  for certain tax liabilities
based on income or gain which the NAC  Contributors  are  required to include in
their gross income for federal,  applicable  state and certain  local income tax
purposes as a result of such an event.  In connection with the conversion of the
Nardi Group's  general partner common units into limited partner common units as
described above, our tax indemnification agreement with the NAC Contributors was
amended to provide that the tax indemnification by us is reduced by 10% per year
over  the  10-year  term  of  the  tax  indemnification   agreement,   effective
retroactively  from the date of the IPO.  This  indemnity  covers  these  income
taxes, interest and penalties and is required to be made on a "grossed up" basis
that effectively results in the NAC Contributors receiving the indemnity payment
on a net,  after-tax basis.  The percentage of the tax liabilities  which we are
required to  indemnify  is 60% for the taxable  year ended on December 31, 2002,
and declines by 10% each year  thereafter  until  December 31, 2007.  We are not
required to indemnify the NAC  Contributors  for income or gain realized by them
after the taxable year ended December 31, 2007. We estimate our maximum possible
exposure under this indemnity at December 31, 2002 is $12.1 million.

     Other Transactions.  We are aware of environmental contamination at certain
of our older industrial  properties  contributed to us as an equity contribution
by PGI during our initial public offering.  We have a receivable at December 31,
2002 of $26,000  due from PGI  (included  in other  assets),  relating  to PGI's
indemnification  to us for certain  costs of  environmental  remediation.  These
environmental   matters   are  set   forth   above  in  the   section   entitled
"Business--Government Regulations--Environmental Matters."

     Governor  James R.  Thompson,  one of our Trustees,  is Chairman of the law
firm of Winston & Strawn,  which has provided,  and continues to provide,  legal
services to us.  Winston & Strawn earned fees of $1.7 million for legal services
provided to us in 2002.

Critical Accounting Policies

     General.  The previous  discussion and analysis of our financial  condition
and results of operations are based upon our consolidated  financial statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United  States.  The  preparation  of our  financial  statements
requires  us to make  estimates  and  judgments  about the effects of matters or
future events that are inherently  uncertain.  These estimates and judgments may
affect the reported amounts of assets,  liabilities,  revenues and expenses, and
related  disclosure of contingent assets and liabilities.  On an on-going basis,
we evaluate our estimates, including contingencies and litigation. We base these
estimates on  historical  experience  and on various other  assumptions  that we
believe to be reasonable in the  circumstances.  These  estimates form the basis
for making  judgments about the carrying  values of assets and liabilities  that
are not readily  apparent  from other  sources.  Actual  results may differ from
these estimates under different assumptions or conditions.

     To  assist  in  understanding  our  results  of  operations  and  financial
position, we have identified our critical accounting policies and discussed them
below. These accounting  policies are the most important to the portrayal of our
results  and  financial  position,  either  because of the  significance  of the
financial  statement  items to which they  relate or because  they  require  our
management's most difficult, subjective or complex judgments.

     Allowance   for   Doubtful   Accounts.   We  monitor  the   liquidity   and
creditworthiness  of our tenants on an ongoing basis. We maintain allowances for
doubtful accounts using the specific  identification method for estimated losses
resulting from the inability of certain of our tenants to make payments required
by the terms of their respective leases. No general reserve is recorded.  If the
financial  condition of our tenants were to deteriorate,  additional  allowances
may be required.

     Deferred  Tax Asset.  We account for income  taxes  payable by our Services
Company in accordance  with SFAS No. 109,  "Accounting  for Income Taxes" ("SFAS
109"),  which  requires that deferred tax assets and  liabilities  be recognized
using enacted tax rates for the effect of temporary differences between the book
and tax bases of recorded  assets and  liabilities.  SFAS 109 also requires that
deferred  tax assets be reduced by a  valuation  allowance  if it is more likely
than  not  that  some  portion  or all of the  deferred  tax  asset  will not be
realized. At December 31, 2002, we had deferred tax assets in excess of deferred
tax  liabilities of $1.4 million  (included in other assets in our  consolidated
balance  sheet).  The deferred tax assets in excess of deferred tax  liabilities
decreased  approximately  $1.8 million during 2002 primarily due to $4.1 million
of pretax income generated by the Services Company.

     We evaluate  quarterly  the  realizability  of our  deferred  tax assets by
assessing the valuation  allowance and by adjusting the amount of the allowance,
if necessary.  The factors used to assess the likelihood of realization  are our
forecast of future  taxable  income and available tax planning  strategies  that
could be implemented to realize the net deferred tax. We have used  tax-planning
strategies  to  realize or renew net  deferred  tax assets in order to avoid the
potential loss of future tax benefits.

     Approximately  $3.6 million of future taxable income earned by our Services
Company  is  ultimately  required  to  realize  the net  deferred  tax assets at
December  31,  2002.  This is based on the  recognition  in future  years by the
Services  Company of  taxable  income  anticipated  from  certain  build to suit
activities  and  management  fees  earned on two of our  properties.  Failure to
achieve forecasted  taxable income might affect the ultimate  realization of the
net deferred tax assets described above.  Factors that may affect our ability to
achieve sufficient  forecasted  taxable income include,  but are not limited to,
unanticipated  decreases in the profitability of build to suit activities and/or
the sale of properties and subsequent loss of the related management contracts.

     Assumed  Lease  Liabilities.  As a result  of the  negotiation  of  certain
leases,  we assumed  the  liability  for the  tenants'  obligation  or agreed to
reimburse  the  tenants  for their  obligation  under  leases  with their  prior
landlords.  In  addition,  in  connection  with the sale of  certain  industrial
properties in 1999, we agreed to a master lease agreement for certain properties
for a defined  period.  Our policy is to record the estimated net  obligation we
may be subject to as a liability.  The net  obligation is derived by calculating
our total contractual  obligation and reducing the amount by existing  subleases
and an estimate of  subleases we  anticipate  signing in the future based on the
nature of the space, the property and market conditions.  We periodically review
these  estimates for  reasonableness  based on changes in market  conditions and
executed subleases. Failure to achieve forecasted results could lead to a future
increase in the liabilities associated with these transactions.

     Provisions  for  Impairment.  In  evaluating  our assets for  impairment in
accordance with SFAS 144, we record  impairment losses on long-lived assets used
in operations  when events and  circumstances  indicate that the assets might be
impaired.  Under SFAS 144, assets that display indicators of possible impairment
are  reviewed to see if their net book value will be  recovered  from  estimated
cash flows over an  anticipated  hold  period.  If these  cash  flows,  plus the
proceeds from a sale at the end of the  anticipated  hold period,  are less than
the net book value of our related  asset,  our policy is to record an impairment
reserve  related to the asset in the amount of the  difference  between  its net
book value and our estimate of its fair market  value,  less costs of sale.  For
assets held for sale,  impairment is measured as the difference between carrying
value and fair  value,  less cost to dispose.  Fair value is based on  estimated
cash flows  discounted at a  risk-adjusted  rate of interest.  Property held for
future  development  and  property  under  development  are also  evaluated  for
impairment.  Impairment is determined  for  development  costs  associated  with
property held for future  development and property under  development based upon
management's assessment that these costs have no future value.

     In evaluating  our  long-lived  assets used in operations for impairment at
December 31, 2002,  we assumed  anticipated  hold periods of three to five years
for our  operating  properties  and concluded no reserve was warranted for these
properties at this time. In evaluating our property held for future  development
and  property  under  development,  we  concluded  that  historical  and  future
development  expenditures,  including capitalized interest, were recoverable and
no reserves were warranted at this time.  However, as discussed under "Liquidity
and Capital  Resources",  we may need to sell assets to meet our liquidity needs
during 2003. If our anticipated  hold periods for certain assets were shortened,
impairment  reserves would be required.  These  reserves would have  significant
impacts on our operating results.

     Capitalization  of  Interest  and  Other  Costs  on  Development  Projects.
Development  costs,  which include land acquisition  costs, fees and other costs
incurred in developing new properties,  are  capitalized as incurred.  Interest,
financing  costs,  real estate  taxes,  other direct  costs and  indirect  costs
(including   certain  employee   compensation  costs  and  related  general  and
administrative  expenses) incurred during development periods are capitalized as
a component of the building costs.  These costs continue to be  capitalized,  to
the extent  they relate to vacant  space,  for one year  following  the date the
development  is placed in service.  During this one-year  period,  the amount of
capitalized  costs  could be  materially  affected  by the timing and changes in
occupancy  levels.  Subsequent  to the  one-year  period,  these costs are fully
expensed as incurred.

Impact of Recently Issued Accounting Standards

     In April 2002,  FASB issued SFAS 145. In accordance  with SFAS 145 gains or
losses from the early  extinguishments  of debt would seldom, if ever, result in
extraordinary  items  classification  of the  gain or loss  associated  with the
extinguishment.   Our   adoption   of  SFAS  145  during   2002   reflects   the
reclassification  of the  loss  on  early  extinguishments  of  debt  previously
classified as an extraordinary  item to amortization of deferred financing costs
resulting in a reduction of funds from  operations  previously  reported of $0.2
million  and $3.5  million  for the  years  ended  December  31,  2001 and 2000,
respectively.

     In  November  2002,  FASB  issued   Interpretation  No.  45,   "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others"  ("Interpretation 45").  Interpretation 45
is an interpretation of SFAS No. 5, 57 and 197 and incorporates, without change,
the guidance of Interpretation  No. 34 and clarifies the requirements for proper
accounting and disclosures to be made by a guarantor in its financial statements
regarding  obligations  under  certain  guarantees  it has  issued.  We  adopted
Interpretation 45 in November 2002, which has resulted in additional disclosures
in our Consolidated Financial Statements.

     In December 2002,  FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No.
123,   Accounting  for  Stock-Based   Compensation   ("SFAS  123"),  to  provide
alternative  methods of transition to SFAS 123's fair value method of accounting
for  stock-based  employee  compensation.  SFAS 148 also  amends the  disclosure
provisions of SFAS 123 and Accounting  Principles  Board ("APB") Opinion No. 28,
Interim Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to  stock-based  employee  compensation  on reported net income and earnings per
share in annual and interim financial statements.  While SFAS 148 does not amend
SFAS 123 to require us to account  for  employee  stock  options  using the fair
value  method,  the  disclosure  provisions  of SFAS 148 are  applicable  to all
companies with  stock-based  employee  compensation,  regardless of whether they
account for that  compensation  using the fair value method of Statement  123 or
the  intrinsic  value  method of APB Opinion No. 25. We account for our employee
common share option grants using the intrinsic method.

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable   Interest   Entities"   ("Interpretation   46"),  which  required  the
consolidation of an entity by an enterprise (i) if that  enterprise,  known as a
"primary  beneficiary",  has a variable  interest that will absorb a majority of
the entity's  expected losses if they occur,  receive a majority of the entity's
expected  residual  returns if they  occur,  or both and (ii) if the entity is a
variable  interest  entity,  as  defined  by  Interpretation  46. An entity is a
variable  interest  entity if (a) the  total  equity  investment  at risk in the
entity is not sufficient to permit the entity to finance its activities  without
additional  subordinated  financial support from other parties or (b) the equity
investors do not have the characteristics of a controlling financial interest in
the entity.  Interpretation  46 applies  immediately  to all  variable  interest
entities created after January 31, 2003. For variable  interest entities created
by public companies before February 1, 2003,  Interpretation  46 must be applied
no later than the  beginning  of the first  interim or annual  reporting  period
beginning after June 15, 2003. The initial determination of whether an entity is
a  variable  interest  entity  shall be made as of the  date at which a  primary
beneficiary becomes involved with the entity and reconsidered as of the date one
of three  triggering  events  described by  Interpretation  46 occur.  We do not
believe that the adoption of this  interpretation will have a material effect on
our financial statements.

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, 2002,  approximately  $556.4 million of our  outstanding
indebtedness was subject to interest at floating rates.  Future indebtedness may
also be subject to floating  rate  interest.  The  floating  rate debt  includes
$456.9 million subject to various interest rate cap agreements.  Inflation,  and
its impact on  floating  interest  rates,  could  affect the amount of  interest
payments due on such indebtedness.


<PAGE>


ITEM 7A.  Quantitative and Qualitative 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  mortgages  and  notes  payable,  bonds  payable  and
construction  financing,  the table  presents  principal  cash flows,  including
principal amortization,  and related weighted-average interest rates by expected
maturity  dates as of  December  31,  2002.  For the  interest  rate  protection
agreement, the table presents the notional amount entered into and the cap rate.


<PAGE>


<TABLE>
<CAPTION>


                                                                   Interest Rate Sensitivity
                                                       Principal (Notional) Amount by Expected Maturity
                                                                     Average Interest Rate
                                      ------------------------------------------------------------------------------------
                                          2003        2004        2005        2006       2007     Thereafter    Total
                                      ------------------------------------------------------------------------------------
                                                                     (Dollars in Millions)
<S>                                    <C>          <C>          <C>         <C>         <C>        <C>         <C>
Liabilities
Mortgage notes payable:
Fixed rate amount..................    $  30.2     $    3.3     $   5.8      $  3.8      $  3.9     $183.2      $ 230.2
Weighted-average interest rate (1).       11.31%        7.45%       7.41%       7.46%       7.46%      7.58%

Variable rate amount...............    $ 193.4     $   61.2     $  68.3      $ 61.2         -          -        $ 384.1
Weighted-average interest rate (1).        3.92%        5.23%       2.94%       4.45%       -          -

Notes payable:
Fixed rate amount (2)..............    $  57.3          -            -            -         -          -        $  57.3
Weighted-average interest rate (1).       14.12%        -            -            -         -          -

Bonds payable:
Variable rate amount (3)...........        -            -           -           -         $24.9        -        $  24.9
Weighted-average interest rate (1).        -            -           -           -           3.75%      -

Construction Financing:
Fixed rate amount..................        -        $  60.8         -           -           -          -        $  60.8
Weighted-average interest rate (1).        -           23.00%       -           -           -          -

Variable rate amount ..............        -        $ 147.4         -           -           -          -        $ 147.4
Weighted-average interest rate (1).        -            4.41%       -           -           -          -

Interest rate cap agreements (1)(4):
Notional amount....................     $249.5      $ 264.0         -           -           -          -        $ 513.5
Cap rate...........................        5.35%        6.86%       -           -           -          -           -



</TABLE>

<PAGE>



(1)  Based upon the rates in effect at December 31, 2002,  the  weighted-average
     interest rates on our mortgage notes payable,  notes payable, bonds payable
     and construction  financing at December 31, 2002 were 5.55%,  14.12%, 3.75%
     and  9.84%,  respectively.  If  interest  rates on our  variable  rate debt
     increased by one percentage point, our annual interest incurred  (including
     the effects of the interest rate protection  agreements)  would increase by
     $5.6 million.

(2)  Amount shown for 2003 does not reflect  unamortized  debt  discount of $0.3
     million on notes payable as of December 31, 2002.

(3)  The bonds payable of $24.9 million are  collateralized by letters of credit
     of $25.2  million.  The scheduled  maturity date for the bonds is 2022. The
     letters of credit mature on January 2, 2007.

(4)  On August 22, 2001,  we entered into an interest rate cap agreement for the
     period from January 22, 2002  through  January 5, 2004.  The interest  rate
     under the terms of the agreement is capped at the LIBOR index rate of 4.25%
     increasing to 7.4% over the term of the cap agreement.  The notional amount
     of the cap began at $81.0  million and  increases  over the term of the cap
     agreement to a maximum of $230.0 million, based on increases anticipated in
     the  construction  loan for Bank One Corporate  Center.  As of December 31,
     2002, the notional amount was $204.0 million with a capped LIBOR index rate
     of 6.75%.

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.

                                    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 23, 2003 (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 sections captioned "Election of Trustees,"
"Compensation     of     Executives--Executive     Officers,"     and     "Other
Information--Compliance  with Section  16(a) of the  Securities  Exchange Act of
1934" of the Proxy Statement is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information contained in the sections captioned "Election of Trustees -
Compensation  of Trustees",  "Report of  Compensation  Committee",  "Performance
Graph" and  "Compensation  of Executives" of the Proxy Statement is incorporated
herein by reference.


<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

     The following table gives  information  about our common shares that may be
issued upon the  exercise of options,  warrants and rights under the Prime Group
Realty Trust 1997 Share Incentive Plan, as amended,  as of December 31, 2002. We
have no other compensation plans pursuant to which common shares may be issued.


<TABLE>
<CAPTION>

                                               (a)             (b)                (c)                (d)


                                                                                Number of
                                                                             common shares
                                          Number of                           available for
                                         common shares        Weighted-      future issuance
                                          to be issued        average          under equity
                                         upon exercise     exercise price      compensation
                                         of outstanding    of outstanding      plans (excluding   Total of common
                                            options,          options,       common shares      shares reflected
                                          warrants and      warrants and      reflected In       in Columns
Plan Category                                rights            rights           Column (a)         (a) and (c)
                                     ----------------- ------------------ ------------------ ------------------
<S>                                   <C>                <C>                <C>                <C>
Equity compensation plan
  approved by shareholders........        2,003,546 (1)        $ 16.09              707,464 (2)     2,711,010 (2)
Equity compensation plans not                                    Not
  approved by shareholders........           None             Applicable              None            None
                                        ----------------- ------------------ ------------------ ------------------

                             TOTAL:       2,003,546            $ 15.58              707,464         2,711,010 (2)
                                        ================= ================== ================== ==================


</TABLE>

------------
(1)  Issued  under the Prime Group Realty Trust 1997 Share  Incentive  Plan,  as
     amended.

(2)  We have  granted the options to purchase  common  shares,  set forth in the
     table  above  as  well as  restricted  common  shares  subject  to  vesting
     schedules and unrestricted common shares under the Plan. As of December 31,
     2002,  we had  granted  149,764  restricted  common  shares  and  2,003,546
     unrestricted  common  shares under the Plan.  Of those  149,764  restricted
     common share  grants,  14,144 shares  remained  unvested as of December 31,
     2002,  of which  8,246  vested on January  15,  2003 and 5,898 will vest on
     January 15,  2004.  We are  authorized  to issue an  aggregate of 2,860,774
     common  shares  under the Plan.  After taking into  account  common  shares
     subject to outstanding options and restricted and unrestricted common share
     grants,  707,464  common shares of the authorized  2,860,774  common shares
     remain available for future issuance under the Plan.

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See  the  information  contained  in the  section  captioned  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Certain Relationships and Related Transactions" of this report.

ITEM 14.   Controls and Procedures

     Evaluation of Disclosure Controls and Procedures

     Based on an  evaluation  of our  disclosure  controls  and  procedures  (as
defined  in Rules  13a-14(c)  and  15d-14(c)  promulgated  under the  Securities
Exchange Act of 1934, as amended) conducted within 90 days of the date of filing
of this annual report Form 10-K under the supervision and with the participation
of our  Chairman  of the  Board  (our  principal  executive  officer)  and Chief
Financial  Officer,  our Chairman of the Board and Chief Financial  Officer have
concluded that our disclosure controls and procedures are effective.

     Changes in Internal Controls

     There have been no significant changes in our internal controls or in other
factors that could significantly  affect our internal controls subsequent to the
date of their evaluation.


<PAGE>


                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                   ON FORM 8-K

(a) (1)  Consolidated Financial Statements

Report of Independent Auditors                                              F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001                F-3

Consolidated Statements of Operations for the years ended
  December 31, 2002, 2001 and 2000                                          F-4

Consolidated  Statements of Changes in Shareholders'  Equity
  for the years ended December 31, 2002, 2001 and 2000                      F-6

Consolidated Statements of Cash Flows for the years ended
  December 31, 2002, 2001 and 2000                                          F-7

Notes to Consolidated Financial Statements                                 F-10

     (2) Financial Statement Schedule

The following financial statement schedule is included in Item 145(d)

Schedule III - Real Estate and Accumulated Depreciation of Prime Group
  Realty Trust as of December 31, 2002                                     F-60

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



<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 exhibit 3.1 to our 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 exhibit 4.1 to
     our  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 of Prime Group  Realty Trust dated as of December 29,
     1998 as filed as  exhibit  3.3 to our 1998  Annual  Report on Form 10-K and
     incorporated by reference.

3.4  Amended and Restated Bylaws of Prime Group Realty Trust as filed as exhibit
     3.1 to our Quarterly  Report on Form 10-Q for the quarter  ended  September
     30, 2000 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  exhibit  3.3 to our  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,  1997 as filed  as  exhibit  3.5 to
     Amendment No. 1 to our 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,  1997 as filed  as  exhibit  3.6 to
     Amendment No. 1 to our 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  exhibit  3.7 to
     Amendment No. 1 to our 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  exhibit  3.8 to
     Amendment No. 1 to our 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 exhibit 3.9 to Amendment
     No. 1 to our  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  exhibit  3.10 to
     Amendment No. 1 to our 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  exhibit  3.11 to
     Amendment No. 1 to our Registration  Statement on Form S-11 (No. 333-51599)
     and incorporated herein by reference.



<PAGE>


Exhibit
No.                            Description

3.13 Amendment  No.  8  to  the  Amended  and  Restated   Agreement  of  Limited
     Partnership  dated  as of May  15,  1998 as  filed  as  exhibit  3.2 to our
     Quarterly  Report  on Form 10-Q for the  quarter  ended  June 30,  1998 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  exhibit  3.3 to our
     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  exhibit  3.4 to our
     Quarterly  Report  on Form 10-Q for the  quarter  ended  June 30,  1998 and
     incorporated herein by reference.

3.16 Amendment  No.  11  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated  as of  July  15,  1998  as  filed  as  exhibit  3.15 to
     Post-Effective  Amendment No. 1 to our 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  exhibit  3.16 to
     Post-Effective  Amendment No. 1 to our Registration  Statement on Form S-11
     (No. 333-51935) and incorporated 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 exhibit  3.17 to
     Amendment  No. 1 to  Post-Effective  Amendment  No.  1 to our  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  exhibit  3.18 to
     Amendment No. 2 to our 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  exhibit  3.19 to
     Amendment No. 1 to our 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  exhibit  3.20 to
     Post-Effective  Amendment No. 3 to our  Registration  Statement on Form S-3
     (Registration No. 333-51935) and incorporated herein by reference.

3.22 Amendment  No.  17  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of January  15,  1999 as filed as exhibit  3.1 to our
     Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  1999 and
     incorporated herein by reference.

3.23 Amendment  No.  18  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of  February  15, 1999 as filed as exhibit 3.2 to our
     Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  1999 and
     incorporated herein by reference.

3.24 Amendment  No.  19  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of March  15,  1999 as  filed as  exhibit  3.3 to our
     Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  1999 and
     incorporated herein by reference.



<PAGE>


Exhibit
                                No. Description

3.26 Amendment  No.  21  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated  as of  April  15,  1999 as  filed  as  exhibit  3.24 to
     Amendment No. 1 to our Registration  Statement on Form S-3 (No.  333-70369)
     and incorporated herein by reference.

3.27 Amendment  No.  22  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated  as of  April  22,  1999 as  filed  as  exhibit  3.25 to
     Amendment No. 1 to our Registration  Statement on Form S-3 (No.  333-70369)
     and incorporated herein by reference.

3.28 Amendment  No.  23  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of May 15, 1999 as filed as exhibit 3.26 to Amendment
     No.  1 to our  Registration  Statement  on Form  S-3  (No.  333-70369)  and
     incorporated herein by reference.

3.29 Amendment  No.  24  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of June  15,  1999 as  filed  as  exhibit  3.4 to our
     Quarterly  Report  on Form 10-Q for the  quarter  ended  June 30,  1999 and
     incorporated herein by reference.

3.30 Amendment  No.  25  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of July  14,  1999 as  filed  as  exhibit  3.1 to our
     Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999 and
     incorporated herein by reference.

3.31 Amendment  No.  26  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of July  15,  1999 as  filed  as  exhibit  3.2 to our
     Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999 and
     incorporated herein by reference.

3.32 Amendment  No.  27  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of August  16,  1999 as filed as  exhibit  3.3 to our
     Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999 and
     incorporated herein by reference.

3.33 Amendment  No.  28  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of September  15, 1999 as filed as exhibit 3.4 to our
     Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999 and
     incorporated herein by reference.

3.34 Amendment  No.  29  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of October 15,  1999 as filed as exhibit  3.34 to our
     1999 Annual Report on Form 10-K and incorporated herein by reference.

3.35 Amendment  No.  30  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of November  15, 1999 as filed as exhibit 3.35 to our
     1999 Annual Report on Form 10-K and incorporated herein by reference.

3.36 Amendment  No.  31  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of December  15, 1999 as filed as exhibit 3.36 to our
     1999 Annual Report on Form 10-K and incorporated herein by reference.

3.37 Amendment  No.  32  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  dated as of December  30, 1999 as filed as exhibit 3.37 to our
     1999 Annual Report on Form 10-K and incorporated herein by reference.



<PAGE>


Exhibit
                                No. Description

3.38 Amendment  No.  33  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  of Prime Group  Realty,  L.P.  dated as of January 17, 2000 as
     filed as exhibit 3.1 to our  Quarterly  Report on Form 10-Q for the quarter
     ended March 31, 2000 and incorporated herein by reference.

3.39 Amendment  No.  34  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  of Prime Group Realty,  L.P.  dated as of February 15, 2000 as
     filed as exhibit 3.2 to our  Quarterly  Report on Form 10-Q for the quarter
     ended March 31, 2000 and incorporated herein by reference.

3.40 Amendment  No.  35  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty, L.P. dated as of March 15, 2000 as filed
     as exhibit 3.3 to our  Quarterly  Report on Form 10-Q for the quarter ended
     March 31, 2000 and incorporated herein by reference.

3.41 Amendment  No.  36  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty, L.P. dated as of March 15, 2000 as filed
     as exhibit 3.4 to our  Quarterly  Report on Form 10-Q for the quarter ended
     March 31, 2000 and incorporated herein by reference.

3.42 Amendment  No.  37  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty, L.P. dated as of March 24, 2000 as filed
     as exhibit 3.5 to our  Quarterly  Report on Form 10-Q for the quarter ended
     March 31, 2000 and incorporated herein by reference.

3.43 Amendment  No.  38  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty, L.P. dated as of April 17, 2000 as filed
     as exhibit 3.1 to our  Quarterly  Report on Form 10-Q for the quarter ended
     June 30, 2000 and incorporated herein by reference.

3.44 Amendment  No.  39  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership  of Prime Group Realty,  L.P. dated as of May 15, 2000 as filed
     as exhibit 3.2 to our  Quarterly  Report on Form 10-Q for the quarter ended
     June 30, 2000 and incorporated herein by reference.

3.45 Amendment  No.  40  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty,  L.P. dated as of June 15, 2000 as filed
     as exhibit 3.3 to our  Quarterly  Report on Form 10-Q for the quarter ended
     June 30, 2000 and incorporated herein by reference.

3.46 Amendment  No.  41  to  the  Amended  and  Restated  Agreement  of  Limited
     Partnership of Prime Group Realty,  L.P. dated as of March 7, 2002 as filed
     as exhibit  3.46 to our 2001  Annual  Report on Form 10-K and  incorporated
     herein by reference.

10.1 Credit  Agreement  dated  January 5, 2001 by and between  Dearborn  Center,
     L.L.C. and Bayerische Hypo-Und Vereinsbank AG, New York Branch, as filed as
     exhibit  10.1 to our  Quarterly  Report on Form 10-Q for the quarter  ended
     March 31, 2001 and incorporated herein by reference.



<PAGE>


Exhibit
                                No. Description

10.2 Promissory  Note dated January 5, 2001 by Dearborn  Center,  L.L.C.  to the
     order of Bayerische  Hypo-Und  Vereinsbank AG, New York Branch, as filed as
     exhibit  10.2 to our  Quarterly  Report on Form 10-Q for the quarter  ended
     March 31, 2001 and incorporated herein by reference.

10.3 Guaranty of Completion  and  Indemnity  dated January 5, 2001 made by Prime
     Group Realty, L.P. in favor of Bayerische Hypo-Und Vereinsbank AG, New York
     Branch,  as filed as exhibit 10.3 to our Quarterly  Report on Form 10-Q for
     the quarter ended March 31, 2001 and incorporated herein by reference.

10.4 Guaranty of Interest and  Operating  Costs and  Indemnity  dated January 5,
     2001 made by Prime  Group  Realty,  L.P.  in favor of  Bayerische  Hypo-Und
     Vereinsbank AG, New York Branch,  as filed as exhibit 10.4 to our Quarterly
     Report on Form 10-Q for the quarter  ended March 31, 2001 and  incorporated
     herein by reference.

10.5 Guaranty of Loan Payment and Indemnity  dated January 5, 2001 made by Prime
     Group Realty, L.P. in favor of Bayerische Hypo-Und Vereinsbank AG, New York
     Branch,  as filed as exhibit 10.5 to our Quarterly  Report on Form 10-Q for
     the quarter ended March 31, 2001 and incorporated herein by reference.

10.6 Mezzanine  Construction  Loan Agreement  dated as of January 5, 2001 by and
     among Prime/Beitler  Development Company,  L.L.C. and Bankers Trust Company
     and other lenders, as filed as exhibit 10.6 to our Quarterly Report on Form
     10-Q for the  quarter  ended  March  31,  2001 and  incorporated  herein by
     reference.

10.7 Mezzanine  Note dated as of January  5, 2001 by  Prime/Beitler  Development
     Company,  L.L.C. to the order of Bankers Trust Company, as filed as exhibit
     10.7 to our  Quarterly  Report on Form 10-Q for the quarter ended March 31,
     2001 and incorporated herein by reference.

10.8 Mezzanine  Note dated as of January  5, 2001 by  Prime/Beitler  Development
     Company,  L.L.C.  to the order of MMBC Debt  Holdings  I, LLC,  as filed as
     exhibit  10.8 to our  Quarterly  Report on Form 10-Q for the quarter  ended
     March 31, 2001 and incorporated herein by reference.

10.9 Mezzanine  Note dated as of January  5, 2001 by  Prime/Beitler  Development
     Company,  L.L.C. to the order of New York Life Insurance Company,  as filed
     as exhibit 10.9 to our Quarterly  Report on Form 10-Q for the quarter ended
     March 31, 2001 and incorporated herein by reference.

10.10Mezzanine  Note dated as of January  5, 2001 by  Prime/Beitler  Development
     Company,  L.L.C.  to the order of Vornado Realty Trust, as filed as exhibit
     10.10 to our Quarterly  Report on Form 10-Q for the quarter ended March 31,
     2001 and incorporated herein by reference.



<PAGE>

<TABLE>
<CAPTION>


Exhibit
No.     Description
<S>    <C>
10.11  Guaranty of Completion  and  Indemnity  dated as of January 5, 2001 made by
       Prime Group  Realty,  L.P. in favor of Bankers Trust  Company,  as filed as
       exhibit  10.11 to our  Quarterly  Report on Form 10-Q for the quarter ended
       March 31, 2001 and incorporated herein by reference.

10.12  Guaranty of Interest and  Operating  Costs dated as of January 5, 2001 made
       by Prime Group Realty,  L.P. in favor of Bankers Trust Company, as filed as
       exhibit  10.12 to our  Quarterly  Report on Form 10-Q for the quarter ended
       March 31, 2001 and incorporated herein by reference.

10.13  Credit  Agreement  dated  April 25,  2001 by and  between  BRE/City  Center
       L.L.C.  and Corus Bank,  N.A.,  as filed as exhibit  10.13 to our Quarterly
       Report on Form 10-Q for the quarter  ended June 31,  2001 and  incorporated
       herein by reference.

10.14  Promissory  Note dated  April 25,  2001 by BRE/City  Center  L.L.C.  to the
       order of Corus  Bank,  N.A.,  as filed as  exhibit  10.14 to our  Quarterly
       Report on Form 10-Q for the quarter  ended June 31,  2001 and  incorporated
       herein by reference.

10.15  Limited  Guaranty dated April 25, 2001 made by Prime Group Realty,  L.P. in
       favor of Corus  Bank,  N.A.,  as filed as  exhibit  10.15 to our  Quarterly
       Report on Form 10-Q for the quarter  ended June 31,  2001 and  incorporated
       herein by reference.

10.16  Mortgage  dated April 15, 2001 by BRE/City  Center  L.L.C in favor of Corus
       Bank,  N.A., as filed as exhibit 10.16 to our Quarterly Report on Form 10-Q
       for the quarter ended June 1, 2001 and incorporated herein by reference.

10.17  Omnibus First  Modification  to Senior Loan Documents dated as of March 12,
       2001 by and among Dearborn Center, L.L.C.,  Bayerische Hypo-Und Vereinsbank
       AG, New York Branch and Prime Group Realty, L.P., as filed as exhibit 10.17
       to our  Quarterly  Report on Form 10-Q for the quarter  ended June 31, 2001
       and incorporated herein by reference.

10.18  Omnibus First  Modification  to Mezzanine Loan Documents  dated as of March
       12, 2001 by and among Prime/Beitler  Development Company,  L.L.C.,  Bankers
       Trust Company,  Vornado  Realty Trust,  MMBC Debt Holdings I, LLC, New York
       Life Insurance Company,  and Prime Group Realty,  L.P., as filed as exhibit
       10.18 to our  Quarterly  Report on Form 10-Q for the quarter ended June 31,
       2001 and incorporated herein by reference.

10.19  Reserve Account  Agreement dated as of March 12, 2001 by and among Dearborn
       Center,  L.L.C.,  Bayerische  Hypo-Und  Vereinsbank  AG,  New York  Branch,
       Bankers Trust Company,  Prime/Beitler  Development  Company,  L.L.C., Prime
       Group Realty,  L.P., Penny Beitler L.L.C., and J. Paul Beitler  Development
       Company, as filed as exhibit 10.19 to our Quarterly Report on Form 10-Q for
       the quarter ended June 31, 2001 and incorporated herein by reference.

</TABLE>

<PAGE>


Exhibit
 No.   Description

<TABLE>
<CAPTION>

<S>    <C>

10.20  Support and Standstill  Agreement dated as of August 30, 2001 between Cadim
       inc., The Prime Group Inc., Prime Group Realty Trust and Prime Group Realty
       L.P., as on filed on August 31, 2001 under  Schedule 14D9 and  incorporated
       herein by reference.

10.21  Amended  and  Restated  Support  and  Standstill   Agreement  dated  as  of
       September  14, 2001 between Cadim inc.,  The Prime Group Inc.,  Prime Group
       Realty Trust and Prime Group Realty  L.P.,  as filed on September  19, 2001
       under Schedule 14D9-C and incorporated herein by reference.

10.22  Tax  Indemnity  Agreement  dated as of November 17, 1997 by and among Prime
       Group Realty L.P.,  Roland E. Casati and Richard A. Heise as filed on March
       28,  2002 as  exhibit  10.22 to our 2001  Annual  Report  on Form  10-K and
       incorporated herein by reference.

10.23  Amendment to Omnibus  First  Modification  to Senior Loan  Documents  dated
       January 2, 2002 by and among Dearborn Center,  L.L.C.,  Bayerische Hypo-Und
       Vereinsbank AG, New York Branch,  and Prime Group Realty,  L.P. as filed as
       exhibit 10.6 to our 2001 Annual Report on Form 10-K and incorporated herein
       by reference.

10.24  First Amendment to Series A Preferred  Securities  Purchase Agreement dated
       as of February 22, 2002 among Prime Group Realty Trust, Prime Group Realty,
       L.P.,  and Security  Capital  Preferred  Growth  Incorporated,  as filed as
       exhibit  99.1 to Prime  Group  Realty  Trust's  Current  Report on Form 8-K
       (filed February 28, 2002, File No.  001-13589) and  incorporated  herein by
       reference.

10.25  Omnibus Second  Modification  to Senior Loan Documents dated March 27, 2002
       by and among Dearborn Center,  L.L.C.,  Bayerische Hypo-Und Vereinsbank AG,
       New York Branch,  and Prime Group Realty,  L.P. as filed on May 15, 2002 as
       exhibit  10.2 to our  Quarterly  Report on Form 10-Q for the quarter  ended
       March 31, 2002 and incorporated herein by reference.

10.26  Pledge,  Assignment  and Security  Agreement  (Liquidity  Covenant  Waiver)
       dated March 27,  2002  between  Prime Group  Realty,  L.P.  and  Bayerische
       Hypo-Und  Vereinsbank AG, New York Branch,  and  acknowledged and agreed by
       Dearborn  Center,  L.L.C.  as filed on May 15, 2002 as exhibit  10.3 to our
       Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  2002 and
       incorporated herein by reference.

10.27  Omnibus Second  Modification  to Mezzanine  Loan Documents  dated March 26,
       2002 by and among Prime/Beitler  Development Company, L.L.C., Bankers Trust
       Company,  Vornado  Realty  Trust,  MMBC Debt Holdings I, LLC, New York Life
       Insurance Company, Dearborn Center, L.L.C., and Prime Group Realty, L.P. as
       filed on May 15, 2002 as exhibit 10.4 to our Quarterly  Report on Form 10-Q
       for the quarter ended March 31, 2002 and incorporated herein by reference.

10.28* Separation  Agreement dated April 8, 2002 among Prime Group Realty Trust,
       Prime Group Realty, L.P. and Michael W. Reschke as filed as exhibit 10.1 to
       our Current Report on Form 8-K (filed April 10, 2002,  File No.  001-13589)
       and incorporated herein by reference.


</TABLE>

<PAGE>


<TABLE>
<CAPTION>

Exhibit
 No.    Description

<S>    <C>

10.29* Separation  Agreement dated April 8, 2002 among Prime Group Realty Trust,
       Prime Group  Realty,  L.P. and Richard S. Curto as filed as exhibit 10.2 to
       our Current Report on Form 8-K (filed April 10, 2002,  File No.  001-13589)
       and incorporated herein by reference.

10.30* Bonus Agreement  dated May 20, 2002 among Louis G. Conforti,  Prime Group
       Realty Trust and Prime Group  Realty,  L.P. as filed as exhibit 10.3 to our
       Quarterly  Report  on Form 10-Q for the  quarter  ended  June 30,  2002 and
       incorporated herein by reference.

10.31* Bonus  Agreement  dated May 20, 2002 among  Jeffrey A.  Patterson,  Prime
       Group Realty Trust and Prime Group Realty, L.P. as filed as exhibit 10.4 to
       our  Quarterly  Report on Form 10-Q for the quarter ended June 30, 2002 and
       incorporated herein by reference.

10.32* Bonus  Agreement  dated May 20, 2002 among James F. Hoffman,  Prime Group
       Realty Trust and Prime Group  Realty,  L.P. as filed as exhibit 10.5 to our
       Quarterly  Report  on Form 10-Q for the  quarter  ended  June 30,  2002 and
       incorporated herein by reference.

10.33  Securities  Purchase and Exchange Agreement dated as of June 13, 2002 among
       Security Capital  Preferred Growth  Incorporated,  Prime Group Realty Trust
       and Prime Group Realty, L.P. as filed as exhibit 99.1 to our Current Report
       on Form 8-K (filed June 14,  2002,  File No.  001-13589)  and  incorporated
       herein by reference.

10.34  Form of Promissory Note in the principal  amount of $20,000,000  from Prime
       Group Realty,  L.P. in favor Security Capital Preferred Growth Incorporated
       as filed as exhibit 99.2 to our Current  Report on Form 8-K (filed June 14,
       2002, File No. 001-13589) and incorporated herein by reference.

10.35  Form of  Exchangeable  Promissory  Note from Prime  Group  Realty,  L.P. in
       favor of Security Capital Preferred Growth Incorporated as filed as exhibit
       99.3 to our  Current  Report on Form 8-K  (filed  June 14,  2002,  File No.
       001-13589) and incorporated herein by reference.

10.36  Form of Promissory Note in the principal  amount of $20,000,000  from Prime
       Group  Realty,   L.P.  in  favor  of  Security  Capital   Preferred  Growth
       Incorporated  as filed as Exhibit  99.1 to our  Current  Report on Form 8-K
       (filed  July 18,  2002,  File No.  001-13589)  and  incorporated  herein by
       reference.

10.37  Form  of  Exchangeable   Promissory   Note  in  the  principal   amount  of
       $37,279,909  from Prime Group  Realty,  L.P.  in favor of Security  Capital
       Preferred  Growth  Incorporated  as filed as  Exhibit  99.2 to our  Current
       Report  on  Form  8-K  (filed  July  18,  2002,  File  No.  001-13589)  and
       incorporated herein by reference.

10.38  Amendment No. 1 to the Securities  Purchase and Exchange Agreement dated as
       of July 16, 2002,  among Security Capital  Preferred  Growth  Incorporated,
       Prime Group Realty Trust and Prime Group  Realty,  L.P. as filed as Exhibit
       99.3 to our  Current  Report on Form 8-K  (filed  July 18,  2002,  File No.
       001-13589) and incorporated herein by reference.

10.39  Registration  Agreement  dated  as of July 16,  2002  between  Prime  Group
       Realty Trust and Security Capital Preferred Growth Incorporated as filed as
       Exhibit 99.4 to our Current  Report on Form 8-K (filed July 18, 2002,  File
       No. 001-13589) and incorporated herein by reference.

<PAGE>

</TABLE>

<TABLE>



Exhibit
No.    Description

<S>    <C>

10.41  Series A-2 Share  Purchase  Warrant  dated July 16,  2002 from Prime  Group
       Realty Trust to Security Capital Preferred Growth  Incorporated as filed as
       Exhibit 99.6 to our Current  Report on Form 8-K (filed July 18, 2002,  File
       No. 001-13589) and incorporated herein by reference.

10.42  Series B Share  Purchase  Warrant  dated  July 16,  2002 from  Prime  Group
       Realty Trust to Security Capital Preferred Growth  Incorporated as filed as
       Exhibit 99.7 to our Current  Report on Form 8-K (filed July 18, 2002,  File
       No. 001-13589) and incorporated herein by reference.

10.43  Series C Share  Purchase  Warrant  dated  July 16,  2002 from  Prime  Group
       Realty Trust to Security Capital Preferred Growth  Incorporated as filed as
       Exhibit 99.8 to our Current  Report on Form 8-K (filed July 18, 2002,  File
       No. 001-13589) and incorporated herein by reference.

10.44  Omnibus Third  Modification  to Senior Loan Documents  dated as of July 16,
       2002 among Dearborn  Center,  L.L.C.,  Prime/Beitler  Development  Company,
       L.L.C.,  Bayerische Hypo- Und Vereinsbank AG, New York Branch , Prime Group
       Realty,  L.P., Penny Beitler L.L.C. and J. Paul Beitler Development Company
       Incorporated  as filed as Exhibit  99.9 to our  Current  Report on Form 8-K
       (filed  July 18,  2002,  File No.  001-13589)  and  incorporated  herein by
       reference.

10.45  Omnibus Third  Modification  to Mezzanine Loan  Documents  dated as of July
       16, 2002 among Prime/Beitler  Development  Company,  L.L.C.,  Deutsche Bank
       Trust Company  Americas,  Vornado Realty Trust,  MMBC Debt Holdings I, LLC,
       New York Life  Insurance  Company,  Dearborn  Center,  L.L.C.,  Prime Group
       Realty,  L.P., Penny Beitler L.L.C. and J. Paul Beitler Development Company
       as filed as Exhibit 99.10 to our Current Report on Form 8-K (filed July 18,
       2002, File No. 001-13589) and incorporated herein by reference.

10.46  Pledge,  Assignment and Security  Agreement  (Second Senior Citadel Reserve
       Account)  dated as of July 16,  2002 given by Prime Group  Realty,  L.P. in
       favor of Bayerische  Hypo- Und  Vereinsbank AG, New York Branch as filed as
       Exhibit 99.11 to our Current Report on Form 8-K (filed July 18, 2002,  File
       No. 001-13589) and incorporated herein by reference.

10.47  First  Amendment  to Loan  Agreement  (BRE/City  Center  L.L.C.)  dated for
       reference purposes only as of June 27, 2002, between BRE/City Center L.L.C.
       and Corus  Bank,  N.A. as filed as Exhibit  99.12 to our Current  Report on
       Form 8-K (filed July 18, 2002, File No. 001-13589) and incorporated  herein
       by reference.

10.48  Reaffirmation  and Amendment of Limited  Guaranty (Loan to BRE/City  Center
       L.L.C.)  entered into as of June 27, 2002 between Prime Group Realty,  L.P.
       and Corus Bank N.A. as filed as Exhibit 99.13 to our Current Report on Form
       8-K (filed July 18, 2002, File No.  001-13589) and  incorporated  herein by
       reference.

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

21.1   Subsidiaries of the Registrant.

</TABLE>



<PAGE>

<TABLE>
<CAPTION>


Exhibit
No.    Description

<S>  <C>

23.1 Consent of Independent Auditors.

99.1 Certification  Pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002 of Stephen J. Nardi, Chairman
     of the Board of Registrant.

99.2 Certification  Pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to
     Section  906 of the  Sarbanes-Oxley  Act of  2002  of  Louis  G.  Conforti,
     Co-President and Chief Financial Officer of Registrant.

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

*    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit to this  Report on Form 10-K  pursuant to Item 14(c) of
     the Report on Form 10-K.

</TABLE>

<PAGE>



(b) Reports on Form 8-K

     We filed the  following  reports on Form 8-K  during the fourth  quarter of
2002:

     Form 8-K dated  November  14,  2002  (filed  November  14,  2002,  File No.
001-13589)  relating  to  additional   financial  and  operational   information
concerning us and  properties  owned by us or  subsidiaries  as of September 30,
2002, in the form of a Supplemental Package.

     Form 8-K dated  November  14,  2002  (filed  November  15,  2002,  File No.
001-13589)  relating to Regulation FD  Disclosure  disclosing  the reaching of a
verbal  agreement with Bank One, NA to enter into a lease  amendment at the Bank
One Corporate Center.

     Form 8-K dated  December  10,  2002  (filed  December  11,  2002,  File No.
001-13589)  relating to the determination to continue the existing suspension of
quarterly  distributions  on our Series B preferred shares and our common shares
for the fourth quarter of 2002.

     Form 8-K dated  December  18,  2002  (filed  December  19,  2002,  File No.
001-13589)  relating to the announcement that our Board of Trustees had approved
our engagement of Merrill Lynch & Co. as our financial  advisor to assist in our
evaluation of our strategic  alternatives,  as well as the execution of a letter
agreement with Northland Capital Partners,  L.P.,  Northland Capital  Investors,
LLC, NCP, LLC and Northland Investor Investment Corporation regarding a possible
recapitalization proposed by Northland.


<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 26, 2003.

                                                  PRIME GROUP REALTY TRUST
                                                    /s/ Stephen J. Nardi
                                                    --------------------
Dated: March 26, 2003                                 Stephen J. Nardi
                                                    Chairman of the Board

                                                    /s/ Louis G. Conforti
                                                    ---------------------
                                                      Louis G. Conforti
                                                 Office of the President and
Dated: March 26, 2003                              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.

<TABLE>
<CAPTION>
<S>                             <C>                                                 <C>

Name                                  Title                                          Date



/s/ Stephen J. Nardi                  Chairman of the Board and Trustee               March 26, 2003
---------------------------------
Stephen J. Nardi





/s/ Louis G. Conforti                 Office of the President and
---------------------------------       Chief Financial Officer                       March 26, 2003
Louis G. Conforti





/s/ Roy P. Rendino
---------------------------------    Senior Vice President - Finance and Chief
Roy P. Rendino                          Accounting Officer                            March 26, 2003









/s/ Douglas Crocker, II
---------------------------------    Trustee                                         March 26, 2003
Douglas Crocker, II


/s/ Jacque M. Ducharme
---------------------------------    Trustee                                         March 26, 2003
Jacque M. Ducharme



/s/ Christopher J. Nassetta
---------------------------------    Trustee                                         March 26, 2003
Christopher J. Nassetta


/s/ Michael W. Reschke               Trustee                                         March 26, 2003
---------------------------------
Michael W. Reschke



/s/ James R. Thompson
---------------------------------    Trustee                                         March 26, 2003
Governor
James R. Thompson


</TABLE>

<PAGE>



                                 CERTIFICATIONS

I, Stephen J. Nardi, certify that:

1.       I have  reviewed  this annual report on form 10-K of Prime Group Realty
         Trust;

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

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

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

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

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

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

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

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

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

6.       The registrant's  other certifying officer and I have indicated in this
         annual  report  whether  there were  significant  changes  in  internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date:  March 26, 2003

                                                   /s/ Stephen J. Nardi
                                                   --------------------
                                                   Stephen J. Nardi
                                                   Chairman of the Board


<PAGE>


I, Louis G. Conforti, certify that:

1.   I have  reviewed  this  annual  report on form 10-K of Prime  Group  Realty
     Trust;

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

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

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

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

              b)  evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

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

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

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

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

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date:  March 26, 2003
       /s/ Louis G. Conforti
       ---------------------
       Louis G. Conforti
       Co-President and
         Chief Financial Officer


<PAGE>

PRIME GROUP REALTY TRUST

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Financial Statements

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

Consolidated Balance Sheets as of December 31, 2002 and 2001.............F-3

Consolidated Statements of Operations for the years ended
   December 31, 2002, 2001 and 2000......................................F-4

Consolidated Statements of Changes in Shareholders' Equity for the
   years ended December 31, 2002, 2001 and 2000..........................F-6

Consolidated Statements of Cash Flows for the years ended
   December 31, 2002, 2001 and 2000......................................F-7

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

Financial Statement Schedule

Schedule III - Real Estate and Accumulated Depreciation
   as of December 31, 2002..............................................F-60


<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,  2002  and  2001,  and  the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the three years in the period  ended  December  31,  2002.  We have also
audited the related  financial  statement  schedule  listed in the Index at Item
15(a).  These financial  statements and schedule are the responsibility of Prime
Group Realty Trust's management.  Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

      We conducted our audits in accordance  with auditing  standards  generally
accepted in the United States.  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, 2002 and 2001, and the consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2002, in conformity with accounting  principles  generally accepted
in the United  States.  Also, in our opinion,  the related  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company's  ability to meet 2003 debt  service  requirements  is  dependent  upon
completing  future asset sales and debt refinancings and maintaining its results
of  operations  at current  levels.  If the Company is unable to complete  these
transactions and or maintain its results of operations at current levels, it may
not be able to  maintain  compliance  with  the  performance  provisions  and or
financial  covenants  contained  in  certain  of  its  debt  facilities.   These
conditions raise  substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2. The financial  statements do not include any  adjustments  to reflect
the possible future effects on the  recoverability  and classification of assets
or the  amounts  and  classification  of  liabilities  that may result  from the
outcome of this uncertainty.

      As discussed in Note 1 to the consolidated financial statements,  in 2002,
Prime  Group  Realty  Trust  changed  its  method  of  accounting  for  loss  on
extinguishment of debt and discontinued operations.

                                                          /s/Ernst & Young LLP


Chicago,  Illinois
March 19, 2003,
except for Note 20, as to which the date is
March 25, 2003
<PAGE>


                            Prime Group Realty Trust
                           Consolidated Balance Sheets
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>


                                                                                December 31        December 31
                                                                                   2002                2001
                                                                            ----------------------------------------
<S>                                                                         <C>                    <C>
Assets Real estate, at cost:
   Land..................................................................       $   183,891        $   193,380
   Building and improvements.............................................         1,032,669            920,723
   Tenant improvements...................................................           111,547             82,285
   Furniture, fixtures and equipment.....................................            10,218             10,128
                                                                            ----------------------------------------
                                                                                  1,338,325          1,206,516
   Accumulated depreciation..............................................          (110,387)           (97,495)
                                                                            ----------------------------------------
                                                                                  1,227,938          1,109,021
   Property held for or under development................................            20,158            224,994
                                                                            ----------------------------------------
                                                                                  1,248,096          1,334,015

Property held for sale..................................................                 -              7,322
Investments in unconsolidated entities...................................             1,440             25,214
Cash and cash equivalents................................................            15,800              6,582
Receivables, net of allowance of $1,867 and $992 at
   December 31, 2002 and 2001,respectively:
     Tenant..............................................................             1,595              4,033
     Deferred rent.......................................................            22,351             21,811
     Other...............................................................             2,453              3,402
Restricted cash escrows..................................................            58,933             75,962
Deferred costs, net......................................................            53,943             42,580
Other....................................................................             3,987              6,728
                                                                            ----------------------------------------
Total assets.............................................................       $ 1,408,598         $1,527,649
                                                                            ========================================

Liabilities and Shareholders' Equity
Mortgages and notes payable..............................................      $    671,340        $   762,349
Bonds payable............................................................            24,900             57,150
Construction financing...................................................           208,198            105,637
Accrued interest payable.................................................            21,818             10,323
Accrued real estate taxes................................................            36,642             40,251
Accrued tenant improvement allowances....................................            33,172              9,585
Accounts payable and accrued expenses....................................            16,981             28,894
Construction costs payable, including retention
   of $5,034 and $7,412 at December 31, 2002
   and 2001, respectively................................................            12,896             29,254
Liabilities for leases assumed...........................................            21,692              9,925
Deficit investment in unconsolidated entity..............................             4,223              5,260
Deferred hedge liability.................................................                 -              6,455
Other....................................................................            10,654             11,654
                                                                            ----------------------------------------
Total liabilities........................................................         1,062,516          1,076,737
Minority interests:
   Operating Partnership.................................................            98,643            126,806
   Other.................................................................             2,000              2,000
Series A - Cumulative Convertible Preferred Shares, 2,000,000 shares
   designated, issued and outstanding at December 31, 2001...............                 -             40,000
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, 2002
     and December 31, 2001...............................................                40                 40
   Common Shares, $0.01 par value; 100,000,000 shares authorized;
     15,689,623 and 15,703,158 shares issued and outstanding at December
     31, 2002 and 2001, respectively.....................................               157                157
   Additional paid-in capital............................................           330,327            329,390
   Accumulated other comprehensive loss..................................            (6,008)           (11,055)
   Distributions in excess of earnings...................................           (79,077)           (36,426)
                                                                            ----------------------------------------
Total shareholders' equity...............................................           245,439            282,106
                                                                            ----------------------------------------
Total liabilities and shareholders' equity.............................          $1,408,598         $1,527,649
                                                                            ========================================


                             See accompanying notes.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                            PRIME GROUP REALTY TRUST
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                -------------------------------------------
<S>                                                             <C>           <C>           <C>
Revenue:
Rental........................................................     $ 110,009  $ 108,466     $ 114,944
Tenant reimbursements.........................................        58,465     59,064        56,171
Other property revenues.......................................         6,664      7,264         7,855
Mortgage note interest........................................             -          -         4,864
Services Company revenue......................................         7,366      7,219             -
                                                                -------------------------------------------
Total revenue ................................................       182,504    182,013       183,834

Expenses:
Property operations...........................................        47,270     48,252        47,185
Real estate taxes.............................................        37,436     35,340        34,203
Depreciation and amortization.................................        32,374     31,256        28,329
General and administrative....................................         9,794      9,085        10,359
Services Company operations...................................         4,811      6,898             -
Provision for asset impairment................................        30,095     20,337         1,000
Severance costs...............................................         2,525          -             -
Strategic alternative costs...................................         1,561      3,289           717
Other expense ................................................           189      1,191             -
                                                                -------------------------------------------
Total expenses................................................       166,055    155,648       121,793
                                                                -------------------------------------------

Operating income..............................................        16,449     26,365        62,041
Other income..................................................         2,190      4,587         7,513
Interest:
      Expense.................................................       (40,212)   (43,214)      (47,174)
      Amortization of deferred financing costs................        (4,359)    (3,919)       (6,172)
                                                                -------------------------------------------
(Loss) income from continuing operations before minority             (25,932)   (16,181)       16,208
   interests..................................................
Minority interests............................................        16,517     10,363        (1,551)
                                                                -------------------------------------------
Income (loss) from continuing operations....................          (9,415)    (5,818)       14,657
Discontinued operations, net of minority interests of $14,196,
   $(1,002) and $(1,452) in 2002, 2001 and 2000, respectively.       (20,263)     1,467         2,346
                                                                -------------------------------------------
(Loss) income before (loss) gain on sales of real estate and
   cumulative effect of change in accounting principles.......       (29,678)   (4,351)        17,003
(Loss) gain on sales of real estate, net of minority interests
   of $660, $(118) and $786 in 2002, 2001 and 2000,
   respectively.............................................            (943)      174         (1,271)
Cumulative effect of change in accounting principles, net of
   minority interests of $218 in 2001 and $1,140 in 2000......             -      (321)        (1,843)
                                                                -------------------------------------------
Net (loss) income.............................................       (30,621)   (4,498)        13,889
Net income allocated to preferred shareholders................       (11,280)  (12,150)       (12,147)
                                                                -------------------------------------------
Net (loss) income available to common shareholders............     $ (41,901) $(16,648)    $    1,742
                                                                ===========================================

                             See accompanying notes.

</TABLE>



<PAGE>


                            PRIME GROUP REALTY TRUST
                CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>


                                                                           Year ended December 31
                                                                     2002          2001           2000
                                                                ---------------------------------------------
<S>                                                              <C>            <C>              <C>
Basic and diluted earnings available to common shares per
   weighted-average common share:
(Loss) income from continuing operations......................    $ (1.32)     $ (1.15)         $ 0.16
Discontinued operations, net of minority interests............      (1.29)        0.09            0.15
(Loss) gain on sales of real estate, net of minority interests      (0.06)        0.01           (0.08)
Cumulative effect of change in accounting principles, net of
   minority interests.........................................        -          (0.02)          (0.12)
                                                                ---------------------------------------------
Net (loss) income available per weighted-average common share
   of beneficial interest -basic and diluted..................    $  (2.67)    $ (1.07)         $ 0.11
                                                                =============================================
Comprehensive (loss) income:
Net (loss) income.............................................    $(30,621)    $(4,498)       $ 13,889
Other comprehensive (loss) income - interest rate
   protection agreements
   Cumulative effect of change in accounting
     principle................................................         -         (3,227)            -
   Unrealized gains (losses) arising during the year..........       6,116       (4,521)            -
   Equity in unrealized losses arising during the
     year - unconsolidated entities...........................      (1,344)      (3,629)            -
   Losses reclassified into earnings from other
     comprehensive income - unconsolidated entities...........         275          322             -
                                                                ---------------------------------------------
Comprehensive (loss) income...........................           $ (25,574)    $(15,553)      $ 13,889
                                                                =============================================

                             See accompanying notes.

</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                              PRIME GROUP REALTY TRUST

                                                  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                                         YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                                (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

                                                                                  Accumulated
                                                                    Additional       Other      (Distributions
                                      Preferred Shares     Common     Paid-In    Comprehensive   in Excess of)
                                    ----------------------
                                     Series B  Series A    Shares     Capital        Loss      Retained Earnings   Total
                                    ----------------------------------------------------------------------------------------
<S>                                 <C>       <C>         <C>         <C>            <C>         <C>             <C>
Balance at January 1, 2000.......   $    40   $    -       $  152     $ 321,357       $   -      $  12,086       $ 333,635
Amortization of restricted stock          -        -            -           411           -              -             411
   awards........................
Issuance of 5,000 common shares
   granted during the year.......         -        -            1            76           -              -              77
Net income.......................         -        -            -             -           -         13,889          13,889
Series B - preferred share                                                                -
   dividends declared ($2.25 per          -        -            -             -                     (9,000)         (9,000)
   share)........................
Series A - preferred share
   dividends declared ($1.50 per          -        -            -             -           -         (3,000)         (3,000)
   share)........................
Series A - preferred share
   amortized dividend............         -        -            -             -           -           (147)           (147)
Common share dividends declared
   ($1.35 per share).............         -        -            -             -           -        (20,798)        (20,798)
Conversion of 347,032 common
   units to common shares (one            -        -            3         6,843           -              -           6,846
   for one)......................
                                    ----------------------------------------------------------------------------------------
Balance at December 31, 2000.....        40        -          156       328,687           -         (6,970)        321,913
Amortization of restricted stock          -        -            1           705           -              -             706
   awards........................
Exercise of stock options........         -        -            -            22           -              -              22
Net loss.........................         -        -            -             -           -         (4,498)         (4,498)
Series B - preferred share
   dividends declared ($1.69 per          -        -            -             -           -         (6,750)         (6,750)
   share)........................
Series A - preferred share
   dividends declared ($1.13 per          -        -            -             -           -         (2,250)         (2,250)
   share)........................
Series A - preferred share
   amortized dividend............         -        -            -             -           -           (150)           (150)
Common share dividends declared
   ($1.01 per share).............         -        -            -             -           -        (15,808)        (15,808)
Conversion of 33,085 common
   units to common shares (one            -        -            -           454           -              -             454
   for one)......................
Repurchase of 33,085 common               -        -            -          (478)          -              -            (478)
   shares........................
Transition adjustment for change
   in accounting principle.......         -        -            -             -      (3,227)             -          (3,227)
Unrealized loss on derivative
   instruments...................         -        -            -             -      (8,150)             -          (8,150)
Losses reclassified into.........
   earnings--unconsolidated                -        -            -             -         322             -             322
   entities......................
                                    ----------------------------------------------------------------------------------------
Balance at December 31, 2001.....        40        -          157       329,390     (11,055)       (36,426)        282,106
Amortization of restricted stock
   awards........................         -        -            -           304           -              -             304
Net loss.........................         -        -            -             -           -        (30,621)        (30,621)
Series B - preferred share
   dividends declared ($2.25 per
   share)........................         -        -            -             -           -         (9,000)         (9,000)
Series A - preferred share
   dividends declared ($1.51 per
   share)........................         -        -            -             -           -         (3,030)         (3,030)
Unrealized gain on derivative
   instruments...................         -        -            -             -       5,047              -           5,047
Issuance of stock warrants.......         -        -            -           633           -              -             633
                                    ----------------------------------------------------------------------------------------
Balance at December 31, 2002.....   $    40   $    -     $    157    $  330,327  $   (6,008)    $  (79,077)      $ 245,439
                                    ========================================================================================

</TABLE>


                             See accompanying notes.



<PAGE>


                            PRIME GROUP REALTY TRUST

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                -------------------------------------------
<S>                                                               <C>            <C>            <C>
Operating activities
Net (loss) income...........................................       $  (30,621)    $  (4,498)    $  13,889
Adjustments to reconcile net (loss) income to net cash
   provided by operating activities:
     Amortization of discount on notes payable..............              290             -             -
     Amortization of costs for leases assumed (included in
       rental revenue)......................................              836           767           833
     Interest income and developer fees added to mortgage
       note receivable principal............................                -             -        (1,855)
     Loss (gain) on sales of real estate ($3,211 loss in
       2002 included in discontinued operations)............            4,814          (292)        2,057
     Depreciation and amortization (including discontinued
       operations)..........................................           39,295        42,047        40,972
     Unrealized loss on derivatives.........................                -           230             -
     Provision for asset impairment (asset impairments of
       $34,430 and $1,500 in 2002 and 2001, respectively,
       included in discontinued operations).................
                                                                       64,525        21,837         1,000
     Net equity in (income) loss of unconsolidated
       investments..........................................             (810)       (1,770)          768
     Minority interests (including discontinued operations).
                                                                      (31,373)       (9,461)        1,077
     Cumulative effect of change in accounting principles...
                                                                            -           539         2,983
     Changes in operating assets and liabilities:
       Increase in receivables..............................             (808)           (7)       (3,198)
       Decrease (increase) in other assets..................              582           (74)       (1,399)
       Increase in accrued interest payable.................            3,333         1,298         1,234
       Increase (decrease) in accrued real estate taxes.....            2,480         2,094        (1,682)
       (Decrease) increase in accounts payable and accrued
         expenses...........................................           (9,229)        2,583         7,774
       Decrease in other liabilities........................             (994)       (2,483)          (60)
                                                                -------------------------------------------
Net cash provided by operating activities...................           42,320        52,810        64,393
Investing activities
Expenditures for real estate and equipment..................         (124,054)     (146,423)     (122,337)
Proceeds from sales of real estate..........................           26,596        25,413       141,994
Purchase of and additional advances on mortgage
   note receivable..........................................                -             -       (12,208)
Decrease (increase) in restricted cash escrows..............           13,187       (14,496)      (16,800)
Leasing costs...............................................          (13,770)       (9,239)      (12,136)
Proceeds from assignment of joint venture interest..........           22,969             -             -
Net loans provided to Services Company......................                -             -        (4,761)
(Distributions from) investments in unconsolidated
   entities, net............................................             (879)            1             -
                                                                -------------------------------------------
Net cash used in investing activities.......................          (75,951)     (144,744)      (26,248)



</TABLE>

<PAGE>




                            PRIME GROUP REALTY TRUST

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                  -------------------------------------------
<S>                                                               <C>            <C>          <C>
Financing activities
Financing costs.............................................       $   (2,950)   $   (4,714)  $   (13,649)
Proceeds from mortgages and notes payable...................           20,448       136,237       258,233
Repayment of credit facilities..............................                -             -       (19,527)
Repayment of mortgages and notes payable....................          (35,310)     (115,909)     (193,406)
Repayment of bonds payable..................................          (27,150)            -       (17,300)
Proceeds from construction financing........................          102,561       105,637             -
Common share repurchase.....................................                -          (478)            -
Proceeds from exercise of stock options.....................                -            22             -
Repurchase of operating partnership common units............                -             -          (700)
Contribution from minority interests - other................                -             -         1,000
Distributions to minority interests - operating partnership.
                                                                            -       (14,485)      (14,772)
Series A - preferred shares repurchase........................         (5,000)            -             -
Dividends paid to Series B - preferred shareholders...........         (9,000)       (9,000)       (9,000)
Dividends paid to Series A - preferred shareholder............           (750)       (3,000)       (3,000)
Dividends paid to common shareholders.........................              -       (21,062)      (20,666)
                                                                -------------------------------------------
Net cash provided by (used in) financing activities...........         42,849        73,248       (32,787)
                                                                -------------------------------------------
Net increase (decrease) in cash and cash equivalents..........          9,218       (18,686)        5,358
Cash and cash equivalents at beginning of year................          6,582        25,268        19,910
                                                                -------------------------------------------
Cash and cash equivalents at end of year......................      $  15,800     $   6,582      $ 25,268
                                                                ===========================================

                             See accompanying notes.

</TABLE>



<PAGE>


                            PRIME GROUP REALTY TRUST

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                             (dollars in thousands)

      During  the  years  ended  December  31,  2002,  2001 and 2000 we sold the
following net assets:

<TABLE>
<CAPTION>

                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                 ------------------------------------------
<S>                                                               <C>           <C>         <C>
Real estate, net..............................................    $   145,948  $    23,843    $  172,607
Deferred rent receivable......................................          2,826          120         1,971
Deferred costs, net...........................................          2,706          225         3,304
Restricted escrows............................................          3,842         (307)         (839)
Mortgage notes payable assumed by buyer.......................       (113,085)           -       (28,000)
Bonds payable assumed by buyer................................         (5,100)           -             -
Accrued real estate taxes.....................................         (6,089)        (699)       (3,988)
Other liabilities and assets, net.............................            362        1,939        (1,004)
                                                                 ------------------------------------------
Net assets sold...............................................         31,410       25,121       144,051
Proceeds from sales of real estate............................         26,596       25,413       141,994
                                                                 ------------------------------------------
Gain (loss) on sales of real estate(1)........................   $     (4,814)$        292   $    (2,057)
                                                                 ==========================================

</TABLE>





(1)  $3.7 million of loss on sale of real estate during the year ended  December
     31, 2002 is included in discontinued operations.

<PAGE>

      The following  represents  supplemental  disclosure of significant noncash
activity for the years ended December 31, 2002, 2001, and 2000:

<TABLE>
<CAPTION>

                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                -------------------------------------------
<S>                                                             <C>           <C>               <C>
Real estate additions through the issuance of
   partnership units to minority interest................       $      3,210  $          -  $      3,832
Real estate additions through consolidation due to
   purchase of second mortgage note......................                  -             -       103,210
Real estate additions through the increase in accrued
   interest payable on construction financing............              8,162         4,700             -
Real estate additions through the increase in accrued
   tenant improvement allowances.........................             23,577         2,144             -
Mortgage notes payable reduction through assumption of
   debt by buyer of sold properties......................            113,085             -             -
Bonds payable reduction through assumption of debt by
   buyer of sold property................................              5,100             -             -
Repurchase of Series A preferred shares through the
   issuance of notes payable.............................             35,000             -             -
Dividends paid to Series A preferred shares through the
   issuance of notes payable.............................              2,280             -             -
Contributions of real estate to unconsolidated real
   estate joint ventures.............................                      -             -       (35,290)
Real estate additions through the increase in
   accounts payable and accrued expenses.............                      -         7,694         1,562
Increase in accrued real estate taxes through
   consolidation due to the purchase of second
   mortgage note.....................................                      -             -         4,300
Net asset additions through consolidation of the
   Services Company..................................                      -         2,524             -
                                                                -------------------------------------------
                                                                   $ 190,414    $   17,062   $    77,614
                                                                ===========================================

</TABLE>


<PAGE>



                             See accompanying notes.


<PAGE>


                            Prime Group Realty Trust

                   Notes to Consolidated Financial Statements


1.  Summary of Significant Accounting Policies

Formation and Organization of the Company

      We were  organized in Maryland on July 21, 1997 and intend to qualify as a
real estate  investment  trust ("REIT") under the Internal Revenue Code of 1986,
as amended, for Federal income tax purposes.  On November 17, 1997, we completed
our initial  public  offering  and  contributed  the net proceeds to Prime Group
Realty, L.P. (the "Operating  Partnership") in exchange for preferred and common
partnership interests.

      We are the managing  general partner of the Operating  Partnership and own
all of the  preferred  units and 58.8% and 59.4% of the common  units  issued at
December 31, 2002 and 2001,  respectively.  Each  preferred unit and common unit
entitles  us  to  receive   distributions   from  the   Operating   Partnership.
Distributions  declared or paid to holders of common shares and preferred shares
are based upon such  distributions  we receive  with respect to our common units
and preferred units.

Basis of Presentation

      Our  consolidated  financial  statements  include  all  of  our  accounts,
including  the  Operating  Partnership  and the other  entities in which we have
control or from which we receive  all  economic  benefits.  We have  significant
controlling financial interests in office buildings located at 1701 Golf Road in
Rolling  Meadows,  Illinois and 180 North  LaSalle  Street in Chicago,  Illinois
through our  ownership of various first and second  mortgage  notes and mortgage
conduit  certificates  secured  by these  properties  and we  consolidate  these
properties. At December 31, 2002 we also indirectly owned in excess of 97% of an
entity which owns 100% of an office building known as Bank One Corporate Center,
formerly  known as  Dearborn  Center,  located in Chicago,  Illinois.  We have a
significant controlling financial interest through our ownership and this entity
is consolidated by us. As more fully disclosed in Note 19 - Subsequent Events to
these Consolidated Financial Statements, we subsequently purchased our partner's
interest and now own 100% of this entity.

      The  preparation  of financial  statements in conformity  with  accounting
principles  generally accepted in the United States 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.

      Investments in  corporations  and  partnerships  in which we do not have a
controlling  financial  interest or a majority interest are accounted for on the
equity  method of  accounting.  To the extent that our recorded  share of losses
exceeds our  investment in a corporation  or  partnership,  we reflect a deficit
investment as a liability in our consolidated financial statements.

      Commencing  on January 2, 2001,  Prime Group Realty  Services,  Inc.  (the
"Services  Company")  elected  to be  treated as a Taxable  REIT  Subsidiary  as
defined under the Internal Revenue Code, as amended.  Effective January 1, 2001,
the Operating  Partnership  acquired all of the outstanding  common stock of the
Services  Company and had the Services Company redeem all of the preferred stock
outstanding  of  the  Services   Company   previously   held  by  the  Operating
Partnership.  As a result we now  consolidate  the  operations  of the  Services
Company.

      Significant intercompany accounts and transactions have been eliminated in
consolidation.


<PAGE>


1.  Summary of Significant Accounting Policies (continued)

      Certain amounts in the prior period consolidated financial statements have
been reclassified to conform to the current period presentation,  with no effect
on our consolidated financial position or results of operations.

Real Estate

      Depreciation is calculated on the straight-line  method over the estimated
useful lives of the related 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,  construction
costs,  fees  and  other  costs  incurred  in  developing  new  properties,  are
capitalized as incurred.  Interest,  financing costs,  real estate taxes,  other
direct costs and indirect costs (including  certain employee  compensation costs
and related general and  administrative  expenses)  incurred during  development
periods  are  capitalized  as a component  of the  building  costs.  These costs
continue to be capitalized,  to the extent they relate to vacant space,  for one
year following the date the development is placed in service.  Subsequent to the
one-year period, these costs are fully expensed 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.

      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. In
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 144"), we record  impairment  losses on long-lived assets
used in operations when events and circumstances  indicate that the assets might
be impaired and the  undiscounted  cash flows estimated to be generated by those
assets  during the expected  hold period are less than the  carrying  amounts of
those assets.  Impairment losses are measured as the difference between carrying
value and fair value of assets. For assets held for sale, impairment is measured
as the difference  between carrying value and fair value, less costs to dispose.
Fair value is based on estimated cash flows  discounted at a risk-adjusted  rate
of interest. Property held for future development and property under development
are also  evaluated for  impairment.  Impairment is determined  for  development
costs  associated  with property held for future  development and property under
development based upon  management's  assessment that these costs have no future
value.

      In accordance with SFAS 144, effective for financial statements issued for
fiscal years  beginning  after  December 15, 2001, net income and gain (loss) on
sales of real estate for properties  sold or properties held for sale subsequent
to December 31, 2001 are reflected in our Consolidated  Statements of Operations
as "Discontinued  operations" for all years presented.  This change has resulted
in certain  reclassifications of 2001 and 2000 consolidated  financial statement
amounts.

Sales of Real Estate

      In accordance with SFAS No. 66, "Accounting for Sales of Real Estate",  we
recognize  gains on sale of real estate using the full accrual method upon sale,
provided  the sales  price is  reasonably  assured and we are not  obligated  to
perform significant  activities after the sale. However, when we agree to assume
responsibility  for re-leasing  sold  properties for a period beyond the date of
sale and where we use  estimates  to  support  our  intent to  mitigate  our net
liability,  we defer  recognition  of the gain on sale of real estate until such
time as we can more  reasonably  determine  our actual  liability  with executed
subleases.


<PAGE>


1.  Summary of Significant Accounting Policies (continued)

Cash Equivalents

      We consider 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,   lease   assumption   costs  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,  we have assumed the liability
for the  remaining  terms of the  tenants'  existing  leases  in their  previous
location.  We have  recorded a liability  for the  difference  between the total
remaining  costs for leases  assumed and the expected  benefits  from actual and
estimated  future  subleasing  of the  assumed  lease  obligations.  The related
incentive  to the lessee has been  capitalized  as a deferred  cost and is being
amortized  as a  reduction  of rental  revenue  over the life of the  respective
lease. The deferred cost and related  liability are adjusted  prospectively  for
changes in the estimated benefits from subleases.

Rental Revenue

      Rental revenue is recorded on the  straight-line  method over the terms of
the related lease  agreements for new leases and the remaining terms of existing
leases for acquired  properties.  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.  Lease
termination income (included in rental revenue) represents amounts received from
tenants  in  connection  with the early  termination  of their  remaining  lease
obligation  reduced by any outstanding tenant  receivables  (including  deferred
rent receivable).  Unamortized tenant  improvements,  deferred lease commissions
and leasing  costs  related to  terminated  leases are  recorded  as  additional
depreciation and amortization expense upon lease termination.

Revenue Recognition

      In December  1999,  the  Securities  and Exchange  Commission  (the "SEC")
issued Staff Accounting  Bulletin No. 101 ("SAB 101"),  "Revenue  Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements.  We adopted SAB 101  retroactive  to January 1, 2000 and  recorded a
charge to income of $1.8  million,  net of minority  interests of $1.1  million,
representing  the  cumulative  effect of adopting SAB 101 as of January 1, 2000.
The  cumulative  effect  represents  income  recognized  in 1999 and  relates to
certain permanent property easements, and lease commissions our Services Company
earned. During both 2002 and 2001, we recognized $0.3 million of other income (a
portion of which is included  in other  property  revenues  in the  consolidated
statements of operations)  previously recorded in 1999. Although the adoption of
SAB 101 may impact the period in which certain revenues are recognized by us, it
is not  expected  to  impact  the  timing  of our  receipt  of  cash  flow  from
operations.


<PAGE>


1.  Summary of Significant Accounting Policies (continued)

      In April 2002, FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64,  Amendment of FASB  Statement  No. 13, and  Technical  Corrections
("SFAS  145").  In  accordance  with  SFAS 145  gains or  losses  from the early
extinguishments  of debt would seldom,  if ever,  result in extraordinary  items
classification  of the gain or loss associated with the  extinguishment of debt.
Our adoption of SFAS 145 during 2002 reflects the  reclassification  of the loss
on early  extinguishments of debt previously classified as an extraordinary item
to amortization of deferred financing costs.

Interest Rate Protection Agreements

      In the normal course of business, we use a variety of derivative financial
instruments  to manage,  or hedge,  interest  rate risk. We require that hedging
derivative  instruments be effective in reducing the interest rate risk exposure
that  they  are  designated  to  hedge.  This  effectiveness  is  essential  for
qualifying for hedge accounting. Some derivative instruments are associated with
the hedge of an anticipated  transaction.  In those cases,  hedge  effectiveness
criteria  also  require  that it be  probable  that the  underlying  transaction
occurs.  Instruments that meet these hedging criteria are formally designated as
hedges  at the  inception  of the  derivative  contract.  When  the  terms of an
underlying  transaction are modified,  or when the underlying hedged item ceases
to exist,  all changes in the fair value of the instrument are  marked-to-market
with changes in value  included in net income each period  until the  instrument
matures,   unless  the  instrument  is   redesignated  as  a  hedge  of  another
transaction.  Any derivative  instrument  used for risk management that does not
meet the hedging criteria is marked-to-market each period in earnings.

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

      In the normal course of business, we are exposed to the effect of interest
rate  changes.  We limit these risks by following  established  risk  management
policies and  procedures  including  the use of  derivatives.  For interest rate
exposures,  derivatives  are used  primarily  to align  rate  movements  between
interest rates  associated  with our leasing income and other  financial  assets
with  interest  rates on  related  debt,  and to  manage  the cost of  borrowing
obligations.

      We have a policy of only entering  into  derivative  contracts  with major
financial  institutions based upon their credit ratings and other factors.  When
viewed in  conjunction  with the  underlying  and  offsetting  exposure that the
derivatives  are designed to hedge,  we have not  sustained a material loss from
those  instruments  nor do we anticipate any material  adverse effect on our net
income or financial position in the future from the use of derivatives.

      Interest rate hedges,  that are designated as cash flow hedges,  hedge the
future cash outflows on debt. Interest rate swaps that convert variable payments
to fixed payments,  interest rate caps, floors,  collars,  and forwards are cash
flow hedges.  The unrealized  gains/losses in the fair value of these hedges are
reported  on  the  balance  sheet  with a  corresponding  adjustment  to  either
accumulated other comprehensive income or in earnings,  depending on the type of
hedging relationship.  If the hedging transaction is a cash flow hedge, then the
offsetting  gains and losses are  reported in  accumulated  other  comprehensive
income.  Over time,  the unrealized  gains and losses held in accumulated  other
comprehensive income will be reclassified to earnings.  This reclassification is
consistent  when the hedged items are also  recognized  in earnings.  Within the
next twelve  months,  we expect to  reclassify  to earnings  approximately  $0.3
million of amounts held in accumulated other comprehensive income.

<PAGE>


      1.  Summary of Significant Accounting Policies (continued)

If a derivative instrument is terminated or the hedging transaction is no longer
determined  to be effective,  amounts held in  accumulated  other  comprehensive
income are reclassified  into earnings over the term of the future cash outflows
on the related debt.

      On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS")  No.  133,   "Accounting   for  Derivative   Instruments   and  Hedging
Activities,"  ("SFAS 133"), as amended by SFAS No. 138,  "Accounting for Certain
Derivative  Instruments and Certain Hedging  Activities" ("SFAS 138"). SFAS 133,
as amended,  established  accounting  and  reporting  standards  for  derivative
instruments.   Specifically  SFAS  133  requires  an  entity  to  recognize  all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and to measure those instruments at fair value. Additionally,  the fair
value  adjustments  will  affect  either  shareholders'  equity  or  net  income
depending  on  whether  the  derivative  instrument  qualifies  as a  hedge  for
accounting  purposes  and,  if so,  the  nature of the  hedging  activity.  Upon
adoption  of SFAS 138 and SFAS 133, we  recorded  as a  cumulative  effect of an
accounting change a net transition adjustment  (unrealized loss) of $0.5 million
in net income,  and a  transition  adjustment  of $3.2 million as an increase in
accumulated other comprehensive loss. Adoption of the standard resulted in a net
transition  adjustment of $3.8 million on the balance sheet  reflected as a $0.5
million  reduction in deferred costs, a $1.4 million  reduction in investment in
unconsolidated  entities  and a deferred  hedge  liability of $1.9  million.  In
August 2001, the Financial  Accounting  Standards Board issued final guidance on
the  accounting  for options  used as hedged  under SFAS 133.  This  guidance is
pursuant to  Derivatives  Implementation  Group  ("DIG")  Issue No. G20 ("G20").
Provided  certain  criteria are met,  options can be considered  fully effective
hedging vehicles,  with gains and losses due to changes in market value recorded
in accumulated other comprehensive  income on the balance sheet. On September 1,
2001, we adopted G20 for our interest  rate hedge  instruments.  Any  subsequent
unrealized  gains or losses due to changes in market  value of options,  such as
interest rate caps,  have been recorded in the accumulated  other  comprehensive
income.

      On December 31, 2002 and 2001, we reported our  derivative  instruments at
their  fair value as other  assets of $967 and $0.4  million,  a deferred  hedge
liability of $0 million and $6.5 million,  an increase in deficit  investment in
unconsolidated  entity of $5.7  million and $4.7 million and  accumulated  other
comprehensive loss of $6.0 million and $11.1 million,  respectively. We recorded
an  unrealized  loss of $0.2 million for the year ended  December  31, 2001.  We
incurred a total comprehensive loss of $25.6 million ($1.63 per weighted average
share) and a total  comprehensive  loss of $15.6  million  ($1.00  per  weighted
average share) for the years ended December 31, 2002 and 2001, respectively.

Earnings Per Share

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

Stock Based Compensation

      We account for common share option grants using the intrinsic value method
in  accordance  with  Accounting   Principles  Board  ("APB")  Opinion  No.  25,
"Accounting  for  Stock  Issued  to  Employees"  ("APB  25").  Under  APB 25, no
compensation expense is to be recognized for the common share option grants when
the  exercise  price of the options  equals the market  price of the  underlying
shares at the date of grant.  Under our Share  Incentive Plan (the "Plan"),  the
measurement  date is the market price of the underlying  shares on the day prior
to the date of grant.  We have not  recorded  any  compensation  expense  as the
market price differential between the dates has been nominal.

<PAGE>


      1.  Summary of Significant Accounting Policies (continued)

Income Taxes

      We have elected to be taxed as a REIT under the  Internal  Revenue Code of
1986 ("the Code"),  as amended.  As a REIT, we generally  will not be subject to
federal  income tax to the extent  that we  distribute  at least 90% of our REIT
taxable  income  to  our  shareholders.   REITs  are  subject  to  a  number  of
organizational and operational requirements.  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
tax rates.

      As of December 31, 2002,  for income tax  purposes,  our real estate had a
gross and net basis of $1.3  billion and $1.2  billion,  respectively,  mortgage
notes  receivable  had a basis of $65.0  million,  investment  in a real  estate
mortgage investment conduit had a tax basis of $58.8 million, deferred costs had
a gross and net basis of $33.3  million  and $15.3  million,  respectively,  and
deferred rent receivable had no tax basis. Our investment in unconsolidated real
estate joint  ventures,  for income tax  purposes,  had a gross and net basis of
$108.7 million and $10.3 million, respectively.

      We account for income taxes payable by the Services  Company in accordance
with SFAS No. 109,  "Accounting  for Income Taxes" ("SFAS 109"),  which requires
that deferred tax assets and  liabilities be recognized  using enacted tax rates
for the  effect  of  temporary  differences  between  the book and tax  bases of
recorded assets and liabilities. SFAS 109 also requires that deferred tax assets
be reduced by a  valuation  allowance  if it is more  likely  than not that some
portion or all of the deferred  tax asset will not be realized.  At December 31,
2002 and  2001,  the  Services  Company  had  deferred  tax  assets in excess of
deferred  tax  liabilities  of  $1.4  million  and  $3.2  million,  respectively
(included in other assets on the  consolidated  balance sheet).  At December 31,
2002 the Services Company had a net operating loss carry forward for federal tax
purposes of  approximately  $3.3 million  which is  available  to offset  future
taxable income, if any, through 2015.

2.  Going Concern

      As  described in Note 5 - Mortgage and Notes  Payable,  Bonds  Payable and
Construction  Financing to these  Consolidated  Financial  Statements,  our debt
obligation  with  Security  Capital  Preferred  Growth  Incorporated   ("SCPG"),
totaling  $57.3  million at  December  31,  2002,  matures  July 16, 2003 and is
secured by certain  equity  interests of our  Operating  Partnership  in various
properties. The terms of this debt provide for two 180-day extension periods, at
our option, if aggregate outstanding principal is not greater than $40.0 million
at the date of first extension and not greater than $25.0 million at the date of
the  second  extension.  We are  pursuing  various  capital  events,  which,  if
consummated in sufficient  amounts,  would enable us to repay this obligation or
reduce the  outstanding  principal  to a level  which would allow us to elect an
extension of the maturity  date.  However,  there can be no assurances as to our
ability to obtain  funds  necessary  for  required  repayment or that we will be
successful in our efforts to execute capital events yielding proceeds sufficient
to  repay  part or all of the SCPG  debt  obligation.  See Note 20 -  Subsequent
Events to these Consolidated  Financial Statements for capital transactions that
have occurred in 2003.

      As described in Note 6 - Debt  Covenants to these  Consolidated  Financial
Statements,  our debt obligations require compliance with various financial loan
covenants.  We  anticipate  that as a result of our  financial  results  for the
quarter  ending  March 31,  2003,  we may not be in  compliance  with  financial
covenants  contained  in  certain  of our debt  facilities  related  to  minimum
quarter-end cash balance requirements of $7.5 million. Our ability to meet these
covenants in the future is contingent on our ability to execute  certain capital
events and on our future financial results. In addition,  if the SCPG obligation
is not extended,  SCPG's default  remedies,  including  assuming  certain equity
interests of our Operating  Partnership in various  properties,  may also hinder
our  ability  to meet the  minimum  quarter  end  cash  requirements  and  other
financial loan covenants and could result in cross-defaults under certain of our
other loans. We are pursuing  various  capital events,  which, if consummated in
sufficient  amounts,  would  provide the  necessary  cash proceeds to meet these
covenant  requirements  in addition to the  repayment of part or all of the SCPG
debt.  If the capital  events are not  consummated,  or the  proceeds of capital
events  are  not  sufficient  to  allow  us to meet  the  minimum  cash  balance
covenants, we intend to seek waivers or modifications from the lenders. However,
there  can be no  assurances  that  we  will  be  successful  and/or  will be in
compliance  with the loan covenants in the future or that we will be able obtain
waivers or amendments of violations at that time.

      The above conditions raise substantial doubt about our ability to continue
as a going  concern.  The financial  statements do not include any adjustment to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

3.  Asset Impairments

      During 2002, 2001 and 2000 we recorded the following  provisions for asset
impairments  (See Note 19 - Segment  Reporting to these  Consolidated  Financial
Statements for disclosure of asset impairment by segment):

<TABLE>
<CAPTION>

                                                                    December 31
                                                          2002         2001         2000
                                                      ----------------------------------------
                                                              (dollars in thousands)
<S>                                                    <C>         <C>          <C>

Operating properties (1).........................       $ 23,892   $         -   $        -
Investment in unconsolidated entities (2)........            495        15,088            -
Property under development (3)...................          5,708         4,924        1,000
Property held for sale (4).......................              -           325            -
                                                      ----------------------------------------
                                                          30,095        20,337        1,000
Discontinued operations (5)......................         34,430         1,500            -
                                                      ----------------------------------------
                                                        $ 64,525      $ 21,837    $   1,000
                                                      ========================================

</TABLE>


(1)      During 2002, we recorded an asset  impairment of $22.1 million  related
         to an  office  property  based  upon our  decision  to exit a  non-core
         market,  which shortened our anticipated  hold period for the property.
         The  impairment  charge  reduced the net book value of the building and
         improvements,  deferred rent  receivables  and deferred  costs by $19.4
         million, $0.8 million and $1.9 million,  respectively,  to our estimate
         of fair value based upon market conditions and discussions we have held
         with a tenant regarding a potential sale.

         During 2002, we recorded a $1.7 million asset impairment  related to an
         other asset  (included in other assets)  associated  with an industrial
         property as it was determined that the asset no longer had value.

(2)      On January 16, 2002,  we assigned our interest in a  development  joint
         venture to our joint venture partner. We recorded a $15.1 million asset
         impairment  in  2001  to  reflect  the  affect  of the  then  impending
         assignment   based  upon  our  decision  not  to   participate  in  the
         development.   The  $15.1  million  asset  impairment   represents  the
         difference  between the balance in our  investment in the joint venture
         and the cash consideration  received from our joint venture partner and
         is included in the  corporate/operating  partnership segment. On August
         23, 2002,  we  transferred  our  interest in a second joint  venture to
         another joint venture partner and recorded an asset  impairment of $0.5
         million related to our investment in this unconsolidated entity.

(3)      During 2002, 2001 and 2000, we abandoned various  development  projects
         and recorded asset  impairments of $4.2 million,  $4.7 million and $1.0
         million,  respectively.  We also recorded a asset  impairments  of $1.0
         million  and $0.2  million in 2002 and 2001,  respectively,  related to
         certain  costs for other  development  projects  that we  determined no
         longer had value to the project.  In addition in 2002, we placed one of
         the development projects on hold and, as a result, the remaining costs,
         other  than  those  attributable  to the fair  value of the land,  were
         determined to have no value resulting in additional asset impairment of
         $0.5 million in 2002.

(4)      During  2001 we entered  into a letter of intent  with a third party to
         sell  approximately 20 acres of land held for development.  We recorded
         an impairment  during 2001 of $0.3 million  reflecting  the fair market
         value of the land, less costs to sell, based upon the contracted price.
         The sale was consummated in February 2002 and resulted in an additional
         loss of $0.1 million in 2002.

(5)      Discontinued  operations for the years ended December 31, 2002 and 2001
         include  provisions for asset impairment related to properties held for
         sale  or  sold.  See  Note  10  -  Discontinued   Operations  to  these
         Consolidated  Financial  Statements  for a  description  of these asset
         impairments.

4.       Deferred Costs

      Deferred costs consist of the following:

<TABLE>
<CAPTION>

                                                                   December 31
                                                             2002                2001
                                                     -----------------------------------------
                                                              (dollars in thousands)
<S>                                                      <C>                 <C>

Financing costs......................................    $  23,136           $  25,396
Leasing costs........................................       62,615              44,088
                                                     -----------------------------------------
                                                            85,751              69,484
Less:  Accumulated amortization......................      (31,808)            (26,904)
                                                     -----------------------------------------
                                                         $  53,943           $  42,580
                                                     =========================================

</TABLE>


<PAGE>


5.  Mortgages and Notes Payable, Bonds Payable and Construction Financing

      Mortgages  and notes  payable,  bonds payable and  construction  financing
consisted of the following:

<TABLE>
<CAPTION>

                                                                                    December 31
                                                                               2002             2001
                                                                         -----------------------------------
                                                                               (dollars in thousands)
<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 7.17% to 11.75% per annum,  with
     principal  and interest  payable  monthly  through  dates
     ranging from 2003 through 2013.  The weighted  average rate
     at December 31, 2002 was 8.06%.............................................$   230,260      $   348,480
   Mortgage  notes  payable  to  various   financial   institutions,
     collateralized  by various  properties,  interest at variable
     rates ranging from LIBOR (1.38% at December 31, 2002) plus 150
     basis points to LIBOR plus700 basis points per annum,  with
     principal and interest  payable  monthly through dates ranging
     from 2003 through 2006. The weighted  average rate at
     December31, 2002 was 4.04%.................................................    384,143          413,869
                                                                                -----------------------------------

Total mortgage notes payable....................................................    614,403          762,349
Notes Payable (C):
   Notes payable to SCPG, an exchangeable note, (the "Exchangeable Note")
    in the principal  amount of $37,280  and (ii) a  non-exchangeable
    note (the "$20M Note") in the principal amount of $20,000 less unamortized
    debt discount of $343.......................................................     56,937                -
                                                                                -----------------------------------
Total mortgages and notes payable...............................................$   671,340       $  762,349
                                                                                ===================================
Bonds Payable: (B), (D), (E):
Variable  rate  tax-exempt  bonds issued by various state and local
   government authorities.......................................................$     24,900     $     57,150
                                                                                ===================================
Construction Financing (F):
   Construction  mezzanine  facility,  with a total commitment of $65,000,
     to a financial institution,  collateralized by 100% of the ownership
     interest in Bank One Corporate Center, interest at a fixed rate of 12%
     per annum (up to 50% of which,  but no more than $10,000 may be funded
     from the mezzanine  facility) with an additional accrual rate ranging
     from 9.5% to 13% (11% at December 31, 2002), dependent upon certain
     leasing  thresholds,  with interest  payable  monthly through
     January 2004, principal and accrued interest due in January 2004...........$     60,820     $     57,240
   Construction loan facility, with a total commitment of
     $220,000 to $230,000, to a financial institution, collateralized
     by 100% of the ownership interest in Bank One Corporate Center and
     a $60,000 guarantee by us,  interest  at a  variable  rate of LIBOR
     plus 265 basis  points per annum, with interest  accruing monthly through
    January 2004,  principal and accrued interest due in January 2004...........     147,378           48,397
                                                                                -----------------------------------

Total construction financing.................................................... $   208,198      $   105,637
                                                                                 ===================================



</TABLE>

<PAGE>


5.   Mortgages and Notes Payable, Bonds Payable and Construction Financing

(A)  The  mortgages  and notes  payable  are  subject to various  operating  and
     financial covenants.  In addition, we are required to periodically fund and
     maintain  escrow  accounts,  to make future  real estate tax and  insurance
     payments,  as well as to fund certain  tenant  releasing  costs and capital
     expenditures. These are included in restricted cash escrows.

(B)  All of our real  estate  assets and  mortgage  notes  receivable  have been
     pledged as collateral for our mortgages,  and notes payable,  bonds payable
     and construction financing.

(C)  On July 16, 2002,  we and our  Operating  Partnership  closed a transaction
     with SCPG. See Note 9 - Preferred  Shares to these  Consolidated  Financial
     Statements for a description of this  transaction and related  issues.  The
     initial total interest rate on the Exchangeable  Note was 11.50% per annum,
     which  increased to 12.00% per annum on August 6, 2002, to 12.50% per annum
     on  November 4, 2002,  and to 12.75% per annum on February 2, 2003,  and is
     compounded  quarterly.  The  interest  rate on the $20M Note is 15.00%  per
     annum.  Interest only payments on the  Exchangeable  Note and the $20M Note
     are paid currently on a quarterly basis at a rate of 7.50% per annum,  with
     the balance of the total  interest  being due at maturity on July 15, 2003.
     Each of the  notes  also has a fee of 0.75% for any  principal  repayments,
     whether at  maturity  or earlier.  The notes are  secured by  mortgages  on
     approximately  123  acres of vacant  land  owned by us in  several  Chicago
     suburban  areas,  as well as the  pledge by our  Operating  Partnership  of
     certain equity interests in specified property-level  subsidiaries of ours.
     The equity interests in the property-level  subsidiaries pledged consist of
     a pledge of (i) 49.9% of the  membership  interests  in 180 North  LaSalle,
     L.L.C.,  (ii)  70% of the  membership  interests  in each of the  following
     entities:  342 Carol Lane,  L.L.C., 343 Carol Lane, L.L.C., 370 Carol Lane,
     L.L.C., 388 Carol Lane,  L.L.C., 200 E. Fullerton,  L.L.C., 350 Randy Road,
     L.L.C., 550 Kehoe Blvd., L.L.C., 4160 Madison Street,  L.L.C., 4211 Madison
     Street,  L.L.C.,  4300 Madison Street,  L.L.C.,  1051 N. Kirk Road, L.L.C.,
     1401 S. Jefferson,  L.L.C.,11039  Gage Avenue,  L.L.C.,  11045 Gage Avenue,
     L.L.C.,  4343 Commerce Court,  L.L.C., 1301 E. Tower Road, L.L.C., and 1600
     167th  Street,  L.L.C.,  (iii) 100% of the  membership  interests  in Prime
     Aurora,  L.L.C.  and  (iv)  Phoenix  Office,   L.L.C.'s  right  to  receive
     distributions   from   Plumcor/Thistle,   L.L.C.   We  and  our   Operating
     Partnership's  affiliates owning the vacant land guaranteed the obligations
     of our Operating  Partnership  under the notes and the securities  purchase
     agreement.

     Under the terms of the  Exchangeable  Note and $20M Note,  SCPG may require
     repayment  of all or a portion of the  outstanding  principal  of the notes
     upon the  occurrence of certain  change of control  events or if our common
     shares cease to be listed for trading on a national  securities exchange or
     included for quotation on the Nasdaq National Market. In addition,  certain
     mandatory  prepayments  of the notes will be  required  in the event of the
     sale of SCPG's collateral or specified asset sales by us.

     There is a 2.00% prepayment fee on the principal amount being prepaid under
     each of the notes in the event of prepayments  relating to certain "changes
     of control" of Prime Group Realty Trust. Any repayments of principal on the
     notes must first be made on the Exchangeable  Note until it is repaid,  and
     then may be made on the $20M Note.

     The transaction  documents with SCPG contain certain negative,  affirmative
     and financial covenants.  These covenants require, among other things, that
     we will  not be  permitted  to  declare  and pay any  distributions  on our
     outstanding  equity  securities  so long as the notes  remain  outstanding,
     except that we may pay  distributions  on our Series B Shares to the extent
     that we  prepay  the  notes in an amount  equal to such  distributions.  In
     addition,  the transaction documents contain other financial covenants that
     will become applicable one year after the closing of the  transactions,  if
     any amounts evidenced by the notes remain outstanding.



<PAGE>


5.  Mortgages and Notes Payable, Bonds Payable and Construction Financing

     The Exchangeable  Note and the $20M Note each may be extended for up to two
     periods  of six  months  each,  provided  that,  among  other  things,  the
     aggregate  outstanding  principal  amount  of the  notes at the time of the
     first  extension is not greater  than $40.0  million and at the time of the
     second  extension  is not  greater  than  $25.0  million.  We  must  pay an
     extension fee of 0.50% of the aggregate outstanding principal amount of the
     notes each time an extension option is exercised. See Note 20 - "Subsequent
     Events" to the Consolidated Financial Statements.

(D)  On January 2, 2002, we purchased  $23.3 million of the bonds  utilizing the
     $23.0  million  in a cash  collateral  account  related  to the  bonds  and
     additional cash of $0.3 million.  The remaining bonds are collateralized by
     letters-of-credit from a financial institution totaling $25.2 million which
     expire January 2, 2002 and have an annual fee (paid  quarterly) of 2.35% of
     the letters-of-credit face amounts which was charged to interest expense as
     incurred.

     The  agreement  with the  financial  institution  providing  the letters of
     credit includes a future lease value clawback  provision which compares the
     lenders  credit risk with the  underlying  value of the related  industrial
     facilities. We were required to deposit $2.5 million into a cash collateral
     escrow by March 31,  2002  under  this  provision.  Any  future  changes in
     property  values  will result in  additional  deposits or releases of funds
     from the cash collateral escrow on a quarterly basis. In addition,  we have
     guaranteed  all  obligations  under  this  replacement   letter  of  credit
     facility.  In order to  secure  our  obligations  under the  guarantee,  we
     pledged the bonds  purchased of $23.3  million as well as certain  property
     assets and a cash escrow account (which had a balance of $1.8 million as of
     December 31, 2002).

     These  bonds  mature  on June 1,  2022.  Under  the  terms of the bond loan
     agreements,  we make  interest-only  payments  monthly,  calculated using a
     floating rate determined by the remarketing  agent of the bonds.  The rates
     ranged  from 1.20% to 2.02%  during  2002,  1.33% to 4.98%  during 2001 and
     3.09% to 5.97%  during 2000.  The rate at December 31, 2002 was 1.32%.  The
     maximum  annual  interest  rate  on  the  bonds  is  13.0%.  Under  certain
     conditions, the interest rate on the bonds may be converted to a fixed rate
     at our request.

     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,  we  are  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.

(E)  Permanent  financing  for certain  office  properties  has been provided by
     $26.3 million of tax-exempt  industrial  revenue bonds.  During 2000, $17.3
     million  of the  bonds  were  repaid  with  proceeds  from the sales of the
     related  properties.  The remaining $9.0 million of bonds were to mature on
     December 1, 2014 and were collateralized by letters-of-credit totaling $9.3
     million  which were subject to quarterly  extension  fees.  On November 21,
     2002,  in  connection  with the sale of our Centre  Square I  property,  we
     redeemed  approximately  $3.9  million of the $9.0  million of  outstanding
     bonds  (See  Note 16 -  Property  Acquisitions  and  Dispositions  to these
     Consolidated Financial Statements) with funds escrowed with the provider of
     the letters of credit.  The remainder of the outstanding bonds were assumed
     by the purchaser of Centre Square I. Additionally,  in connection with this
     sale,  the facility  that  provided  credit  enhancement  for the bonds was
     terminated.  Under the terms of the bond agreements,  we made interest-only
     payments  monthly,  calculated  using a  floating  rate  determined  by the
     remarketing agent of the bonds. The rates ranged from 1.25% to 1.75% during
     2002, 1.45% to 4.50% during 2001 and, 3.55% to 5.50% during 2000.


<PAGE>


5.   Mortgages and Notes Payable, Bonds Payable and Construction Financing

(F)  Both  construction  facilities  related  to the Bank One  Corporate  Center
     project are subject to various  financial  covenants  and have certain cash
     escrow requirements. (See Note 6 - Debt Covenants for a full description of
     the covenants and related issues). As of December 31, 2002, $5.8 million in
     interest had been funded from the  mezzanine  facility.  In order to obtain
     the consent of the  construction  and  mezzanine  lenders to close the SCPG
     transaction,  we  agreed,  among  other  things,  to  make  certain  escrow
     deposits,  reallocate  certain  line items in the  project  budget and make
     certain other  revisions to the loan documents.  These escrow  requirements
     were modified in connection with the refinancing of the mezzanine facility.
     See Note 20 - Subsequent Events to these Consolidated Financial Statements.

      During the years ended  December  31,  2002,  2001 and 2000,  we wrote-off
unamortized  deferred  financing  costs of $0.8  million,  $0.1 million and $3.4
million,  respectively,  (included in amortization of deferred financing costs).
These  write-offs  resulted  from  mortgage  notes,  bonds payable and a line of
credit that were repaid or refinanced.

      Total  interest  paid on the mortgage  notes  payable,  bonds  payable and
construction  financing was $62.5  million,  $69.8 million and $69.1 million for
the years ended December 31, 2002, 2001 and 2000, respectively. During the years
ended December 31, 2002,  2001 and 2000, we incurred  interest  expense of $74.0
million, $75.7 million and $69.9 million,  respectively, of which $29.9 million,
$23.9  million  and $14.2  million,  respectively,  was  capitalized  related to
development projects.

      On January 31, 1999,  we entered into an interest  rate collar  agreement,
with  respect  to the debt  collateralized  by the  property  located at 33 West
Monroe Street in Chicago,  Illinois, that hedged our interest rate exposure with
respect to the variable  rate mortgage note secured by the 33 West Monroe Street
property.  The interest  rate ceiling  under the  agreement was based on a LIBOR
index rate of 7.50% and the interest  rate floor was based on a LIBOR index rate
of 3.73%.  This agreement was for an original  notional  amount of $65.0 million
and its term was coincident with the aforementioned  variable rate mortgage note
(January  31,  1999  through  January  31,  2002).  On November  15,  2000,  the
underlying  note was  refinanced  with the proceeds of a $67.0 million  variable
rate mortgage note. The interest rate collar agreement remained in place and was
designated to the new loan in conjunction  with an additional  interest rate cap
agreement.  (See November 15, 2000 hedge agreement  activity described below for
further discussion). The interest rate collar expired in 2002.

      On November 1, 1999,  we entered into an interest  rate collar  agreement,
with  respect  to the debt  collateralized  by the  property  located at 77 West
Wacker Drive in Chicago,  Illinois, for the period from November 1, 1999 through
September 30, 2002 with a financial  institution for an original notional amount
of $170.0 million.  The interest rate ceiling under the agreement was based on a
LIBOR index rate of 7.75% and the interest rate floor was based on a LIBOR index
rate of 5.62%. On November 22, 1999, we transferred the $170.0 million  interest
rate collar agreement to an unconsolidated  real estate joint venture which owns
the property and related indebtedness. We own a 50% common ownership interest in
this joint venture and account for our  ownership  using the equity  method.  On
November 10, 1999,  the joint venture  entered into an additional  interest rate
collar agreement for the period from October 1, 2002 through  September 30, 2004
with a financial  institution for an original notional amount of $157.5 million.
The interest  rate ceiling under the agreement is based on a LIBOR index rate of
7.75% and the interest floor is based on a LIBOR index rate of 6.10%. The $157.5
million collar agreement required the joint venture to make cash escrow deposits
to the extent that the instrument's  valuation decreased more than $5.0 million.
As of  December  31,  2002,  $7.5  million was  escrowed  relating to the $157.5
million  collar  agreement.  On March 12,  2001,  we were  replaced by our joint
venture partner as the guarantor to the  counterparties  related to these collar
agreements.  If our joint venture  partner,  as guarantor,  were required to pay
either  of the  counterparties  under  the  terms of the  interest  rate  collar
agreements,  we would be liable to reimburse our joint  venture  partner its 50%
share of any amount  paid.  On January  16,  2003,  the  $157.5  million  collar
agreement was assigned to a different financial institution for a fee of


<PAGE>


5.   Mortgages  and Notes  Payable,  Bonds  Payable and  Construction  Financing
     (continued)

$0.1 million and modified  such that the joint  venture  would only need to make
cash escrow  deposits to the extent that the  instrument's  valuation  decreases
more than $20.0 million.

      On December 10, 1999,  we entered  into an interest  rate swap  agreement,
with respect to the debt  collateralized  by the  property  located at 330 North
Wabash Avenue (IBM Plaza) in Chicago, Illinois, for the period from December 10,
1999  through  December  10,  2002  based  on a LIBOR  index  rate of 6.3%  that
effectively  fixed our interest  rate with respect to the variable rate mortgage
note payable secured by the IBM Plaza property at a rate of 8.0%. This agreement
had an original  notional  amount of $160.0  million  that  decreased  to $158.4
million on December  10, 2000 and  decreased  to $155.2  million on December 10,
2001,  coincident  with  the  originally  scheduled  principal  payments  on the
mortgage  note payable  secured by the IBM Plaza  property.  We received the net
amount of $0.1 million  under the terms of the swap  agreement  during 2000.  No
amounts  were paid or received  during  1999.  We had provided a guaranty to the
counterparty related to this agreement to the extent of any decrease in value in
the swap  agreement.  In  accordance  with this  guarantee,  the swap  agreement
required  cash escrow  deposits to the extent  that the  instrument's  valuation
decreased more than $0.5 million. As of December 31, 2001, we had deposited $5.6
million pertaining to the interest rate swap agreement. On December 10, 2002, we
entered into an interest  rate cap  agreement  for the period  December 10, 2002
through December 13, 2003 for a notional amount of $153.2 million.  The interest
rate  under  this  agreement  is capped at the LIBOR  index  rate of 4.25%.  The
notional amount automatically reduced to $150.0 million on December 13, 2002.

      On July 11, 2000,  we entered into an interest  rate cap  agreement,  with
respect to the debt  collateralized by the property located at 180 North LaSalle
Street in Chicago, Illinois, for the period from July 11, 2000 through August 1,
2001 with respect to a $52.0 million  variable rate note payable  secured by the
180 North LaSalle Street property.  The agreement was  subsequently  extended to
January 15, 2004 and the notional  amount was  increased to $60.0  million.  The
interest rate under the agreement is capped at the LIBOR index rate of 7.25%. No
amounts were  received  under the terms of the agreement  during 2002,  2001 and
2000.

      On November 15, 2000, we entered into an interest rate cap agreement, with
respect to the debt  collateralized  by the  property  located at 33 West Monroe
Street in  Chicago,  Illinois,  for a notional  amount of $67.0  million for the
period from  November 15, 2000 through  January 31, 2002. On December 6, 2001 we
extended the  interest  rate cap  agreement  to January 31, 2003 (an  additional
hedge  agreement  is required by  February 1, 2003,  for the period  February 1,
2003,  through  debt  maturity of November  15,  2005) with respect to the $67.0
million  variable  rate  note  payable  secured  by the 33  West  Monroe  Street
property. Our Operating Partnership has guaranteed $3.0 million of the principal
amount of the loan.  The  interest  rate  under the terms of the  agreement  was
capped at the LIBOR index rate of 6.50% for a notional  amount of $67.0 million.
Included in the initial  interest rate cap agreement was the sale of an interest
rate cap based on the LIBOR index rate of 7.50% for the period from November 15,
2000 through  January 31, 2002,  for a notional  amount of $65.0  million.  This
agreement  allowed  us to  reduce  the cost of this  hedge  instrument  and take
advantage of the  remaining  term of the existing  collar  agreement  originally
entered into on January 31, 1999. We received $10,000 under the terms of the cap
agreement  during 2000 and no amounts  during 2001 or 2002. On January 29, 2003,
we entered into an interest rate cap  agreement for the period  January 31, 2002
through October 31, 2004 for a notional amount of $67.0 million that will reduce
over the term of the  agreement to $65.5  million.  The interest rate under this
agreement is capped at a LIBOR index rate of 6.50%.

      On November 15, 2000, we entered into a second interest rate cap agreement
with  respect  to the debt  collateralized  by the  property  located at 33 West
Monroe Street in Chicago,  Illinois,  for a notional amount of $12.5 million for
the period November 15, 2000 through November 15, 2003 with respect to the $12.5
million  variable  rate  note  payable  secured  by the 33  West  Monroe  Street
property.  Our Operating  Partnership  has  guaranteed  the entire $12.5 million
principal amount of the loan. The interest rate under the terms of the agreement
is capped at the LIBOR index rate of 8.35%,


<PAGE>


5.   Mortgages  and Notes  Payable,  Bonds  Payable and  Construction  Financing
     (continued)

8.75% and 9.0% for loan years one, two and three,  respectively,  for a notional
amount of $12.5  million.  No amounts were  received  under the terms of the cap
agreement during 2002, 2001 and 2000.

      In  March  2001,   we  entered   into  an   agreement   to  amend  a  loan
collateralized, in part, by a pledge of the first mortgage loan that we held and
which is secured by the property  known as 180 North LaSalle  Street in Chicago,
Illinois.  The  original  commitment  under the loan was $64.0  million of which
$52.0 million had been disbursed.  Under the terms of the amendment, the maximum
loan  amount was  reduced to $60.0  million and the  remaining  $8.0  million of
borrowing availability was funded.  Restricted cash escrows at December 31, 2002
and 2001 include $3.5 million and $2.5  million,  respectively,  related to this
loan for future capital expenditures, tenant improvements and lease commissions.
As part of the  agreement,  we agreed to allow the lender to securitize the loan
by utilizing a Real Estate Mortgage Investment Conduit ("REMIC"),  if desirable.
The REMIC closed on October 30, 2001 and matures on January 15, 2004. The lender
has  transferred the first mortgage loan to the REMIC.  The principal  amount of
the REMIC is $113.7  million and is  comprised of three  classes of  certificate
holders.  Class "A"  certificates  represent the original first mortgage  holder
owning a $60.0 million priority interest, Class "B" certificates are owned by us
and represent a $53.7 million interest  subordinate to the Class A certificates,
and the Class "R" certificates represent any residual amounts due to us upon any
sale of the property  should net proceeds  exceed $113.7  million.  The interest
rate on the Class "A"  certificate  is LIBOR plus 3.75% and the interest note on
the Class "B" certificate is equal to the difference between (i) 16.22% and (ii)
the product of LIBOR multiplied by 1.1179. Our Services Company acts as the loan
servicer  for  the  REMIC  and  we  account  for  our  ownership  interest  on a
consolidated basis.

      On April 2, 2001,  we entered  into an interest  rate cap  agreement  with
respect to the property at 208 South LaSalle  Street in Chicago,  Illinois,  for
the period from April 2, 2001  through  June 30, 2003 with  respect to the $20.0
million  variable  rate note  payable  secured by the 208 South  LaSalle  Street
property.  The  interest  rate under the  agreement is capped at the LIBOR index
rate of 7.5%. No amounts were received  under the terms of the agreement  during
2002 and 2001.

      On August 22, 2001, we entered into an interest rate cap  agreement,  with
respect to the debt  collateralized  by the property known as Bank One Corporate
Center in  Chicago,  Illinois,  for the period from  January  22,  2002  through
January 5, 2004. The interest rate under the terms of the agreement is capped at
the  LIBOR  index  rate of  4.25%  increasing  to 7.4%  over the term of the cap
agreement.  The notional amount of the cap begins at $81.0 million and increases
over the term of the cap  agreement  to a maximum  of $230.0  million,  based on
increases  anticipated in the construction loan during the expected construction
period of the property.  As of December 31, 2002, the notional amount was $204.0
million capped at the LIBOR index rate of 6.75%.  No amounts were received under
the terms of the agreement in 2002 and 2001.

      On January 9, 2002,  we extended  the maturity  date of the $30.0  million
mortgage note payable  secured by 100% of its  ownership  interest in IBM Plaza,
Chicago,  Illinois,  until  February  23,  2003 for a fee of $0.2  million.  The
principal  balance as of December 31, 2002 was $27.1 million.  The mortgage note
payable was  refinanced  on March 10, 2003.  See Note 20 - Subsequent  Events to
these Consolidated Financial Statements.

      On January 15, 2002,  we extended the $8.0 million  mortgage  note payable
collateralized  by the land we own in Aurora,  Illinois  until February 15, 2002
for a fee of $0.1 million.  On February 5, 2002, we repaid $2.2 million reducing
the loan  balance to $5.8  million.  On February 15 2002,  we extended  the loan
until March 1, 2002 for a nominal fee plus  expenses of the lender.  On February
28, 2002, we repaid $2.8 million  reducing the loan balance to $3.0 million.  On
March 1, 2002 we  extended  the loan until  March 31,  2002 for a fee of $30,000
plus expenses of the lender and agreed that the interest rate would  increase by
2% on each of March 16, 2002, March 23, 2002 and March 30, 2002, if the loan has
not been repaid. Both principal reductions made


<PAGE>


5. Mortgages and Notes  Payable,  and Bonds Payable and  Construction  Financing
(continued)

in 2002 were  generated  from  proceeds  from the sale of vacant land in Aurora,
Illinois. On June 21, 2002, we repaid the mortgage note payable in full.

      On February  15, 2002,  we extended the maturity  date from May 9, 2002 to
November  9, 2002 for the letters of credit  enhancing  the  industrial  revenue
bonds for an office  property  located  in  Knoxville,  Tennessee,  for a fee of
$35,000.  On November 21, 2002,  we sold the property.  In connection  with this
sale, we redeemed  approximately  $3.9 million of the $9.0 million of bonds that
encumbered the property.  The purchaser assumed the remainder of the outstanding
bonds.  The  facility  that  provided  credit  enhancement  for  the  bonds  was
terminated in connection with this sale.

      We have provided  guarantees  ranging from 25% to 100% of the  outstanding
principal  balances on certain  mortgage and notes  payable,  bonds  payable and
construction  financing.  As of December 31, 2002, the guarantees totaled $129.4
million.

      Certain  mortgage  and  notes  payable,  bonds  payable  and  construction
financing  are subject to various  financial  covenants  including  minimum cash
balances and debt service  coverage ratios.  In addition,  certain loans contain
cross-default  provisions  whereby a default under the covenants  related to one
loan  agreement  would also result in a default  under the  provisions of one or
more  loans.  See  Note 6 -  Debt  Covenants  to  these  Consolidated  Financial
Statements for a description of our various debt covenants.

      The following  represents our future minimum principal payments due on our
mortgage and notes payable, bonds payable and construction financing outstanding
at December 31, 2002 (dollars in thousands):

<TABLE>
<CAPTION>

<S>                                                      <C>

Year Ending December 31                                     Amount
-------------------------------------------------------------------------
2003.................................................       $280,897
2004.................................................        272,660
2005.................................................         74,112
2006.................................................         65,010
2007.................................................         28,861
Thereafter...........................................        183,241
                                                      -------------------
                                                            $904,781
                                                      ===================

</TABLE>


       The principal  payments above exclude  unamortized  debt discount of $0.3
million at December 31, 2002.

      Certain mortgage notes payable,  construction financing, and notes payable
provide for the deferral of a portion of accrued interest and require additional
loan exit fees be paid upon repayment of the debt obligation. As of December 31,
2002, the deferred interest and loan exit fees totaled $18.9 million.

6.  Debt Covenants

      Both the first mortgage  construction loan and the mezzanine  construction
loan for our Bank One Corporate Center property  contained a liquidity  covenant
which required us to maintain a minimum unrestricted cash balance (as defined in
the relevant loan  documents) of $20.0 million at the end of every  quarter.  In
addition, under these loans, the maximum amount of distributions that we can pay
to our  common  shareholders/unitholders  is 90% of funds  from  operations  (as
defined in the  relevant  loan  documents)  for the most recent four full fiscal
quarters. At December 31, 2001 and March 31, 2002, our unrestricted cash balance
was less than $20.0 million and we obtained waivers from the respective lenders.
In consideration  for the waivers from the lenders,  we were required to deposit
$2.0 million into a cash  collateral  account over a four-month  period,  with a
$0.5 million  initial  deposit  made at the time the waivers were given,  and to
pledge, as additional collateral under the


<PAGE>


6.  Debt Covenants (continued)

loans, the tax increment financing  assistance that we may receive from the City
of Chicago with respect to Bank One Corporate Center. Additionally,  the lenders
agreed to permanently reduce the$20.0 million unrestricted cash balance covenant
to $17.5 million.  At June 30, 2002, our unrestricted cash balance was less than
$17.5 million.  In July 2002,  concurrently with the close of a transaction with
SCPG,  we  negotiated  modifications  to certain loan  covenants,  including the
unrestricted cash balance requirement.  These modifications are discussed below.
See Note 9 - Preferred Shares to these Consolidated  Financial  Statements for a
description of the SCPG transaction.

      In order to consummate the SCPG transaction and obtain the consents of the
construction  and mezzanine  lenders  financing  the Bank One  Corporate  Center
project, the following covenant modifications were made with respect to the Bank
One Corporate Center construction and mezzanine loans:

a.   The unrestricted cash liquidity  covenant was reduced from $17.5 million to
     $7.5  million,  and any funds in the Citadel  Escrow (as defined  below) in
     excess of $10.0 million  constitute  unrestricted  cash for the purposes of
     calculating the liquidity covenant;
b.   The  unrestricted  cash  and  Funds  From  Operations   liquidity  covenant
     contained  only in the  construction  loan documents was reduced from $22.5
     million to $12.5 million,  and any funds in the Citadel Escrow in excess of
     $10.0 million constitute  unrestricted cash for the purposes of calculating
     the liquidity covenant;
c.   The  Consolidated  EBITDA to Consolidated  Total Interest Expense ratio was
     reduced from 165% to 140%;
d.   The Consolidated  EBITDA to Consolidated  Fixed Charges A ratio was reduced
     from 145% to 120%;
e.   The Consolidated  EBITDA to Consolidated  Fixed Charges B ratio was reduced
     from 125% to 105%; and
f.   Consolidated Net Worth will be calculated without reduction for accumulated
     depreciation.

      The undefined  capitalized terms used in the above list are defined in the
relevant loan documents.

      In exchange  for the above  modifications,  we agreed that if we desire to
declare or pay any future dividends on our common or preferred  shares,  we must
demonstrate compliance with the financial covenants under the Bank One Corporate
Center loans in existence prior to the foregoing modifications.  In addition, we
agreed,  among other  things,  to (a) deposit  into  escrow an  additional  $2.5
million to fund certain hard and soft costs  relating to the Bank One  Corporate
Center  project and (b)  reallocate  to other  items in the project  budget $2.0
million of leasing  commissions  due to us upon the occupancy of certain tenants
of the Bank One Corporate Center project.

      Additionally, in order to obtain the foregoing covenant modifications,  we
agreed with the Bank One Corporate Center lenders to establish an escrow account
(the "Citadel  Escrow") to secure the payment of certain costs  associated  with
the  subleasing  of  the  space  leased  by  Citadel  Investment  Group,  L.L.C.
("Citadel") at One North Wacker Drive in Chicago, Illinois, which obligation was
undertaken by us in  connection  with  Citadel's  lease of space in the Bank One
Corporate Center project.  See Note 7 - Future Minimum Lease Income and Payments
to these Consolidated  Financial Statements for description of our Citadel lease
obligation.  We agreed,  beginning January 2003, to make monthly escrow payments
of $1.0 million per month to an account to be used to pay these  costs.  We have
pre-funded  $4.0  million  of these  costs  into the escrow to be applied to the
monthly  payments for June,  July,  August and  September of 2003.  On March 19,
2003,  we  refinanced  the Bank One  Corporate  Center  mezzanine  loan with the
proceeds of a $75.0 million loan and $1.5 million of our funds.  In  conjunction
with  such  refinancing,  the  construction  lender  and  new  mezzanine  lender
restructured   our  escrow   deposit   obligations   relating   to  the  Citadel
Reimbursement Obligations as


<PAGE>


6.  Debt Covenants (continued)

follows. Prior to the closing of the new mezzanine loan, the construction lender
held $12.6 million in escrows relating to the Bank One Corporate Center project.
At the closing of the new mezzanine  loan, all of such funds were deposited into
a new  account  held by the  construction  lender  (the "New  Citadel  Escrow").
Additionally,  we are required to make additional  monthly deposits into the New
Citadel Escrow in the amount of $0.8 million per month  beginning April 2003 and
continuing through and including January 2004. Upon Citadel's  occupancy at Bank
One Corporate Center, the construction  lender will deposit into the New Citadel
Escrow a $0.5 million  leasing  commission  due and payable to us in  connection
with the Citadel lease. Upon satisfaction of certain conditions contained in the
construction  and mezzanine loan documents,  funds in the New Citadel Escrow may
be  used in the  future  to pay  for  certain  tenant  improvement  and  leasing
commission  costs  associated  with the  subleasing  of the Citadel space at One
North  Wacker  Drive  and,  after  February  1,  2004,  to pay for  the  Citadel
Reimbursement  Obligations.  The $0.8  million  monthly  deposit  is  subject to
adjustment as the Citadel space at One North Wacker Drive is subleased.

      Under the terms of three mortgage notes payable totaling $80.5 million, we
were required to maintain $20.0 million in unrestricted cash balances at the end
of each fiscal quarter.  During the second quarter of 2002, we obtained a waiver
from the lender for the fiscal  quarter ended March 31, 2002.  Additionally,  on
June 27,  2002,  in order to  consummate  the SCPG  transaction,  we amended the
mortgage  loan  documents  for the National  City Center  building in Cleveland,
Ohio, the 200 South Mitchell Court building in Addison,  Illinois,  and the Pine
Meadows,  Building E in  Libertyville,  Illinois.  The  amendments  reduced  the
unrestricted  cash  liquidity  covenant in the loans from $20.0  million to $7.5
million.  Additionally,  in connection with the liquidity covenant  modification
relating  to the  National  City  Center  mortgage  loan,  we  agreed  to  make,
commencing  July 1, 2002 and ending January 1, 2004,  monthly  $50,000  deposits
into an escrow  held by the lender as  additional  security  for such  loan.  On
August 23, 2002, we transferred our 10% ownership  interest in Pine Meadow,  LLC
to our  joint  venture  partner.  In  consideration  of this  transfer,  we were
released of our obligations  under the joint venture agreement and the documents
that evidenced and secured a $9.3 million construction mortgage loan encumbering
the property.

      Under the terms of a $20.0 million note payable collateralized by three of
our  properties  and a $9.0  million  letter  of credit  facility  with the same
lender, we are required to limit the amount of distributions that can be paid on
our common  shares and units to a maximum  of 90% of funds from  operations  (as
defined in the relevant loan  documents) for each calendar year. At December 31,
2001,  we did not meet this  requirement  with respect to calendar year 2001. In
March  2002,  we  obtained  amendments  to the loan  and the  letter  of  credit
facility.  Under  the  amendments,  we  obtained  a waiver  of the  distribution
covenant for calendar year 2001, and we agreed,  among other things, to increase
a $3.5 million guaranty related to a $12.5 million mezzanine  facility on our 33
West Monroe  Street  property  with the same  lender to a full  guaranty of this
mezzanine loan. Also, in order to consummate the SCPG  transaction,  on July 16,
2002,  the debt  service  coverage  ratio  required to be  maintained  by us was
modified from 1.25 to 1.10.

      Under the terms of a $25.2 million letter of credit facility that provides
support for certain industrial revenue bonds, we are required to maintain,  on a
quarterly  basis, a cash collateral  escrow in an amount equal to the difference
between  $25.2 million and an implied loan value  calculated in accordance  with
the terms of the letter of credit  facility.  As of December  31,  2002,  we had
deposited  $1.8  million  and are  required  to make an  additional  deposit  of
approximately $1.5 million on April 30, 2003 into the cash collateral escrow.

      The  financial  covenants  contained  in many of our loan  agreements  and
guarantee  agreements  with our lenders  include minimum ratios for debt service
coverage and liabilities as a percentage of total assets, as well as minimum net
worth levels,  limits as to recourse  indebtedness  and numerous other financial
covenants.  Compliance with these  covenants in 2003 is highly  dependent on our
financial results  (including but not limited to a failure of one or more of our
significant  tenants  to pay rent  when  due) and  could be  impacted  by future
capital events such as asset sales, debt refinancings


<PAGE>


and new debt or equity  transactions and is not assured.  In some past quarters,
we have failed to meet certain of these  covenants and after  negotiations  with
our lenders (and in certain  instances,  after agreeing to post  additional cash
collateral,  provide other  security  and/or  otherwise  modify the terms of the
relevant  loans)  we have  obtained  the  necessary  loan  modifications  and/or
waivers.  There  can  be no  assurances  that  our  financial  results  will  be
sufficient to enable us to meet these  covenants in the future and, if we do not
meet a  covenant,  whether  appropriate  loan  modifications  or waivers  can be
obtained.  See Note 2 - Going Concern to these Consolidated Financial Statements
for additional discussions concerning our ability to meet debt covenants.

      Certain loans contain cross-default provisions whereby a default under the
covenants related to one loan agreement would also result in a default under the
provisions of one or more other loans.  Failure to meet a covenant  could result
in a  requirement  for a  principal  paydown,  accelerated  maturity,  increased
interest rate,  additional collateral or other changes in terms. This could also
adversely affect our ability to obtain additional sources of financing or equity
capital.

7.  Future Minimum Lease Income and Payments

      We have  entered  into lease  agreements  with  tenants  with lease  terms
ranging from one year to twenty years at lease  inception.  The leases generally
provide for tenants to share in increases in operating  expenses and real estate
taxes in excess of specified  base  amounts.  Approximately  30%, 27% and 25% of
rental  revenue  for  the  years  ended  December  31,  2002,   2001  and  2000,
respectively,  was  received  from five  tenants  (all five tenants were present
during the years ended December 31, 2002, 2001 and 2000).

      The  total  future  minimum  rentals  to  be  received  by us  under  such
noncancelable  operating  leases in effect at December  31,  2002,  exclusive of
tenant  reimbursements  and  contingent  rentals,  are as  follows  (dollars  in
thousands):

<TABLE>
<CAPTION>

<S>                                                      <C>

Year Ending December 31                                     Amount
-------------------------------------------------------------------------

2003.................................................    $   115,558
2004.................................................        114,216
2005.................................................        105,109
2006.................................................         88,860
2007.................................................         80,350
Thereafter...........................................        406,689
                                                      -------------------
                                                           $ 910,782
                                                      ===================

</TABLE>

      The above table  excludes  Arthur  Andersen,  LLP ("Arthur  Andersen") as,
subsequent to December 31, 2002, we entered into a  termination  agreement  with
Arthur Andersen (See Note 20 - Subsequent Events to these Consolidated Financial
Statements).  Arthur Andersen leased an aggregate of 656,831 net rentable square
feet in two of our office  properties  (579,982  square  feet at 33 West  Monroe
Street and 76,849 square feet at 330 North Wabash Avenue),  which comprised 9.6%
of our total revenue for the year ended December 31, 2002.

      We have a lease with  Citadel for space in Bank One  Corporate  Center and
have agreed to reimburse  Citadel for the financial  obligations,  consisting of
base rent and the pro rata share of operating  expenses  and real estate  taxes,
under Citadel's preexisting lease (the "Citadel  Reimbursement  Obligation") for
161,488  square feet of space at One North  Wacker  Drive in  downtown  Chicago,
Illinois.  The Citadel  Reimbursement  Obligation  includes an estimated nominal
gross  rental  obligation  of $78.4  million  over the  term of the  lease.  The
landlord at One North  Wacker  Drive is  obligated to provide us with $47.50 per
square foot in a tenant improvement  allowance.  In addition, as a part of lease
agreements  entered  into  with  certain  tenants  for other  properties  in our
portfolio,  we assumed these  tenants'  leases at their  previous  locations and
subsequently executed subleases for certain of the assumed lease space.


<PAGE>


7.  Future Minimum Lease Income and Payments (continued)

      Future minimum rental payments (exclusive of tenant  reimbursements) to be
paid by us under leases assumed,  net of subleases executed through December 31,
2002, are as follows:

<TABLE>
<CAPTION>

<S>                                                      <C>                <C>                <C>

                                                            Gross            Executed            Net
Year Ending December 31                                     Amount          Subleases          Amount
------------------------------------------------------------------------------------------------------------
                                                                     (dollars in thousands)

2003.................................................    $   7,800        $   (1,956)        $   5,844
2004.................................................        7,793            (2,075)            5,718
2005.................................................        7,548            (2,237)            5,311
2006.................................................        6,742            (2,200)            4,542
2007.................................................        5,281            (1,034)            4,247
Thereafter...........................................       24,946            (5,326)           19,620
                                                      ------------------------------------------------------
                                                          $ 60,110         $ (14,828)         $ 45,282
                                                      ======================================================

</TABLE>

      Through  February  2003,  we have  executed  subleases at One North Wacker
Drive totaling 135,967 square feet of space to partially mitigate our obligation
under the Citadel  Reimbursement  Obligation.  We are required  under one of the
subleases  for 27,826  square  feet to escrow a total of $1.1  million  with the
owner of One North Wacker Drive, in six equal monthly increments of $0.2 million
commencing  in  December  2002,  as security  for the payment of the  difference
between the rental amount payable under the Citadel lease and this sublease.  In
addition, in connection with another sublease for 55,494 square feet, we assumed
two lease  obligations,  at two Chicago office buildings owned by third parties,
with gross  rental  obligations  of  approximately  $3.0  million.  We intend to
partially  mitigate  our  financial  obligations  under  one of these  leases by
subleasing the space.

      Liabilities for leases assumed at December 31, 2002 includes $15.5 million
related to the Citadel Reimbursement Obligations,  which represents our estimate
of a  net  obligation  of  $19.4  million  after  actual  and  estimated  future
subleasing,  net of  payments  we  made in 2002  on  these  obligations  of $3.9
million.

      On  November  26,  2001,  we  finalized a lease with a tenant for space in
Continental Towers, an office building located in Rolling Meadows,  Illinois. We
have agreed to reimburse the tenant for a portion of the  financial  obligations
consisting  of base rent and the pro rata share of  operating  expenses and real
estate  taxes,  under the  tenant's  lease for  occupancy  executed at an office
building  located  in  downtown  Chicago,  Illinois.  This  lease  has a nominal
estimated gross rental obligation of approximately $4.1 million over the initial
term of the lease. We intend to mitigate our financial obligations by subleasing
the space and  recorded  approximately  $2.6 million in  liabilities  for leases
assumed during the year ended December 31, 2002, representing an estimate of our
net liability related to this obligation.

      During 1999, we sold ten properties in a single transaction resulting in a
deferred gain of $3.1  million.  As a condition of the sale, we agreed to assume
responsibility  for  re-leasing two of the properties for a period of five years
after the expiration in 2000 and 2001 of the then existing  tenant  leases.  Our
remaining  nominal gross lease  obligation at December 31, 2002 is approximately
$10.9  million.  During 2002, we released one of the  properties and revised our
leasing  assumptions  related to the second  property.  At December 31, 2002 and
2001,  we have a net liability of  approximately  $3.5 million and $3.9 million,
respectively,  in liabilities for leases assumed,  representing  our estimate of
the net liability anticipated related to this obligation.  Correspondingly,  the
remaining  deferred gain has been reduced to zero and we have recorded a loss on
the sale of real estate of $1.3 million in 2002.


<PAGE>


7.  Future Minimum Lease Income and Payments (continued)

      Future  minimum  lease  payments to be paid by us on our  operating  lease
obligations in effect at December 31, 2002 are as follows:

<TABLE>
<CAPTION>

<S>                                                     <C>


               Year Ending December 31                      Amount
-------------------------------------------------------------------------
                (dollars in thousands)
2003.................................................    $   2,907
2004.................................................        2,361
2005.................................................        2,226
2006.................................................        2,187
2007.................................................        1,976
Thereafter...........................................        3,461
                                                      -------------------
                                                          $ 15,118
                                                      ===================

</TABLE>

      During the years ended  December 31, 2002,  2001 and 2000,  we  recognized
lease  termination  income  of $2.3  million,  $0.4  million  and $1.4  million,
respectively, which is included in rental revenue. In 1999, we granted permanent
easements and recorded fees of $2.6 million, which are being recognized in other
property revenues over terms ranging from 10 to 15 years beginning in 2000.

8.  Minority Interests

      During 2000,  an affiliate  of Mr.  Stephen J. Nardi,  the Chairman of our
Board,  exchanged  927,100  common  units of  general  partner  interest  of the
Operating  Partnership  for 927,100  common units of limited  partner  interest.
These common units of limited partner interest are exchangeable on a one-for-one
basis,  for common shares or, at our option,  cash equivalent to the fair market
value  of a  common  share  at the  time of  exchange.  In  connection  with the
modification,  a tax indemnification agreement with the affiliate was amended to
provide that the tax indemnification by the Operating  Partnership is reduced by
10% per  year  over  the  10-year  term of the  tax  indemnification  agreement,
effective  retroactively  from our initial  public  offering.  In addition,  the
affiliate's  put option  agreement  allowing  the  affiliate  to put the general
partner common units to the Operating Partnership was terminated.

      Primestone Investment Partners L.P.  ("Primestone") is an affiliate of The
Prime Group,  Inc.  ("PGI"),  that previously  owned  7,944,893  limited partner
common units (the  "Primestone  Units") of the Operating  Partnership.  PGI is a
privately held company controlled by Michael W. Reschke,  the former Chairman of
our Board.  Mr. Reschke  resigned as Chairman on April 8, 2002, but continues to
serve as a Trustee.  On April 30, 2002,  Vornado PS,  L.L.C.  ("Vornado  PS"), a
lender to Primestone who had a lien on the Primestone  Units, held a foreclosure
auction  of the  Primestone  Units and  acquired  all of the units for $8.35 per
common unit.  Vornado PS subsequently  assigned 3,972,446 (the "Cadim Units") of
the  Primestone  Units to  Cadim  Acquisition,  LLC  ("Cadim  Acquisition")  and
retained the remaining 3,972,447 units (the "Vornado Units").  The Vornado Units
are  convertible  into our  common  shares,  on a  one-for-one  basis or, at our
option,  in cash  equivalent  to the fair market  value of a common share at the
time of exchange.  Pursuant to an agreement with Cadim  Acquisition,  we and the
Operating  Partnership  have agreed to exchange  the Cadim Units only for common
shares.  We have  granted a limited  waiver of our 9.9% common  share  ownership
limitation  contained  in our  charter to both  Cadim  Acquisition  and  Vornado
allowing them to own the Cadim Units and Vornado  Units,  respectively,  and any
shares which may be exchanged for such units, so long as no additional shares or
units are acquired by either party without our and the  Operating  Partnership's
consent.


<PAGE>


9.  Preferred Shares

      We are authorized to issue up to 30,000,000 of non-voting preferred shares
of beneficial interest in one or more series. Concurrent with our initial public
offering of November 17, 1997, we completed a private placement with SPCG of our
2,000,000  Series  A-Cumulative   Convertible  Preferred  Shares  of  beneficial
interest  ("Series A  Shares")  with a $0.01 par value  which  were  designated,
issued and  outstanding  at December 31, 2001. On June 5, 1998, we completed the
sale of 4,000,000 Series B-Cumulative  Redeemable Preferred Shares of beneficial
interest  ("Series B  Shares")  with a $0.01 par  value,  which were  designated
issued and outstanding at December 31, 2002 and 2001.

      Dividends  on the Series B 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 Share).  The  Series B Shares  rank
senior  to our  common  shares  as to the  payment  of  dividends  and as to the
distribution of assets upon liquidation. On and after June 5, 2003, the Series B
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 other capital shares of beneficial interest
of ours.

      On January 31, 2002,  we paid  distributions  of $0.375 per Series A Share
and $0.5625 per Series B Share to shareholders of record on January 18, 2002.

      On February 22, 2002, we amended the dividend rate on our Series A Shares,
and agreed to pay a deferral payment,  as defined,  of 3.5% of the $40.0 million
aggregate  liquidation  value of our outstanding  Series A Shares.  The deferral
payment  increased by 0.50% on May 8, 2002 and  compounded  quarterly  beginning
March 31, 2002.

      On July 16, 2002,  we and our Operating  Partnership  closed a transaction
with  SCPG.  Prior to the  closing,  SCPG was the sole  holder  of our  Series A
Shares. At the closing, our Operating  Partnership purchased all of the Series A
Shares for a total redemption price of $42.3 million through the issuance of two
notes payable  described below (which  represents the $40.0 million  liquidation
preference  of the Series A Shares plus  accrued  distributions,  including  the
accrued deferred payment amount, to the date of redemption).

      Our Operating  Partnership  issued to SCPG (i) an  exchangeable  note (the
"Exchangeable  Note")  in the  principal  amount  of  $37.3  million  and (ii) a
nonexchangeable note (the "$20M Note") in the principal amount of $20.0 million.
Our  Operating  Partnership  purchased  the  Series  A  Shares  by  issuing  the
Exchangeable  Note to SCPG and paying SCPG $5.0 million of the proceeds from the
$20M Note. The principal amount of the Exchangeable  Note is exchangeable by its
terms for our common shares at an exchange price of $20.00 per share, subject to
anti-dilution  adjustments.  Approximately $6.8 million of the proceeds from the
$20M Note were used to fund the payment of  distributions on our Series B Shares
for the  first,  second  and third  quarters  of 2002.  The  balance of the loan
proceeds was used to fund certain escrow accounts  described below, pay expenses
related to the transactions and for general corporate purposes.

      In order to permit the  purchase of the Series A Shares under our charter,
our Board  conditionally  declared  distributions on our Series B Shares for the
first,  second and third  quarters of 2002, at the quarterly rate of $0.5625 per
share.  This  declaration of dividends  became  effective July 16, 2002 upon the
closing  of the SCPG  transaction.  The  record  date for the first  and  second
quarter 2002 dividends on the Series B Shares was July 31, 2002, and the payment
date was August 15, 2002. The record date for the third quarter dividends on the
Series B Shares was  September  30,  2002,  and the payment date was October 31,
2002.  Except for the above  declaration  on our Series B Shares,  our  existing
suspension  of  quarterly  distributions  on our  preferred  and  common  shares
presently remains unchanged.


<PAGE>


9.  Preferred Shares (continued)

      As part of the  foregoing  transactions,  we  issued  to SCPG  Series  A-1
warrants to purchase up to 500,000  common  shares at $9.00 per share and Series
A-2  warrants to purchase up to 500,000  common  shares at $7.50 per share.  The
Series A-1 and  Series A-2  warrants  are  structured  so that only a maximum of
500,000 of the warrants may be exercised. The Series A-1 warrants will expire if
the notes are not repaid on or before April 1, 2003, and the Series A-2 warrants
are exercisable  only in the event the  Exchangeable  Note and $20M Note are not
repaid on or before April 1, 2003. We have also issued to SCPG additional Series
B and Series C warrants to purchase common shares that are  exercisable  only in
the event the notes are not repaid on or before April 1, 2003.  If  exercisable,
the Series B  warrants  will allow SCPG to  purchase  250,000  common  shares at
$10.00  per share and the Series C warrants  will allow SCPG to  purchase  up to
250,000  common  shares at $12.50 per  share.  The  warrants,  which have a fair
market value of $0.6 million,  will contain antidilution  adjustment  provisions
and will expire on the fifth anniversary of their issuance,  except as specified
above.  We recorded  the fair market  value of the warrants as a discount to the
$20M Note and an increase to additional  paid-in capital.  The discount is being
amortized as interest  expense over a twelve-month  period ending July 16, 2003,
the initial  maturity  date of the related  notes.  We have also granted to SCPG
certain  demand  and  incidental  registration  rights in  respect of any common
shares  SCPG may  receive  upon the  exchange  of any  principal  amount  of the
Exchangeable  Note or upon the exercise of any of the warrants.  We also granted
SCPG the right to name a trustee to our Board,  which right SCPG has informed us
it does not presently anticipate exercising.

      Although we have paid  distributions on our Series B Shares for the first,
second and third quarters of 2002, we currently do not  anticipate  that we will
declare and pay  distributions  on the Series B Shares for the fourth quarter of
2002 or for  calendar  year  2003.  Distributions  on the  Series B  Shares  are
cumulative  and will  continue to accrue to the extent they are not declared and
paid currently.  Except as described above, the existing suspension of quarterly
distributions on our common shares and preferred  shares remains  unchanged and,
as  described  above,  the  terms of the  Exchangeable  Note and $20M  Note will
prohibit payment of distributions on our common shares so long as either or both
of the notes are outstanding.  Any future distributions in respect of the common
shares  may  not  be  paid  unless  all  accrued  but  unpaid   preferred  share
distributions have been or are concurrently satisfied.

      In order to obtain the consent of the construction  and mezzanine  lenders
financing  our Bank One  Corporate  Center  to close  the SCPG  transaction,  we
agreed, among other things, to make certain escrow deposits,  reallocate certain
line items in the project  budget and make certain  other  revisions to the loan
documents.  See  Note  6  -  Debt  Covenants  to  these  Consolidated  Financial
Statements for further  discussions  regarding our compliance  requirements with
various financial loan covenants.


<PAGE>


10.  Discontinued Operations

      The  components  of  discontinued  operations  through  the  date  of each
respective  sale for sold  properties for the year ended December 31, 2002 and a
full year of operations for the years ended December 31, 2001 and 2000 are shown
below:

<TABLE>
<CAPTION>

                                                         Year Ended December 31
                                                    2002          2001            2000
                                            ------------------------------------------------
                                                          (dollars in thousands)
<S>                                           <C>                <C>            <C>
Rental revenue............................     $   10,820        $  21,368      $  20,818
Tenant reimbursements.....................          5,853           11,261         10,862
Other property income.....................            119              309            237
                                            -------------------------------------------------
   Total revenue..........................         16,792           32,938         31,917

Property operations.......................          3,896            7,272          6,904
Real estate taxes.........................          3,273            6,188          6,163
Depreciation and amortization.............          2,505            6,561          6,108
Interest:
   Expense................................          3,879            8,637          8,581
   Amortization of deferred
     financing costs......................             57              311            363
                                            -------------------------------------------------
   Total expenses.........................         13,610           28,969         28,119
                                            -------------------------------------------------

Income before provisions for asset
   impairment, net gain (loss) on sale
   of real estate and minority interests..          3,182            3,969          3,798
Provisions for asset impairment(1)........        (34,430)          (1,500)             -
Net loss on sales of real estate(2).......         (3,211)               -              -
Minority interests........................         14,196           (1,002)        (1,452)
                                            -------------------------------------------------
Discontinued operations...................     $  (20,263)       $   1,467      $   2,346
                                            =================================================

</TABLE>



(1)  Impairment  losses during 2002 include $33.6 million related to assets sold
     during the second  quarter  when the  anticipated  hold  period was reduced
     based upon our decision to sell certain non-core suburban office properties
     and $0.8  million  related  to an office  property  sold  during the fourth
     quarter  based upon our  decision to actively  market the property and exit
     the Tennessee  market (an impairment  loss of $1.5 million  related to this
     office  property was  recognized  during the first  quarter of 2001 and the
     related  assets were shown as property held for sale at December 31, 2001).
     The Tennessee  office  property was classified as property held for sale at
     December  31,  2001 as the sale was  determined  to be  probable  and would
     qualify for  recognition  as a completed  sale within one year.  We entered
     into a contract to sell our non-core  suburban  office  properties in April
     2002.  The purchase price less costs of sale was used to determine the fair
     value of the properties and related  assets.  We determined the fair market
     value of the Tennessee  office  property based upon the purchase price less
     costs of sale of a contract with a third party  purchaser and our knowledge
     of the Tennessee marketplace.

(2)  See Note 16 - Property  Acquisitions and Dispositions to these Consolidated
     Financial Statements for a description of these sales.


<PAGE>


11.  Earnings Per Share

      The following  table sets forth the  computation  of our basic and diluted
net income available per  weighted-average  common share of beneficial  interest
for the years ended  December 31,  2002,  2001 and 2000  (dollars in  thousands,
except per share amounts):



<PAGE>

<TABLE>
<CAPTION>




                                                                          Year ended December 31
                                                                     2002          2001          2000
                                                                -------------------------------------------
<S>                                                            <C>             <C>             <C>
Numerator:
   (Loss) income from continuing operations before minority
     interests..............................................    $     (25,932)  $   (16,181) $     16,208
   Minority interests.........................................         16,517        10,363        (1,551)
   Net income allocated to preferred shareholders.............        (11,280)      (12,150)      (12,147)
                                                                -------------------------------------------
   (Loss) income before (loss) gain on sales of real estate,
     discontinued items and cumulative effect of
     change in accounting principles......................            (20,695)      (17,968)        2,510
   (Loss) gain on sales of real estate, net of minority
     interests................................................           (943)          174        (1,271)
   Discontinued operations, net of minority interests.........        (20,263)        1,467         2,346
   Cumulative effect of change in accounting
     principles, net of minority interests....................              -          (321)       (1,843)
                                                                -------------------------------------------
Numerator for earnings per share - (loss) income
  available to common shares..................................  $     (41,901)   $  (16,648)  $     1,742
                                                                ===========================================

Denominator:
   Denominator for basic earnings per share - weighted
     average common shares...............................          15,673,544    15,630,586    15,408,822
Effect of dilutive securities:
   Employee stock options.....................................              -             -       120,524
   Employee stock grants......................................              -             -         9,991
                                                                -------------------------------------------
Denominator for diluted earnings per share - adjusted
   weighted average common shares and assumed
   conversions........................................             15,673,544    15,630,586    15,539,337
                                                                ===========================================


BASIC AND DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER
   WEIGHTED-AVERAGE COMMON SHARE:
(Loss) from continuing operations.............................  $      (1.32)  $     (1.15)   $      0.16

(1.15)0.16
Discontinued operations, net of minority interests............         (1.29)         0.09           0.15

(Loss) gain on sales of real estate, net of minority
   interests..................................................         (0.06)         0.01          (0.08)

Cumulative effect of change in accounting principles,
   net of minority interests............................                   -         (0.02)         (0.12)
                                                                -------------------------------------------
Net (loss) income available per weighted-average
   common share of beneficial interest - basic and
   diluted.............................................         $      (2.67)  $     (1.07)   $      0.11

                                                                ===========================================

</TABLE>


      For the 2002  earnings  per share  computation,  2,293,591  of our options
during the first quarter of 2002, 2,115,755 options during the second quarter of
2002,  2,029,926 options during the third quarter of 2002, and 2,008,191 options
during  the fourth  quarter  of 2002 were not  included  in the  computation  of
diluted earnings per share because the conversion would have been antidilutive.

      For the 2001  earnings  per share  computation,  2,574,754  of our options
during the first quarter of 2001, 2,550,642 options during the second quarter of
2001,  2,304,741 options during the third quarter of 2001, and 2,295,364 options
during  the fourth  quarter  of 2001 were not  included  in the  computation  of
diluted earnings per share because the conversion would have been antidilutive.

      For the 2000  earnings  per share  computation,  2,009,954  of our options
during the first quarter of 2000,  1,216,166 options during the second and third
quarters of 2000,  and 1,167,000  options during the fourth quarter of 2000 were
not  included  in the  computation  of diluted  earnings  per share  because the
conversion would have been antidilutive.

      We had  nonvested  stock  grants of 14,144 and 58,980  shares  outstanding
during the years ended December 31, 2002 and 2001, respectively,  which were not
included in the  computation  of diluted  earnings per share  because the effect
would have been antidilutive.



<PAGE>


11.  Earnings Per Share (continued)

      The  minority  interest  in  the  Operating  Partnership  had  10,996,166,
10,722,853  and  10,876,506,  weighted  average  limited  partner  common  units
outstanding   during  the  years  ended  December  31,  2002,   2001  and  2000,
respectively, of which 7,023,720, 10,661,808 and 9,662,666, respectively, may be
exchanged  for  common  shares  on a  one-for-one  basis,  subject  to our  9.9%
ownership  limitation  contained  in  our  charter,  or,  at  our  option,  cash
equivalent  to the fair market  value of a common share at the time of exchange.
In  addition,  the Cadim  Units may be  exchanged  only for  common  shares on a
one-for-one basis,  subject to a limited waiver of our 9.9% ownership limitation
contained in our charter.  The limited partner common units were not included in
the computation of diluted  earnings per share because the conversion would have
been antidilutive.

      We had  2,000,000  Series A Shares  outstanding  during  the  years  ended
December 31, 2001 and 2000 which were not included in the computation of diluted
earnings per share because they conversion would have been antidilutive. On July
16, 2002, the Series A shares were purchased by our Operating  Partnership  (See
Note 9 - Preferred Shares to these Consolidated Financial Statements).

12.  Employee Benefit Plans

      Our Plan permits the grant of share options,  share  appreciation  rights,
restricted shares,  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 share options to non-employee Trustees.

      Under the Plan,  up to  2,860,774  of our  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.

      The  Compensation  Committee of our Board of Trustees  (the  "Compensation
Committee") 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 Compensation  Committee 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.

     During  2000 and 1999,  the Board  granted  options to  purchase a total of
7,500 and 107,500,  respectively,  (exclusive of options described below as part
of our annual incentive award program) of our common shares to various employees
and executives of the Company hired in 2000 and 1999 at exercise prices equal to
the  closing  price on the  trading  day  before  the grant of the  options.  In
addition,  during 2002,  2001 and 2000,  286,320,  289,647 and 201,850  options,
respectively,   expired  or  were  voluntarily  terminated  in  connection  with
employees or executives,  who held options, resigning from the Company. In 2001,
we also repurchased 15,625 options from a former executive for a nominal payment
equal to the net value of the options and recorded  the payment as  compensation
expense.  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.

      On December 16,  1999,  the Board  granted  each of the four  non-employee
Trustees  options to acquire an  additional  5,000  common  shares at $13.19 per
share (the  closing  price on the day before  the grant of the  options).  Share
options granted to the Trustees have a term of 10 years and vested and


<PAGE>


12.  Employee Benefit Plans (continued)

became  exercisable at the rate of 33.3% per year over three years commencing on
the first anniversary of their date of grant.

      During 2000, we issued 5,000 common shares  granted to Mr. Nardi  pursuant
to his consulting  agreement  valued at the market price of our common shares at
the date of grant, totaling $0.1 million.

      As part of an annual  incentive  award  program,  on January 23, 2001, the
Board granted certain executives 15,482 shares of our common shares, and options
to  purchase  33,400 of our  common  shares at an  exercise  price of $14.31 per
share. The common share grants vested 50% on January 23, 2001 and 50% on January
15, 2002 and the  options  vested on January 23,  2001.  The Board also  granted
certain  executives  57,190 shares of our common  shares and certain  executives
options to purchase 33,400 of our common shares,  at an exercise price of $14.31
per share, as part of a long-term  incentive program.  These common share grants
and  options  vest at the rate of 25.0%  per  year in four  annual  installments
commencing on January 23, 2001.

      As part of an annual  incentive  award program,  on December 16, 1999, the
Board granted certain executives 32,668 shares of our common shares, and options
to purchase  363,891 of the our common shares at an exercise price of $13.19 per
share. The common share grants vested 50% on January 15, 2000 and 50% on January
15, 2001 and the options vested on January 15, 2000.

      The Board also  granted  certain  executives  25,380  shares of our common
shares and certain  executives and employees  options to purchase 364,200 of our
common shares,  at an exercise price of $13.19 per share, as part of a long-term
incentive  program.  These  common  share grants and options vest at the rate of
25.0% per year in four annual installments commencing on January 15, 2000.

      As part of an annual  incentive  award program,  on December 17, 1998, the
Board granted  certain  executives  24,933 common shares and options to purchase
538,889 common shares at an exercise price of $14.00 per share. The common share
grants  vested  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 common  shares,  at an exercise price of $14.00 per
share,  as part of a long-term  incentive  program.  These options vested at the
rate of 25.0% per year in four  annual  installments  commencing  on January 15,
1999.

      The unaudited pro-forma  information regarding net income and earnings per
share is required by SFAS No. 123,  "Accounting for  Stock-Based  Compensation,"
("SFAS  123") and has been  determined  as if we had  accounted  for our 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 2001 and 2000, respectively:
risk-free interest rate of 5.22% and 6.77%; expected dividend yield of 9.43% and
8.85% volatility  factor of the expected market price common shares of 0.294 and
0.307;  and a  weighted-average  expected life of the options of seven years for
2001 and 2000. There were no options granted in 2002.

      Under the fair  value  method of SFAS 123,  $158,000  ($0.01 per basic and
diluted common share),  $175,000 ($0.01 per basic and diluted common share), and
$1,153,000 ($0.07 per basic and diluted common share) would have been recognized
as additional  compensation  expense for the years ended December 31, 2002, 2001
and 2000,  respectively.  For purposes of pro-forma  disclosures,  the estimated
fair value of the options is amortized to expense over the vesting period of the
options.  The unaudited  pro-forma net (loss) income  available to common shares
was  $(27,403,000)  ($(1.75) per basic and diluted common share),  $(16,823,000)
($(1.08) per basic and diluted common share),  and $589,000 ($0.04 per basic and
diluted  common  share) for the years ended  December 31,  2002,  2001 and 2000,
respectively.  We did not recognize any  compensation  expense in 2002, 2001 and
2000 related to options granted under APB 25.



<PAGE>


12.  Employee Benefit Plans (continued)

      The effects on unaudited  pro-forma net income and pro-forma  earnings per
common share for the years ended December 31, 2002,  2001 and 2000 of amortizing
to  expense  the  estimated  fair  value of share  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 share options, and the potential for
issuance of additional  share 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 periods.

      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 opinion of our management,  the existing
models do not necessarily provide a reliable single measure of the fair value of
the options granted under the Plan.

      In February 2002,  our  Compensation  Committee  approved 2001 bonuses and
2002 stay  bonuses  totaling  $0.4  million  for  certain  members of our senior
management.  None of the  participants in the bonus program was a Trustee of the
Company.  One-half of the bonus pool was  designated as bonuses for 2001 and the
other  one-half as stay bonuses  that vested in two  increments,  two-thirds  on
April 1, 2002 and one-third on June 1, 2002.  Any vested or earned  amounts were
payable  at our option at any time on or before  August 8, 2002 in (i) cash,  or
(ii) restricted shares of the Company under the Plan, having an equivalent value
based on the average of the high and low trading  price of the common  shares on
the day before  notification of such election is given to the relevant employee.
In addition, the participants could have elected to receive any vested or earned
bonus amounts in restricted shares.  These amounts were paid entirely in cash in
August 2002.

      On May 20, 2002, we entered into  retention  agreements  with Mr. Louis G.
Conforti and Mr. Jeffrey A. Patterson,  our two Co-Presidents,  and Mr. James F.
Hoffman,  our Executive  Vice  President,  General  Counsel and  Secretary.  The
agreements  provided for a retention  payment for calendar year 2002 of $250,000
for each of Mr.  Conforti and Mr.  Patterson and $100,000 for Mr.  Hoffman.  The
retention  payments  vested on a per diem basis from the  beginning  of calendar
year 2002 so long as the participant  remained employed by us or our affiliates.
Any unvested  portions of the bonus are  forfeited in the event the  participant
voluntarily terminated his employment. Vested portions of the retention payments
were payable upon the earlier of December 31, 2002 or at the  discretion  of the
Compensation Committee of our Board of Trustees in the event of the consummation
of various capital events.  The entire retention  payment was due and payable in
the  event  the  participant   ceased  to  be  an  employee  because  of  (i)  a
participant's  death or  disability,  (ii) a change of  control  of Prime  Group
Realty Trust or (iii) our  termination  of a  participant's  employment  without
cause. In addition,  in the event the terms of a  participant's  employment were
materially  diminished  by us,  the  payment  also  became  due.  The  foregoing
retention  payments are considered a 2002 performance bonus distribution for the
purpose of calculating any termination  compensation due under the participants'
previously existing employment or severance  agreements with us. These retention
payments were paid by us in January 2003.


<PAGE>


12.  Employee Benefits Plans (continued)

      The  following  is a summary of our share  option  activity,  and  related
information  for the years ended  December 31, 2002,  2001 and 2000  (dollars in
thousands, except per share amounts):


<TABLE>
<CAPTION>


                                                                Weighted Average
                                                  Shares            Exercise
                                                Subject to          Price Per
                                                 Option              Share
                                             -----------------------------------
<S>                                          <C>                     <C>
Balance at January 1, 2000................       2,757,713           $16.30
Additional options granted................           7,500            15.13
Options canceled..........................        (201,850)           15.73
                                            ------------------------------------
Balance at December 31, 2000..............       2,563,363            16.35
Additional options granted................          33,400            14.31
Options exercised.........................          (1,625)           13.88
Options canceled or repurchased...........        (305,272)           15.89
                                            ------------------------------------
Balance at December 31, 2001..............       2,289,866            16.38
Options canceled or repurchased...........        (286,320)           18.41
                                            ------------------------------------
Balance at December 31, 2002..............       2,003,546           $16.09
                                            ====================================

</TABLE>


      At December 31, 2002, options with respect to 1,924,227 common shares were
exercisable  with exercise  prices ranging from $13.19 to $21.00 per share and a
weighted   average   exercise   price  of  $16.20  per  share.   The   remaining
weighted-average   contractual  life  of  these  options  was  5.65  years.  The
weighted-average  grant date fair value of all options  granted during the years
ended December 31, 2001 and 2000 was $1.39 and $2.01, respectively.

13.  Related Party Transactions

     On March 19,  2002,  we  entered  into an  agreement  appointing  Julien J.
Studley,  Inc. as our exclusive  agent to lease space on our behalf at One North
Wacker  Drive  which  is  owned  by a third  party.  We have  certain  financial
obligations relating to the space under the Citadel Lease Obligation. Mr. Jacque
M.  Ducharme,  one of our  Trustees,  is the Vice  Chairman  Western  Region and
Director of Julien J. Studley,  Inc. Julien J. Studley,  Inc. earned commissions
of $0.2 million for services provided to us in 2002.

     On April 8, 2002, we announced the  resignations  of Mr. Michael W. Reschke
from his  position as  Chairman  of our Board and Mr.  Richard S. Curto from his
position as our Chief  Executive  Officer.  Mr. Reschke  continues to serve as a
member of our Board.  Mr.  Curto's term as a member of our Board  expired on May
31,  2002.  We appointed  Mr. Nardi as Acting  Chairman of our Board on April 8,
2002.  Prior to that date,  Mr. Nardi was Vice Chairman of our Board since 1997.
We appointed Mr. Nardi as Chairman of our Board on May 31, 2002.

      Mr. Reschke and Mr. Curto each entered into a separation agreement with us
in connection with their resignations.  The separation  agreement  applicable to
Mr. Reschke provided for among other things,  severance compensation of $625,000
and other accrued compensation of $42,000.  The termination  compensation to Mr.
Reschke was paid in part in six monthly  installments  of $19,000 each, with the
balance, with interest thereon determined in accordance with the agreement, paid
on November 8, 2002.  In addition,  Mr.  Reschke's  unvested  stock  options and
restricted stock awards were cancelled pursuant to his separation agreement. The
separation  agreement  applicable  to Mr. Curto  provided,  among other  things,
severance  compensation  of $935,000 and other accrued  compensation of $90,000.
The  termination  compensation  to Mr.  Curto  was  paid in part in six  monthly
installments of $32,000 with the balance,  with interest  thereon  determined in
accordance  with the  agreement,  paid on November  8, 2002.  In  addition,  Mr.
Curto's  unvested stock options and restricted  stock awards became fully vested
pursuant to his separation  agreement in exchange for certain other  concessions
from Mr. Curto. Finally, on April 18, 2002, Mr. Curto voluntarily forfeited


<PAGE>


13.  Related Party Transactions (continued)

his options to acquire  175,000 of our common shares,  which were granted to him
at the time of our initial public offering.

      On August 5, 2002, we terminated a tax-deferred exchange trust relating to
a deposit of a portion of net  proceeds  from a sale of land in  February  2002.
This resulted in $0.6 million of net proceeds being released to us, and resulted
in the accrual of a $0.2  million  payment to Mr.  Nardi and  affiliates  of Mr.
Nardi under a tax  indemnification  agreement  entered into by us at our initial
public  offering.   See  Note  15  -  Commitments  and  Contingencies  to  these
Consolidated  Financial Statements for additional information regarding this tax
indemnification.

      On September  27, 2002, we terminated  our lease of  approximately  33,690
square feet at Bank One Corporate Center.

      At December 31, 2002 and 2001, respectively, we had a receivable of a $0.7
million  and  $0.1  million  from  Mr.  Nardi  and  certain  of his  affiliates,
representing  rent  receivable on our 1051 Kirk Road property due under a master
lease agreement with us for the period from October 2001 through  December 2002.
Payments  of  rent  per  the  agreement  are to be  deducted  from  common  unit
distributions made to Mr. Nardi and his affiliates. Because there were no common
unit  distributions for this period, no payments were applied to the outstanding
balance and rent  continues to accrue at the rate of  approximately  $48,000 per
month.  The term of the master lease expires on the earlier of March 31, 2003 or
the date the property is leased under qualifying  leases.  We have recorded such
rent as a reduction of our basis in the property.

      At our  initial  public  offering  in  November  1997,  we entered  into a
consulting  agreement with Mr. Nardi having an initial three-year term. The term
of the consulting agreement automatically extended for additional one-year terms
unless  terminated by either party.  In February 2002, and prior to the date Mr.
Nardi became our  Chairman,  our Board  approved a commission  of $75,000 to Mr.
Nardi in connection  with a  build-to-suit  development  (See "Business - Recent
Developments"), which was paid to an affiliate of Mr. Nardi in October 2002.

      Since  the  resignations  of our  former  Chairman  and our  former  Chief
Executive  Officer on April 8, 2002, Mr. Nardi has devoted  substantially all of
his time and  energy  toward  his duties as our new  Chairman.  Effective  as of
November 2002, the  consulting  agreement  between Mr. Nardi and us was mutually
terminated,  and  Mr.  Nardi  became  a  full-time  employee.  In  light  of the
additional  responsibilities  assumed by Mr.  Nardi  since  April 8,  2002,  our
Compensation  Committee  met in January  2003 and  approved  an  increase in Mr.
Nardi's  compensation  from  $220,000  per year to a total of $400,000 per year,
retroactive to April 8, 2002. Our  Compensation  Committee also approved a bonus
of $400,000 for Mr. Nardi for 2002 and awarded Mr. Nardi  100,000  stock options
at $5.02 per share (the closing price on the last trading day immediately  prior
to the award).  These  options vest over three years in one-third  increments on
each annual anniversary of the award.

      For the year beginning January 1, 2001, the Services Company elected to be
treated as a Taxable  REIT  Subsidiary  (as defined in the Code).  On January 1,
2001 we acquired all of the  outstanding  common  stock of the Services  Company
previously  owned by Mr.  Reschke  and Mr.  Curto and had the  Services  Company
redeem all of the preferred stock  outstanding  previously held by the Operating
Partnership.  Effective  January,  2001, we  consolidate  the  operations of the
Services Company.

      Prior to January 1, 2001, we owned 100% of the nonvoting  preferred  stock
of the Services  Company which had an initial carrying value of $0.4 million and
we provided a loan in the amount of $4.8 million to the Services Company (unpaid
interest expense was included in the  line-of-credit  balance  described below),
with  interest at 11% per annum,  payable  quarterly  and principal due November
2007.


<PAGE>


13.  Related Party Transactions (continued)

      We also paid general and administrative expenses (primarily rent, salaries
and  benefits) of $0.6  million on behalf of the  Services  Company for the year
ended December 31, 2000.

      We own a 50% common  ownership  interest in 77 West Wacker Drive, LLC ("77
LLC"), an unconsolidated  joint venture that owns the property at 77 West Wacker
Drive in Chicago,  Illinois.  In connection with our management of the property,
we are entitled to receive  property  management fees and lease  commissions for
services  performed and  reimbursement of costs we pay on behalf of 77 LLC. Such
amounts for the years ended  December 31, 2002,  2001 and 2000 are summarized as
follows:


<TABLE>
<CAPTION>
                                                            2002        2001        2000
                                                         -------------------------------------
                                                                  (dollars in thousands)
<S>                                                      <C>        <C>           <C>
Management fees (1)...................................   $  1,053   $  1,013       $   962
Payroll, leasing costs and other operating costs......      2,088      1,898         1,732

</TABLE>


(1) We earn a  monthly  management  fee  equal  to 2.5% of gross  rental  income
calculated on a cash basis.

      During the year ended  December  31, 2000 (prior to us  consolidating  its
operations  effective  January 1, 2001),  the Services  Company provided us with
development,   construction,   construction  management,  leasing  and  property
management services, which are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>

                                                          Year ended
                                                          December 31
                                                             2000
                                                       -------------------
       <S>                                               <C>
       Development, construction and construction
          management................................     $    4,094
       Leasing......................................          1,806
       Property management..........................            458

</TABLE>

      We had  lease  agreements  with  minority  interest  holders  and  certain
affiliates, from which we recognized rental revenue of $0.2 million for the year
ended December 31, 2000, and tenant  reimbursements  revenue of $0.1 million and
$0.2 million for the years ended  December 31, 2001 and 2000,  respectively.  In
2000,  we provided  $2.0 million to one of the minority  interest  holders,  and
certain  affiliates  for tenant  improvements.  During  2000,  we also paid $0.2
million of lease commissions to a minority interest holder.

      We recognized  rental revenue of $1.0 million from a nonaffiliated  former
minority interest holder (no longer an investor as of September 20, 2000) during
2000. This lease was terminated in 2000.

     The  Operating  Partnership  acquired  29.6  acres of land in 2000 from Mr.
Nardi for a total purchase price of $3.8 million paid in limited  partner common
units. On March 7, 2002, the Operating  Partnership  acquired 24.9 acres of land
from Mr.  Nardi  for a total  purchase  price of $3.3  million  paid in  344,331
limited   partner  common  units.   This  purchase   fulfilled  our  contractual
requirements to acquire land from Mr. Nardi.

     We have a  receivable  at  December  31,  2002 and 2001 of $26,000 and $0.4
million,  respectively,  due from PGI  (included in other  assets),  relating to
PGI's indemnification to us for certain costs of environmental remediation.



<PAGE>


13.  Related Party Transactions (continued)

      During  2000,  we  recognized  $2.0 million of lease  commissions  revenue
(included in other  revenue)  from a  consolidated  real estate  joint  venture,
representing  the  portion of the total lease  commissions  earned for which the
other partner's minority interest in the joint venture is at risk.

      During 2000,  prior to  consolidating  the operations of 180 North LaSalle
Street effective August 1, 2000, we recognized $1.0 million of lease commissions
revenue,  net of  commissions  expense,  (included  in other  revenue) for lease
commissions earned related to 180 North LaSalle Street.

      We recognized  property management fee income (included in Service Company
revenue in 2002 and 2001 and other income in 2000) from an  unconsolidated  real
estate  joint  venture in the amounts of $0.5  million  during each of the years
ended December 31, 2002, 2001 and 2000, respectively.

      Governor James R. Thompson,  a Company  Trustee,  is the Chairman of a law
firm which has provided legal services to us during 2002, 2001 and 2000. The law
firm  earned  fees of $1.7  million,  $2.8  million  and $1.8  million for legal
services provided to us in 2002, 2001 and 2000, respectively.

      During 2001,  we elected not to use the proceeds  from a property  sale to
acquire a  replacement  property  but  rather  elected to use the  proceeds  for
general  corporate  purposes.  A portion of the gain on the sale of the property
was covered by tax  indemnity  agreements  with two  partners  in our  Operating
Partnership.  As a result,  for the year ended  December 31, 2001, we recorded a
$1.2 million tax indemnification  loss (included in other expense)  representing
our liability to the partners for tax indemnity payments under these agreements.

      PGI leases 22,620  square feet of space at 77 West Wacker Drive,  Chicago,
Illinois,  an office  building  owned by one of our  unconsolidated  real estate
joint  ventures.  PGI paid rent and operating  expense  escalations to the joint
venture totaling $1.0 million, $0.8 million and $0.8 million for the years ended
December 31, 2002, 2001 and 2000, respectively.  PGI's lease expires October 31,
2007 with an option,  effective  April 30, 2002, to terminate the lease upon six
months written notice.

      During 2002,  2001 and 2000,  we incurred  rent  expense of $35,600,  $0.2
million  and $0.2  million,  respectively,  under the terms of a  month-to-month
sublease with PGI. This sublease was terminated on February 28, 2002.

      On April 25, 2001, our Operating Partnership acquired 33,085 of our common
shares of beneficial interest, $0.01 par value per share, from a former employee
for a price of $0.5  million.  The  acquired  shares  have been  pledged  to the
lenders under the Bank One Corporate  Center  mezzanine  loan as collateral  for
certain   obligations   under  the  loan  agreement.   In  connection  with  the
acquisition,  the former  employee  agreed to cancel all of his options  granted
pursuant to our 1997 Share  Incentive Plan and an award agreement dated December
17, 1998 between us and the former  employee in exchange for a payment  equal to
the net  value of the  options  and we  recorded  the  payment  as  compensation
expense.

14.  Fair Values of Financial Instruments

      SFAS No.  107,  "Disclosures  About Fair Value of  Financial  Instruments"
("SFAS  107")  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.

      We 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  balance sheets  approximates  their fair
value.

      We maintain our 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. We believe that the risk is not significant.

Mortgage and Notes Payable, Bonds Payable and Construction Financing

      The carrying amount of our variable and fixed rate debt (including accrued
interest)  approximates  fair  value  based on the  current  borrowing  rate for
similar types of debt.

      At December  31,  2002,  the fair value of our  interest  rate  protection
agreements is a net asset of $967.

15.  Commitments and Contingencies

      On August 29, 2002, 180 Acquisition Company, LLC ("180 Acquisition") filed
a  complaint  (the  "Complaint")  against  us, our  Operating  Partnership,  our
Services Company, one of our subsidiaries holding our interests in the 180 North
LaSalle Street property in Chicago, Illinois (the "180 Interests"),  and Jeffrey
A. Patterson,  our Co-President and Chief Investment Officer.  The Complaint was
filed in the  County  Department,  Law  Division  of the  Circuit  Court of Cook
County, Illinois.

      In the  Complaint,  180  Acquisition  alleges that the  defendants  orally
promised to sell the 180 Interests to them, and that 180  Acquisition  relied on
these alleged  promises,  notwithstanding  the facts that (i) a written contract
was not entered into among the parties and (ii) we  terminated  negotiations  to
sell the 180  Interests to 180  Acquisition  in July 2002.  180  Acquisition  is
asking the Court to award it $1.7 million in direct  damages,  $15.7  million in
lost profits and $34.9 million in punitive  damages.  We vigorously  dispute the
allegations contained in the Complaint,  deny making the promises alleged by the
plaintiff and believe that we have valid defenses in this case.  However,  there
can be no assurances that the outcome of this case will be favorable to us.

      We are a  defendant  in legal  actions  arising  in the  normal  course of
business.  We  believe  that the  ultimate  outcome  of those  actions  will not
materially affect our consolidated financial position or results of operations.

      All of our  properties  were  subject to Phase I or similar  environmental
assessments  by  independent  environmental  consultants  which were intended to
discover information regarding,  and to evaluate the environmental condition of,
the surveyed property and surrounding properties.  We are aware of contamination
at  certain  of our  industrial  properties  which are  already  in  remediation
programs  sponsored  by the state in which they are located.  Our  environmental
consultants  estimate  that  remedial  action plans will have a probable cost of
approximately  $3.2  million.  During  1997,  a  liability  of $3.2  million was
recorded  (included in other liabilities at December 31, 2002 and 2001).  During
1997,  PGI,  the  former  owner of the above  mentioned  industrial  properties,
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.  PGI has  contractually  agreed  to  indemnify  us for any  environmental
liabilities  we may incur in  connection  with our  Chicago,  Hammond,  and East
Chicago  Enterprise  industrial parks. In 1998, PGI sued a then current (and now
former)  tenant  of one of the  properties  to  recover  the  costs  of  certain
environmental remedial action plans.

      We are also aware of contamination at two other properties.  At one of the
properties,  the  tenant  has  provided  us with an  indemnity  for all the cost
associated with the environmental remediation and


<PAGE>


15.  Commitments and Contingencies (continued)

the tenant has purchased the property. The second property is in the remediation
program sponsored by the state in which it is located and the previous owner has
placed in an escrow  account $0.8  million (the maximum cost the previous  owner
has  agreed to pay),  which is being  used in the clean up of the  property  and
obtain  a  no  further  remediation  letter  from  the  Illinois   Environmental
Protection Agency approving the completion of our remediation work. Accordingly,
we do not  anticipate  any  material  liability  related to these  environmental
matters.

      In  November  2001,  at the request of the  Department  of the Army of the
United  States of America (the  "DOA"),  we granted the DOA a right of entry for
environmental  assessment and response in connection  with our property known as
the Atrium at 280 Shuman Boulevard in Naperville,  Illinois (the "Atrium").  The
DOA  informed us that the  property  was located  north of a former Nike Missile
Base and that the DOA was investigating  whether certain regional  contamination
of the groundwater by  trichloethene  ("TCE") emanated from the base and whether
the DOA would be required to restore the  environmental  integrity of the region
under the Defense  Environmental  Restoration  Program for Formerly Used Defense
Sites. In December 2001, the results from the tests of the groundwater  from the
site indicated  elevated levels of TCE. It is currently our understanding  based
on information provided by the DOA and an analysis prepared by its environmental
consultants that (i) the source of the TCE contamination did not result from the
past or current activities on the Atrium property, (ii) the TCE contamination is
a regional problem that is not confined to the Atrium, and (iii) the DOA has not
yet  identified  the  source of the TCE in the  groundwater.  Our  environmental
consultants  have  advised it that the United  States  Environmental  Protection
Agency (the "EPA") has issued a Statement of Policy  towards  owners of property
containing  contaminated  acquifers.  According to this policy,  it is the EPA's
position that where  hazardous  substances have come to be located on a property
solely as a result of subsurface migration in an aquifer from an offsite source,
the EPA will not take enforcement actions against the owner of the property. The
groundwater  underneath  this  property is  relatively  deep,  and the  property
obtains its potable  water  supply  from the City of  Naperville  and not from a
groundwater well. Accordingly, we do not anticipate any material liability to it
because of this TCE contamination.

      We have  contracts  to acquire 30.3 acres of land for  approximately  $2.4
million.  These acres must be  purchased  by June 2003.  We are required to make
periodic installment  payments,  of which $0.3 million and $0.6 million was paid
in 2002 and 2001 (amount  included in property  held for or under  development),
respectively.

      The Operating  Partnership  entered into a tax  indemnification  agreement
with certain  principals  affiliated with one of our former  executive  officers
which  contributed  properties to us during our initial  public  offering  ("IBD
Contributors")  pursuant  to which the  Operating  Partnership  is  required  to
indemnify the IBD Contributors for, among other things, the income tax liability
that  would  result  from the  income  or gain  which  they  recognize  upon the
refinancing or repayment by the Operating  Partnership of its liabilities or the
sale or other  disposition by the Operating  Partnership of the properties  they
contributed.  Under the terms of the agreement,  the Operating  Partnership will
indemnify  the IBD  Contributors  for certain  income tax  liabilities  based on
income or gain which the IBD Contributors are required to include in their gross
income for  federal or state  income tax  purposes as a result of such an event.
This indemnity covers these income taxes, interest and penalties and is required
to be  made  on a  "grossed  up"  basis  that  effectively  results  in the  IBD
Contributors  receiving the indemnity  payment on a net,  after-tax  basis.  The
percentage of the tax liabilities which the Operating Partnership is required to
indemnify is 60% for the taxable year ending on December 31, 2002,  and declines
by 10% each year thereafter  until December 31, 2007. The Operating  Partnership
is not required to indemnify the IBD Contributors for income or gain realized by
them after the taxable year ended  December  31, 2007.  We have not recorded any
liability and estimate our maximum  possible  exposure  under this  indemnity at
December 31, 2002 is $4.3 million.

      PGI has entered into an agreement with the Operating  Partnership pursuant
to which PGI has agreed to indemnify the Operating  Partnership  for any amounts
paid by the Operating Partnership to


<PAGE>


15.  Commitments and Contingencies (continued)

the IBD Contributors pursuant to such agreement; provided, that PGI is liable to
the Operating Partnership for such amounts only to the extent that the Operating
Partnership  uses  its best  efforts  to avoid  such  tax  liability  (including
exploring the opportunity for a tax-free exchange under Section 1031 of the Code
for the transaction that gave rise to the obligation under such agreement).

      The  Operating   Partnership  also  entered  into  a  tax  indemnification
agreement  with certain  principals  affiliated  with Mr. Nardi who  contributed
properties  to us during  our  initial  public  offering  ("NAC  Contributors"),
pursuant to which the  Operating  Partnership  is required to indemnify  the NAC
Contributors for, among other things, the income tax liability that would result
from the income or gain which they recognize  upon the  refinancing or repayment
by the Operating Partnership of its liabilities or the sale or other disposition
by the Operating Partnership of the properties they contributed. Under the terms
of the agreement,  the Operating Partnership will indemnify the NAC Contributors
for certain tax liabilities  based on income or gain which the NAC  Contributors
are required to include in their gross income for federal,  applicable state and
certain local income tax purposes as a result of such an event.  This  indemnity
covers these income taxes,  interest and penalties and is required to be made on
a "grossed up" basis that effectively results in the NAC Contributors  receiving
the  indemnity  payment on a net,  after tax basis.  On August 8, 2000,  the NAC
Contributors  converted  927,100  general  partner common units of the Operating
Partnership  into 927,100  limited  partner common units.  These limited partner
common units are exchangeable  for common shares on a one-for-one  basis, or, at
our option,  cash  equivalent  to the fair market value of a common share at the
time of exchange.  In connection  with the conversion,  the tax  indemnification
agreement   with  the   affiliates   was   amended  to  provide   that  the  tax
indemnification by the Operating Partnership is reduced by 10% per year over the
10-year term of the tax indemnification agreement,  effective retroactively from
our initial public  offering.  The percentage of the tax  liabilities  which the
Operating  Partnership  is required  to  indemnify  is 60% for the taxable  year
ending on December 31,  2002,  and  declines by 10% each year  thereafter  until
December 31, 2007.  The Operating  Partnership  is not required to indemnify the
NAC  Contributors  for income or gain  realized by them after the  taxable  year
ended  December 31, 2007.  We have not recorded any  liability  and estimate our
maximum  possible  exposure  under this  indemnity at December 31, 2002 is $12.1
million.

      PGI has also entered an agreement with the Operating  Partnership pursuant
to which PGI has agreed to indemnify the Operating  Partnership  for any amounts
paid by the  Operating  Partnership  to the  NAC  Contributors  pursuant  to the
agreement;  provided,  that PGI is liable to the Operating  Partnership  for the
amounts only to the extent that the Operating  Partnership used its best efforts
to avoid such tax liability  (including exploring the opportunity for a tax-free
exchange  under Section 1031 of the Code for the  transaction  that gave rise to
the obligation under such agreement.)

      In February  2002,  we sold vacant land in Aurora,  IL, a portion of which
was covered by the tax  indemnity  with the NAC  Contributor  and  deposited the
proceeds into a tax-deferred  exchange  trust. In August 2002, we elected not to
use the proceeds to acquire a replacement  property,  thereby triggering the tax
gain on the sale.  As a  result,  we have  accrued  indemnity  payments  of $0.2
million to the NAC Contributor and have recorded the corresponding loss in other
expense.

      On  December  12,  1997,  we  purchased  and  amended  the  mortgage  note
encumbering the property known as Continental Towers located in Rolling Meadows,
Illinois (we  currently  receive all of the economic  benefits from the property
and have consolidated the operations). As part of this transaction, we agreed to
indemnify the two limited partners (the "Principals") of the limited partnership
which owns the property  for,  among other  things,  the federal and  applicable
state  income tax  liabilities  that  result  from the income or gain which they
recognize upon refinancing,  sale,  foreclosure or other action taken by us with
respect to the property or the mortgage note (a "Tax Event"). Under the terms of
the agreement, if an Indemnification Event, as defined,  results in a Tax Event,
we are required to immediately pay to the Principals the amount of any resulting
federal or state tax, including any interest and penalties,  as well as a "gross
up" amount that effectively results


<PAGE>


15.  Commitments and Contingencies (continued)

in the Principals  receiving  this indemnity  payment on a net, after tax basis.
However,  if a legal opinion is obtained from  independent  tax counsel that the
Indemnification  Event  "should"  not trigger a Tax Event  resulting  in taxable
income or gain to the Principals,  no indemnity payment is immediately required.
If the legal  opinion  obtained  from  independent  tax counsel  states that the
Principals  have a "reasonable  basis" for reporting the  Indemnification  Event
without   including  any  taxable  income  or  gain,  no  indemnity  payment  is
immediately required. In either case, the indemnity payment would be required if
a Tax Event  occurred.  However,  if a  "reasonable  basis"  opinion is received
regarding an  Indemnification  Event and if the equity market  capitalization of
the  Company  is less than $400  million  (but more than $200  million),  we are
required to deposit 50% of the total indemnity  amount into an escrow in cash or
in the form of a  letter-of-credit.  If (i) an Indemnification  Event occurs and
our equity  market  capitalization  falls  below $200  million  for more than 30
consecutive  trading  days,  (ii) or  immediately  after  we  sell or  otherwise
disposes  of the  lesser of $100  million  or 33% of our gross  assets  within a
twelve-month   period  ("a  Trigger   Disposition"),   we  desire  to  cause  an
Indemnification  Event and our equity  market  capitalization  is less than $200
million,  then we will be required to deposit 100% of the total indemnity amount
into the  escrow.  In  addition,  in the case of a Trigger  Disposition  and our
equity  market  capitalization  falls below $200  million,  the  Principals  may
acquire the general  partnership  interest in the limited partnership which owns
the  property  for a nominal  amount and be able to prevent the  Indemnification
Event from occurring.  The tax indemnity  obligation expires January 5, 2013. We
have not recorded any  liability and estimate its maximum  possible  exposure at
December 31, 2002 is $57.1 million.

      After  our  public  announcement  on  August  28,  2001  of  our  proposed
acquisition  by Cadim inc.,  an  affiliate  of CDP Capital and the Prime  Group,
Inc., an affiliate of Mr.  Reschke,  five purported  class action  lawsuits were
filed  against us and our  trustees,  three in the Circuit  Court for  Baltimore
City, Maryland, one in the Circuit Court for Montgomery County, Maryland and one
in the Circuit Court of Cook County (Chancery Division), Illinois. Also named as
defendants in certain of the lawsuits are The Prime Group, Inc., Cadim, inc. and
CDP Capital. The purported plaintiff classes consisted of our shareholders.  The
actions alleged, among other things, that the potential  acquisition,  which was
subsequently  withdrawn by Cadim in October  2001,  would under  compensate  our
shareholders  for their common  shares and that certain  members of our board of
trustees  breached their fiduciary  duties by allegedly  engaging in a scheme to
acquire our  outstanding  common shares at an  inadequate  purchase  price.  The
plaintiffs in these lawsuits sought, among other things,  certification of their
classes,  injunctive  relief against the completion of the proposed  acquisition
and  attorneys'  fees and costs.  Following  the October 2001  withdrawal of the
proposal by Cadim inc.,  the  Company  and the other  parties to these  lawsuits
agreed  to  halt  further   proceedings  until  the  possibility  of  a  similar
transaction  is  definitively  foreclosed.  Three of these  lawsuits  have  been
subsequently  voluntarily  dismissed  by the parties to these  lawsuits  and the
other two lawsuits are in the process of being voluntarily dismissed.

      We have a 50% common  interest  in an  unconsolidated  real  estate  joint
venture  which owns an office tower  located at 77 West Wacker  Drive,  Chicago,
Illinois.  The venture has a $157.5 million mortgage note payable secured by the
property.  On November 10, 1999, the joint venture entered into an interest rate
collar agreement for the period from October 1, 2002 through  September 30, 2004
with a financial  institution for an original notional amount of $157.5 million.
The interest  rate ceiling under the agreement is based on a LIBOR index rate of
7.75% and the interest floor is based on a LIBOR index rate of 6.10%. The $157.5
million collar agreement requires the joint venture to make cash escrow deposits
to the extent that the instrument's  valuation decreases more than $5.0 million.
On March  12,  2001,  we were  replaced  by its  joint  venture  partner  as the
guarantor to the counterparties related to these collar agreements. If our joint
venture partner, as guarantor, were required to pay either of the counterparties
under the terms of the interest  rate collar  agreements,  we would be liable to
reimburse its joint venture  partner its fifty percent share of any amount paid.
As of  December  31,  2002,  $7.5  million was  escrowed  relating to the $157.5
million  collar  agreement.  On  January  6, 2003,  the  $157.5  million  collar
agreement was assigned to a different  financial  institution  for a fee of $0.1
million and modified  such that the joint venture would need to make cash escrow
deposits only to the extent that the instrument's  valuation decreases more than
$20.0 million. As a result, funds previously escrowed were returned to the joint
venture.

16.  Property Acquisitions, Placed in Service and Dispositions

      The following properties were acquired, placed in service or sold in 2002,
2001 and 2000. The results of their  operations are included in our consolidated
statements of operations from their respective dates of acquisition.

<TABLE>
<CAPTION>



                                                                          Acquisition         Month
                                                                       Cost/Construction    Acquired/
                    Property                      Location              Costs/Sales Price       Sold
-----------------------------------------------------------------------------------------------------------
                                                                  (dollars in thousands)

<S>                                              <C>                      <C>               <C>
2002 Acquisitions
Land:
   Aurora Land (1)                               Aurora, IL                 $  2,700         February
   Batavia Land (2)                              Batavia, IL                   2,400          March
   Carol Stream Land (2)                         Carol Stream, IL                800          March
                                                                       ------------------
                                                                            $  5,900
                                                                       ==================

2002 Sales
Land:
   Aurora Land (1)                               Aurora, IL                 $  7,000         February
   Aurora Land (3)                               Aurora, IL                    3,400         February
                                                                       ------------------
                                                                             $10,400
                                                                       ==================
Office:
   2000 York Road
     (Oak Brook Business Center) (4)             Oak Brook, IL
   2100 Swift Drive (4)                          Oak Brook, IL
   6400 Shafer Court (4)                         Rosemont, IL
   1699 E. Woodfield Road
     (Citibank Plaza) (4)                        Schaumburg, IL
   3800 and 3850 North Wilke Road and 3930
     Ventura Drive (Commerce Point) (4)          Arlington Heights, IL
   2205-2255 Enterprise Drive (Enterprise
     Office Center) (4)                          Westchester, IL
   1900 Algonquin Road/2000-2060
     Algonquin Road
       (Salt Creek Office Center/Sun Annex) (4)  Schaumburg, IL
   1700 East Golf Road
       (Two Century Centre) (4) Schaumburg, IL
   850, 860, 870 and 1000 Technology Way (Pine
     Meadows Corporate Center) (4)               Libertyville, IL
                                                                       ------------------
                                                                            $131,156            June
   Centre Square I (5)                           Knoxville, TN                 5,100          November
                                                                       ------------------
                                                                            $136,256
                                                                       ==================
Industrial:
   4430 Railroad Avenue (6)                      East Chicago, IN        $       600          December
                                                                       ==================

Joint Venture:
   300 West Monroe Street and 25 & 27
     South Wacker Drive (7)                      Chicago, IL               $  22,900          January
   Pine Meadows Corporate Center
      (Building E) (8)                           Libertyville, IL                  -           August
                                                                       ------------------
                                                                           $  22,900
                                                                       ==================
2002 Developments Placed In Service
   Bank One Corporate Center (9)                 Chicago, IL                $325,207          November
                                                                       ==================



</TABLE>



<PAGE>




16.  Property Acquisitions and Dispositions (continued)

<TABLE>
<CAPTION>


                                                                          Acquisition         Month
                                                                       Cost/Construction    Acquired/
                    Property                           Location        Costs/Sales Price       Sold
-----------------------------------------------------------------------------------------------------------
                                                                  (dollars in thousands)

<S>                                                <C>                 <C>                  <C>
2001 Acquisitions
Office and Industrial Properties:
   200 South Mitchell Court                       Addison, IL              $    6,100         August
                                                                       ==================

Land:
   Aurora Land (10)                               Aurora, IL               $    2,600         March
                                                                       ==================

2001 Sales
Office and Industrial:
   6700 Touhy (11)                                Niles, IL                $    5,700         March
   2675 N. Mayfair (12)                           Wauwatosa, WI                 8,800         April
   43-47 Hintz Road (13)                          Wheeling, IL                 11,700          May
                                                                       ------------------
Total office and industrial sold                                            $  26,200
                                                                       ==================
Land:
   Jorie Plaza (14)                               Oak Brook, IL            $    1,600         March
                                                                       ==================

2000 Acquisitions
Office and Industrial Properties:
   Enterprise Center II                           Westchester, IL          $    9,200        January
   6700 Touhy Avenue                              Niles, IL                     5,000         March
   7100 Madison                                   Willowbrook, IL               5,400         April
   555 Kirk Road                                  St. Charles, IL               2,600         April
   1543 Abbott Drive                              Wheeling, IL                  1,400         April
                                                                       ------------------
Total office and industrial acquired                                        $  23,600
                                                                       ==================

Land:
   Libertyville Office II Land                    Libertyville, IL         $    1,200        January
   Carol Stream Land (15)                         Carol Stream, IL              3,800         March
   Aurora Land (10)                               Aurora, IL                      500          June
   Libertyville Industrial Land                   Libertyville, IL                500        November

                                                                       ------------------
Total land acquired                                                        $    6,000
                                                                       ==================

2000 Developments Placed in Service
Office and Industrial:
   Pine Meadows Center - Bldg. C                  Libertyville, IL         $    2,200          May
   2000 USG Drive                                 Libertyville, IL              9,300         April
   1455 Sequoia Drive                             Aurora, IL                    9,400         August
                                                                       ------------------
Total developments placed in service                                        $  20,900
                                                                       ==================

</TABLE>


<PAGE>





16.  Property Acquisitions and Dispositions (continued)

<TABLE>
<CAPTION>

                                                                         Sales Price/         Month
                                                                          Acquisition       Acquired/
                    Property                           Location              Cost              Sold
-----------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                       <C>
                                                                  (dollars in thousands)
2000 Sales
Office and Industrial Properties:
   201 4th Avenue North (16)                      Nashville, TN                               April
   625 Gay Street (16)                            Knoxville, TN                               April
   4823 Old Kingston Pike (16)                    Knoxville, TN                               April
   398 Unit Parking Facility (16)                 Knoxville, TN                               April
                                                                       ------------------
                                                                            $  20,200

   2160 McGaw Road (17)                           Obetz, OH                                    June
   4849 Groveport Road (17)                       Obetz, OH                                    June
   2400 McGaw Road (17)                           Obetz, OH                                    June
   5160 Blazer Memorial Parkway (17)              Dublin, OH                                   June
   4411 Marketing Place (17)                      Columbus, OH                                 June
   600 London Road (17)                           Delaware, OH                                 June
                                                                       ------------------
                                                                               16,800

   122 South Michigan Avenue (18)                 Chicago, IL                  29,900         August
   33 North Dearborn                              Chicago, IL                  35,200       September
   320 Fullerton Avenue                           Carol Stream, IL             13,000       September
   2000 USG Drive                                 Libertyville, IL             11,200       September
   475 Superior Avenue                            Munster, IN                  12,600       September
   4100 Madison                                   Hillside, IL                    900       December
                                                                       ------------------
Total office and industrial sold                                             $139,800
                                                                       ==================

Land:
   Carol Stream Land (15)                         Carol Stream, IL         $    7,400         March
   475 Superior Avenue Land                       Munster, IN                     800          June
   Pine Meadows Center - Bldg. E (19)             Libertyville, IL              1,200        December
   300 West Monroe Street and 25 and
     77 South Wacker Drive Land (20)              Chicago, IL                  50,000        December
                                                                       ------------------
Total land sold                                                             $  59,400
                                                                       ==================

Retail Center:
   371-385 Gary Avenue                            Carol Stream, IL         $    1,100         March
                                                                       ==================



</TABLE>


<PAGE>



(1)  On February 28, 2002, we sold 52.5 acres of vacant land in Aurora, Illinois
     for $7.0 million  resulting  in a loss of $0.2  million.  Approximately  33
     acres of the 52.5 acres were  acquired  by us on  February  28,  2002 for a
     purchase price of $2.7 million.

(2)  These parcels were acquired by our Operating Partnership from affiliates of
     Mr. Stephen J. Nardi, a Trustee and Chairman of our Board,  in exchange for
     344,331  limited  partner  common units.  These  acquisitions  complete our
     obligation  under a contract  entered into with  affiliates of Mr. Nardi as
     part of our initial public offering.

(3)  Our sale of this land  resulted  in a loss of $0.1  million.  Our  Services
     Company agreed to act as the developer in connection with the  construction
     of  a  350,000  square  foot  industrial  build-to-suit  building  on  this
     property.  In connection  with this sale,  our Services  Company  agreed to
     acquire a 222,840  square  foot  industrial  building  located  in  Aurora,
     Illinois for $10.4 million.  Our Services Company  subsequently  contracted
     with a third  party to sell this  property  for a  purchase  price of $10.4
     million. We purchased and sold the property in October 2002. As part of the
     sale,  the Services  Company was required to master  lease  certain  vacant
     space in the building for a total annual rent of approximately $0.3 million
     for up to two years or until the space was leased to

<PAGE>


16.    Property Acquisitions and Dispositions (continued)

       another  tenant.  In October  2002,  our  obligation to master lease this
       space was  mitigated  upon the  leasing of the space to  another  tenant.
       During the year ended December 31, 2002, our Services Company  recognized
       $1.7  million  of  net  income  after  applicable  income  taxes,  as the
       construction   manager  in  connection  with  the   construction  of  the
       industrial build-to-suit building.

(4)    On  June  26,  2002,  we  completed  the  sale of  nine  suburban  office
       properties to an affiliate of Blackstone Real Estate  Advisors,  L.P. for
       an adjusted  sales price of $131.2  million,  excluding the assumption of
       $113.1 million of debt related to the properties (the "Blackstone Sale").
       We recorded a $33.6  million  provision for asset  impairment  during the
       quarter ended March 31, 2002 related to these  properties  based upon our
       revised  holding  period.  We recorded an additional $3.7 million loss on
       sale during the nine months ended September 30, 2002,  relating primarily
       to the  write-off  of  certain  deferred  assets  associated  with  these
       properties.

(5)    On November 21, 2002, we sold the office  building  located at 620 Market
       Street, Knoxville,  Tennessee for a gross sales price of $5.1 million and
       recorded a gain of $0.1 million in discontinued operations. In connection
       with this  sale,  we  redeemed  approximately  $3.9  million  of the $9.0
       million of bonds that  encumbered  the  property.  The  remainder  of the
       outstanding  bonds that  provided  credit  enhancement  for the bonds was
       terminated in connection with this sale.

(6)    Our  sale of this  property  resulted  in a gain of $0.4  million  and is
       reflected in discontinued operations. Net proceeds from this sale of $0.6
       million were deposited  into escrow with the lender that provides  credit
       enhancement on the bonds relating to this and other properties.

(7)    On January 16, 2002, we assigned our interest in a joint venture relating
       to certain  property  located at the northeast corner of Wacker Drive and
       Monroe  Street in Chicago,  Illinois,  to our joint  venture  partner for
       $22.9  million  and used a  portion  of the  proceeds  to repay the $16.5
       million we  borrowed  from the joint  venture  partner  in 2001.  We also
       received  an  option  which  expired,  unexercised,  on June 28,  2002 to
       repurchase our interest in the joint venture for $22.9 million plus a 10%
       compounded return.

(8)    On August 23, 2002, we  transferred  our 10%  ownership  interest in Pine
       Meadow,  LLC to our  joint  venture  partner.  In  consideration  of this
       transfer,  we were  released of our  obligations  under the joint venture
       agreement  and the  documents  that  evidenced and secured a $9.3 million
       construction  mortgage loan encumbering the property.  We recorded a $0.5
       million provision for asset impairment during the quarter ended March 31,
       2002 related to this ownership interest.

(9)    On August 1,  2002,  we and the City of Chicago  ("City")  closed the tax
       increment  financing  assistance  for  our  Bank  One  Corporate  Center,
       pursuant to which we may be entitled to receive from the City,  depending
       on the satisfaction of certain  requirements,  up to $10.0 million in tax
       increment  assistance.  The  obligation  of the  City is  evidenced  by a
       promissory note in the maximum  principal  amount of $10.0 million (which
       is  subject to  reduction  if certain  requirements  are not  satisfied).
       Interest  on the note  accrues at the rate of 9.5% per year.  Payments of
       the tax  increment  assistance  are to be made  each  January 1 after the
       project is completed, and are to be made from 50% of the incremental real
       estate  taxes   attributable  to  our  Bank  One  Corporate  Center.  The
       promissory  note  matures on December  31,  2008,  and, to the extent any
       portion  of the note  remains  unpaid  as of the  maturity  date,  we are
       required to forego such amounts.  On November 1, 2002, upon  satisfaction
       of the  majority of the City's  significant  requirements,  we recorded a
       promissory  note  receivable  in the amount of $9.4 million  (included in
       building and  improvements)  and related  accrued  interest for financial
       reporting purposes and correspondingly  reduced development costs related
       to Bank One Corporate Center.



<PAGE>


16.    Property Acquisitions and Dispositions (continued)

(10)   We have contracts that require us to purchase an additional 30.3 acres by
       June 2003 for $2.4 million.  This  purchase  will fulfill our  obligation
       under  these  contracts.   Certain  quarterly  installment  payments  are
       required.

(11)   Our  sale of this  property  resulted  in a gain  of  $0.5  million.  The
       proceeds of this sale were deposited  into a tax deferred  exchange trust
       and used to acquire 200 South Mitchell Court.

(12)   Our sale of this property  resulted in a gain of $0.3 million,  with $8.0
       million of the proceeds  from this  transaction  were  deposited  into an
       escrow as  additional  collateral  for the letters of credit that enhance
       $48.2 million of industrial revenue bonds.

(13)   Our  sale of this  property  resulted  in a gain  of  $1.6  million.  The
       proceeds  of this  sale  were  initially  deposited  into a tax  deferred
       exchange trust.  In November,  2001, we elected not to use these proceeds
       to  acquire  a  replacement  property  but  rather  elected  to use these
       proceeds for general  corporate  purposes.  A portion of the gain on this
       property was covered by tax indemnity agreements with two partners in the
       Operating  Partnership.  As a result,  we were liable to the partners for
       approximately   $1.2  million  of  tax  indemnity  payments  under  these
       agreements.

(14)   Our sale of this parcel of land adjacent to one of its office properties
       resulted in a gain of $0.4 million.

(15)   These parcels were acquired from a limited  partner common unit holder of
       the Operating Partnership.

(16)   These  properties  were sold in a single  transaction  with a total sales
       price of $20.2 million resulting in a loss of approximately $3.9 million.
       A  portion  of the  proceeds  were  used  to pay  off  $17.3  million  of
       tax-exempt bonds.

(17)   These  properties  were sold in a single  transaction  with a total sales
       price of $16.8 million, resulting in a gain of $0.1 million. The proceeds
       were used to pay off a $7.5  million  line of credit and $9.2 million was
       deposited into an escrow as collateral for existing tax-exempt bonds.

(18)   On April 19, 1999, we sold approximately 161,710 net rentable square feet
       of our 122  South  Michigan  Avenue  office  building  to  National-Louis
       University  (NLU),  resulting in a gain of $3.8 million.  As part of this
       sale,  NLU also acquired an undivided  31.56%  interest in certain common
       areas of the  property.  We  continued to own the  remaining  350,659 net
       rentable  square  feet  of the  building  and  were  responsible  for the
       management  of the entire  property.  On August 21, 2000,  the  remaining
       portion of the building was sold, resulting in an additional gain of $2.4
       million.

(19)   We formed a joint venture with Multi-Employers  Development  Partnership,
       L.P. to develop the remaining two,  three-story  office  buildings at our
       Pine  Meadows  Corporate  Center  in  Libertyville,   Illinois.  The  two
       buildings to be constructed  would contain 202,000  rentable square feet.
       We had a 10% interest in the joint  venture and,  upon  completion of the
       buildings,  would receive  ongoing  management  fees and a  proportionate
       share of the earnings of the joint  venture.  On December  21,  2000,  we
       contributed  one of the  two  parcels  of  land.  In  exchange  for  this
       contribution,  we received an initial  capital  account of $0.2  million,
       resulting in a gain of $0.4 million. We provided a guarantee to the joint
       venture for hard  construction  cost  overruns,  if any. We completed the
       first  building in November  2001. We recorded our  investment in the new
       joint venture using the equity method of accounting.  On January 8, 2002,
       we received written notice from our joint venture partner,  in accordance
       with the terms of the joint venture


<PAGE>


16.    Property Acquisitions and Dispositions (continued)

       agreement,  of its intent not to fund its capital contribution  necessary
       to develop a second building.  On August 23, 2002, we transferred our 10%
       ownership to our joint venture  partner and recorded an asset  impairment
       of $0.5 million related to our investment in this unconsolidated  entity.
       In  consideration  of this transfer,  we were released of our obligations
       under the joint venture  agreement and the documents  that  evidenced and
       secured  a  $9.3  million  construction  mortgage  loan  encumbering  the
       property. We continue to own the second parcel of land.

(20)   On  December  22,  2000,  we  contributed  these  parcels of land and two
       related  mortgage  notes  totaling  $28.0 million to a newly formed joint
       venture with an affiliate of Pritzker Realty Group, L.P. ("Pritzker"). In
       exchange  for our  contribution,  we were  credited  with an initial  net
       capital  contribution of $21.0 million under the joint venture agreement,
       representing  the fair market value of the land of $50.0 million  reduced
       by the $28.0 million first mortgage note payable  contributed and accrued
       real estate taxes and other transfer costs of $1.0 million.  The value of
       our interest in the venture also included $13.0 million  representing our
       share of the fair  market  value  discounted  cash flow  attributable  to
       leases for at least 300,000 square feet that Pritzker  committed to enter
       into once the  proposed  building  was  constructed.  As a result of this
       contribution, we recorded a loss of $7.7 million in 2000 representing the
       difference between our book value at the date of contribution, net of the
       $28.0  million of debt,  and the total value of our interest in the joint
       venture.  The joint venture  intended to construct an  approximately  1.2
       million  square  foot  office  building  on the  site.  We  recorded  our
       investment in the joint venture using the equity method of accounting. On
       January 16, 2002,  we assigned  our interest in the joint  venture to our
       joint  venture  partner for $22.9 million and repaid the $16.5 million it
       borrowed  from the joint  venture  partner in 2001.  We also  received an
       option which  expired,  unexercised,  on June 28, 2002 to repurchase  our
       interest in the joint venture for $22.9  million,  plus a 10%  compounded
       return.  As a result of assessing the effect of the impending  assignment
       of our  interest  in the  joint  venture,  we  recorded  a $15.1  million
       provision for asset  impairment  during 2001  representing the difference
       between our  investment in the joint venture and cash received in January
       2002.

      On December 16, 1997, we acquired for approximately  $51.2 million in cash
and $5.1 million in common units, the first mortgage note encumbering the office
property  known as 180 North LaSalle  Street.  During 2000,  we made  additional
advances  of $10.9  million  which  were used to fund the  redevelopment  of the
building and pay various operating  expenses.  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 $2.4 million annually, as defined,  payable monthly.  During 2000,
we received  interest  income  payments of $3.0  million.  During the year ended
December 31, 2000,  $1.9 million of interest  income was added to the  principal
balance.

      Included in the purchase of the first mortgage was a non-refundable option
to acquire the existing $85.0 million  second  mortgage on the 180 North LaSalle
Street  property for $4.4 million in common units of the Operating  Partnership.
On August 1, 2000,  we acquired  the second  mortgage  which had an  outstanding
principal  balance  of $90.6  million  under  the terms of the  option  for $1.3
million of cash.  On this date,  we also  redeemed and canceled  $0.7 million of
common units (45,287 common units), which were previously issued pursuant to the
option.  We will receive all of the economic  benefits  from our interest in the
property  and  therefore,  have  consolidated  the  operations  of the  property
effective  August  1,  2000.  We also  have 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 $2.0 million.  The Services Company provides property management and
leasing services for the property  pursuant to a 10-year  management and leasing
contract.

17.  Investments in Unconsolidated Joint Ventures

      We have  investments  in two joint ventures which we account for using the
equity  method.  The following is a summary of the  investments  and the amounts
reflected in our consolidated financial statements related to these investments.

      We own a 50% common  interest in 77 LLC,  which owns a 944,556 square foot
office building located in Chicago,  Illinois. Our interest at December 31, 2002
and 2001 was a deficit  investment of $4.2 million and $5.3 million (included in
deficit  investment in unconsolidated  entity),  respectively,  and includes our
share of operations of $1.0 million, $1.5 million and $0.5 million in 2002, 2001
and  2000  (included  in  other  income),  respectively,  net  of our  share  of
distributions  received of $1.5 million in 2001 and  contributions  made of $1.1
million in 2002.  Also  included  in our  investment  is $1.0  million  and $4.7
million  representing our share of amortization of the other  comprehensive loss
in 2002 and 2001 and includes our share of unrealized losses of $1.3 million and
$3.6  million  in  2002  and  2001(included  in  other  comprehensive   income),
respectively,  our share of losses reclassified into earnings from comprehensive
income of $0.3  million  and $0.3  million in 2002 and 2001  (included  in other
comprehensive  income),  respectively,  and our share of the effect of  adopting
SFAS 133 of $1.4 million in 2001 (included in other  comprehensive  income).  In
addition, the joint venture owed us $9,574 and $0.2 million at December 31, 2002
and 2001,  respectively for management fees and the reimbursement of payroll and
other operating costs paid by us on behalf of 77 LLC property.

      We own a 23.1%  common  interest  in Plumcor  Thistle,  LLC,  which owns a
386,048 square foot office building located in Phoenix,  Arizona, that opened in
late 1999.  Our interest at December 31, 2002 and 2001 was an equity  investment
of $1.4  million and $1.9  million  (included in  investment  in  unconsolidated
entities),  respectively,  and our share of the venture's operations were $(0.2)
million,  $(0.3) million and $(0.2) million in 2002,  2001 and 2000 (included in
other income),  respectively, net of our share of distributions received of $0.2
million and $2.2 million in 2002 and 2001, respectively.

18.  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, 2000,  the Operating  Partnership
acquired and sold various office and industrial  properties  from and to various
third  parties (See Note 16 - Property  Acquisition  and  Dispositions  to these
Consolidated Financial Statements). In our management's 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  our  future  results  of
operations.

            PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                  Year ended December 31
                                                                2002                 2001
                                                         ----------------------------------------
<S>                                                      <C>                  <C>

Total revenue                                            $        182,504     $      182,013
                                                         ==================== ====================
Net loss                                                 $        (10,307)    $       (4,687)
                                                         ==================== ====================
Net Loss available to common shareholders                $        (21,587)    $      (16,838)
                                                         ==================== ====================
Loss per diluted common share                            $          (1.38)    $        (1.08)
                                                         ==================== ====================

</TABLE>



<PAGE>


19.  Segment Reporting

      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.  Our chief operating decision
makers manage the operating  segments  separately because each operating segment
represents  a  strategic  business  unit  that has  different  issues  and serve
different markets. Our reportable operating segments include the office division
and industrial  division,  with  properties  principally  located in the Chicago
metropolitan  area. We evaluate our office and industrial  divisions  operations
principally  on  their  contribution  to  overall  net  income  and  funds  from
operations.


<PAGE>


19.  Segment Reporting (continued)

      The following  summarizes our historical segment operating results for the
years ended December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                Year Ended December 31, 2002
                                                  ---------------------------------------------------------
                                                                                Corporate/
                                                                                Operating
                                                      Office      Industrial   Partnership      Total
                                                  ---------------------------------------------------------
                                                                   (dollars in thousands)
<S>                                                 <C>             <C>        <C>             <C>
Revenue:
   Rental.......................................      $ 96,412      $ 13,597   $         -     $ 110,009
   Tenant reimbursements........................        53,195         5,270             -        58,465
   Other property revenues......................         6,239           425             -         6,664
   Mortgage note interest.......................             -             -             -             -
   Services Company revenue.....................             -             -         7,366         7,366
                                                  ---------------------------------------------------------
Total revenue...................................       155,846        19,292         7,366       182,504
Expenses:
   Property operations..........................        42,619         4,651             -        47,270
   Real estate taxes............................        33,253         4,183             -        37,436
   Depreciation and amortization................        26,245         5,512           617        32,374
   General and administrative...................             -             -         9,794         9,794
   Provision for asset impairment...............        22,143         1,749         6,203        30,095
   Severance costs..............................           483             -         2,042         2,525
   Services Company operations..................             -             -         4,811         4,811
Strategic alternative costs.....................             -             -         1,561         1,561
Other expense...................................             -             -           189           189
                                                  ---------------------------------------------------------
Total expenses..................................       124,743        16,095        25,217       166,055
                                                  ---------------------------------------------------------
Operating income................................        31,103         3,197       (17,851)       16,449
Other income....................................           327             2         1,861         2,190
Interest:
   Expense......................................       (34,465)       (1,726)       (4,021)      (40,212)
   Amortization of deferred financing costs.....        (1,902)       (1,019)       (1,438)       (4,359)
                                                  ---------------------------------------------------------
Income (loss) from continuing operations before
   minority interests...........................        (4,937)          454       (21,449)      (25,932)
FFO adjustments (1) (unaudited):
   Real estate depreciation and amortization....        26,151         5,505           322        31,978
   Straight-line rental revenue.................        (3,849)         (449)            -        (4,298)
   Straight-line rental revenue from
     joint venture........................                (311)            -             -          (311)
   Straight-line rental revenue from
     discontinued operations..............                 127             -             -           127
   Amortization of costs for leases assumed.....           836             -             -           836
   Loss on non-operating sales of real estate...             -        (1,603)            -        (1,603)
   Joint venture adjustments....................         3,386             -             -         3,386
   Adjustments for sales of operating
     properties.................................             -         1,315             -         1,315
   Adjustment for provision for asset impairment
                                                        22,143         1,749             -        23,892
   Adjustment for discontinued operations.......         5,540           147             -         5,687
   Net income allocated to preferred
     shareholders...........................                 -             -       (11,280)      (11,280)
                                                  ---------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue.........                49,086         7,118       (32,407)       23,797
Straight-line rental revenue....................         3,849           449             -         4,298
Straight-line rental revenue from joint venture.
                                                           311             -             -           311
Straight-line rental revenue from discontinued
   operations...................................          (127)            -             -          (127)
                                                  ---------------------------------------------------------
Funds from operations, including
   straight-line rental revenue.................       $53,119       $ 7,567      $(32,407)      $28,279
                                                  =========================================================

</TABLE>


<PAGE>










<PAGE>


      19. Segment Reporting (continued)

<TABLE>
<CAPTION>

                                                                Year Ended December 31, 2001
                                                  ---------------------------------------------------------
                                                                                Corporate/
                                                                                Operating
                                                      Office      Industrial   Partnership      Total
                                                  ---------------------------------------------------------
                                                                   (dollars in thousands)
<S>                                               <C>            <C>          <C>              <C>
Revenue:
   Rental.......................................   $    97,216   $    11,250  $          -    $  108,466
   Tenant reimbursements........................        53,824         5,240             -        59,064
   Other property revenues......................         6,669           595             -         7,264
   Services Company revenue.....................             -             -         7,219         7,219
                                                  ---------------------------------------------------------
Total revenue...................................       157,709        17,085         7,219       182,013
Expenses:
   Property operations..........................        43,566         4,686             -        48,252
   Real estate taxes............................        32,113         3,227             -        35,340
   Depreciation and amortization................        24,542         6,000           714        31,256
   General and administrative...................             -             -         9,085         9,085
   Provision for asset impairment...............         4,574           325        15,438        20,337
   Services Company operations..................             -             -         6,898         6,898
Strategic alternative costs.....................             -             -         3,289         3,289
Other expense...................................             -             -         1,191         1,191
                                                  ---------------------------------------------------------
Total expenses..................................       104,795        14,238        36,615       155,684
                                                  ---------------------------------------------------------

Operating income................................        52,914         2,847       (29,396)       26,365
Other income....................................           794             2         3,791         4,587
Interest:
   Expense......................................       (38,195)       (3,759)       (1,260)      (43,214)
   Amortization of deferred financing costs.....        (1,844)         (446)       (1,629)       (3,919)
                                                  ---------------------------------------------------------
Income (loss) from continuing operations before
   minority interests...........................        13,669        (1,356)      (28,494)      (16,181)
FFO adjustments (1) (unaudited):
   Real estate depreciation and amortization....        24,467         5,991           270        30,728
   Straight-line rental revenue.................        (5,645)          884             -        (4,761)
   Straight-line rental revenue from
     joint venture........................                (535)            -             -          (535)
   Straight-line rental revenue from
     discontinued operations..............                (282)            -             -          (282)
   Amortization of costs for leases assumed.....           767             -             -           767
   Gain (loss) on sales of non-operating real
   estate.......................................           560          (155)            -           405
   Joint venture adjustments....................         3,351             -             -         3,351
   Adjustment for discontinued operations.......        10,357           173             -        10,530
   Net income allocated to preferred
     shareholders...........................                 -             -       (12,150)      (12,150)
                                                  ---------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue.........                46,709         5,537       (40,374)       11,872

Straight-line rental revenue....................         5,645          (884)            -         4,761
Straight-line rental revenue from joint venture.           535             -             -           535
Straight-line rental revenue from discontinued
   operations...................................           282             -             -           282
                                                  ---------------------------------------------------------
Funds from operations, including straight-line
   rental revenue (2)...........................   $    53,171  $      4,653   $   (40,374)   $   17,450
                                                  =========================================================

</TABLE>



<PAGE>



19.  Segment Reporting (continued)

<TABLE>
<CAPTION>

                                                                Year Ended December 31, 2000
                                                  ---------------------------------------------------------
                                                                                Corporate/
                                                                                Operating
                                                      Office      Industrial   Partnership      Total
                                                  ---------------------------------------------------------
                                                                   (dollars in thousands)

<S>                                                 <C>           <C>         <C>              <C>
Revenue:
   Rental.......................................    $   99,210    $   15,734  $           -    $ 114,944
   Tenant reimbursements........................        50,553         5,618             -        56,171
   Other property revenues......................         7,656           199             -         7,855
   Mortgage note interest.......................         4,864             -             -         4,864
                                                  ---------------------------------------------------------
Total revenue...................................       162,283        21,551             -       183,834
Expenses:
   Property operations..........................        43,373         3,812             -        47,185
   Real estate taxes............................        29,685         4,518             -        34,203
   Depreciation and amortization................        21,912         5,701           716        28,329
   General and administrative...................             -             -        10,359        10,359
   Provision for asset impairment...............             -             -         1,000         1,000
Strategic alternative costs.....................             -             -           717           717
                                                  ---------------------------------------------------------
Total expenses..................................        94,970        14,031        12,792       121,793
                                                  ---------------------------------------------------------

Operating income................................        67,313         7,520       (12,792)       62,041
Other income....................................         1,103             9         6,401         7,513
Interest:
   Expense......................................       (40,026)       (5,064)       (2,084)      (47,174)
   Amortization of deferred financing costs.....        (4,915)         (550)         (707)       (6,172)
                                                  ---------------------------------------------------------
Income (loss) from continuing operations before
   minority interests...........................        23,475         1,915        (9,182)       16,208
FFO adjustments (1) (unaudited):
   Real estate depreciation and amortization....        21,871         5,699           253        27,823
   Straight-line rental revenue.................        (7,580)         (857)            -        (8,437)
   Straight-line rental revenue from
     joint venture........................                (751)            -             -          (751)
   Straight-line rental revenue from
     discontinued operations..............                (921)            -             -          (921)
   Amortization of costs for leases assumed.....           833             -             -           833
   Joint venture adjustments....................         3,291             -             -         3,291
   Gain (loss) on sales of non-operating real
     estate.....................................             -           606        (6,058)       (5,452)
   Adjustment for discontinued operations.......         9,712           194             -         9,906
   Net income allocated to preferred
     shareholders...........................                 -             -       (12,147)      (12,147)
                                                  ---------------------------------------------------------
Funds from operations, excluding
   straight-line rental revenue.........                49,930         7,557       (27,134)       30,353
                                                         7,580           857             -         8,437
Straight-line rental revenue....................
Straight-line rental revenue from joint venture.
                                                           751             -             -           751
Straight-line rental revenue from discontinued
   operations...................................           921             -             -           921
                                                  ---------------------------------------------------------
Funds from operations, including straight-line
   rental revenue(2)............................    $   59,182   $     8,414    $  (27,134)   $   40,462
                                                  =========================================================

</TABLE>

(1)  We compute Funds from Operations in accordance  with standards  established
     by the Board of Governors of National Association of Real Estate Investment
     Trust's)  ("NAREIT"),  in its April 2002 White  Paper.  In addition to this
     presentation, we also present funds from operations excluding straight-line
     rental revenue (i.e.,  rental  revenues based on contractual  lease terms),
     which we believe  results  in a more  accurate  presentation  of our actual
     operating  activities.  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 (loss) income, as an indication of our performance or to
     cash flows as a measure of  liquidity  or the ability to pay  dividends  or
     make distributions.

 (2)   In accordance with SFAS No. 145 "Rescission of FASB Statements No. 4, 44,
       and 64,  Amendment of FASB  Statement No. 13, and Technical  Corrections"
       ("SFAS 145") gains or


<PAGE>


19.  Segment Reporting (continued)

       losses from  extinguishments  of debt would  seldom,  if ever,  result in
       extraordinary item classification of the gain or loss associated with the
       extinguishment.  Our  adoption  of SFAS  145  during  2002  reflects  the
       reclassification  of the  loss  on  extinguishments  of  debt  previously
       classified as an extraordinary  item to expense  resulting in a reduction
       of funds from  operations  previously  reported of $0.2  million and $3.5
       million for the years ended December 31, 2001 and 2000, respectively.

      The following  summarizes  our segment  assets as of December 31, 2002 and
2001,  and  expenditures  for real estate for the years ended December 31, 2002,
2001 and 2000.

<TABLE>
<CAPTION>

                                                                 December 31
                                                            2002             2001
                                                     ------------------------------------
                                                           (dollars in thousands)

<S>                                                    <C>                 <C>
Segment assets:
   Office........................................        $1,242,898        $1,313,195
   Industrial....................................           115,024           128,146
   Corporate/operating partnership...............            50,676            86,308
                                                     ------------------------------------
Total consolidated assets........................        $1,408,598        $1,527,649
                                                     ====================================

</TABLE>

<TABLE>
<CAPTION>

                                                                    Year ended December 31
                                                            2002             2001              2000
                                                     ------------------------------------------------------
                                                                    (dollars in thousands)

<S>                                                        <C>              <C>             <C>
Expenditures for real estate:
   Office (1)....................................          $117,515         $  16,415        $  48,129
   Industrial....................................             5,714             7,462           35,491
   Corporate/operating partnership (includes
     property under development) (1).............               825           122,546           38,717
                                                     ------------------------------------------------------
Total expenditures for real estate...............          $124,054          $146,423         $122,337
                                                     ======================================================

</TABLE>

(1)  2002 office expenditures  include $108,660 relating to the transfer of Bank
     One  Corporate  Center from property  held for or under  development  to an
     operating office property.

20.  Subsequent Events

      On January 7, 2003 we repaid $3.0  million of the  Exchangeable  Note from
funds made  available  from the November  2002 sale of Centre Square I, a 93,711
square foot office building located in Knoxville, Tennessee.

      On January 16,  2003,  a $157.5  million  interest  rate collar  agreement
pertaining  to our 50% common  interest in an  unconsolidated  real estate joint
venture  which owns an office tower  located at 77 West Wacker  Drive,  Chicago,
Illinois was  assigned to a different  financial  institution  for a fee of $0.1
million and modified  such that the joint venture would need to make cash escrow
deposits only to the extent that the instrument's  valuation decreases more than
$20.0 million. As a result, previously escrowed funds totaling $6.9 million were
returned to the joint venture.

      On February 5, 2003, we and our Board,  after evaluating the proposal with
our financial  advisors,  determined that we were not interested in pursuing the
recapitalization  proposal presented to us by Northland Capital Partners,  L.P.,
Northland Capital Investors,  LLC, NCP, LLC and Northland Investment Corporation
(collectively, "Northland"), the existence of which proposal was previously

<PAGE>


20.  Subsequent Events (continued)

disclosed by Northland  on  Amendments  to its Schedule 13D filed on December 6,
2002 and December 20, 2002 with the Securities and Exchange  Commission  ("SEC")
and by us on  December  20,  2002 by a Form 8-K filed  with the SEC.  We instead
decided  to  continue  to pursue  other  strategic  alternatives  at this  time,
including  but not  limited  to, a sale,  merger or other  business  combination
involving  the  entire  Company.  We  then  informed  Northland  on of  the  our
determination  after  which  Northland  sent a letter to us stating  that it was
terminating all discussions and negotiations  relating to a possible  negotiated
transaction and Northland publicly disclosed the foregoing letter pursuant to an
Amendment to its Schedule 13D filed with the SEC on February 6, 2003.

      On February  6, 2003,  in  connection  with the  foregoing  pursuit of our
strategic alternatives,  we also engaged Wachovia Securities,  Inc. as financial
advisor to assist us and our existing financing advisor, Merrill Lynch & Co., in
our evaluation of its strategic alternatives.

      On February 19, 2003 we extended the maturity  dates of two loans having a
combined  principal amount of $32.5 million from the same lender.  The two loans
consist of a $20.0 million loan having a previous maturity date of June 30, 2003
and a $12.5  million loan having a previous  maturity date of November 15, 2003.
Our  interests  in various  properties  secure the $20.0  million loan while the
$12.5  million  loan is secured by our  interest  in the 33 West  Monroe  Street
property.  The maturity dates for both of the loans were extended until November
15, 2004 at interest rates of LIBOR plus 7.00%.

      In February 2003, we entered into lease termination agreements with Arthur
Andersen   whereby  Arthur  Andersen  was  released  from  its  remaining  lease
obligations at two of our properties subsequent to December 31, 2002 in exchange
for total  termination  payments  consisting  of $32.4  million  for the 33 West
Monroe  Street  property  lease and $1.1 million for the 330 North Wabash Avenue
property (IBM Plaza) lease. In addition, the agreements provided we could retain
previously  paid rent for the month of January  2003 which has been  recorded in
2003 as rental revenue.  We were required by the lenders to deposit the proceeds
into escrow accounts for each property. The $1.1 million escrow for IBM Plaza is
available to fund future tenant  improvements  and other re-leasing costs at the
property.  The $32.4 million escrow for 33 West Monroe Street may be utilized as
follows:  (i) up to a  maximum  of $8.1  million  may be  utilized  to fund debt
service and operating deficits at the 33 West Monroe Street property;  (ii) $7.0
million is to be utilized to repay principal on the loan  collateralized  by the
property  ninety-one  days following the receipt of the proceeds;  and (iii) the
remainder  (including any remaining  portion of the $8.1 million discussed under
(i)) is available to fund future tenant  improvements and other re-leasing costs
at  the  property.  In  connection  with  these  terminations,  we  will  record
termination  fee  income in the first  quarter  of 2003 of $29.7  million  which
represents  the  above   termination   payments  less  outstanding   receivables
(including deferred rent receivable) related to these leases.

      In connection with the termination of Arthur  Andersen's lease, we entered
into new leases for an aggregate of 61,114 square feet,  with 19,450 square feet
being leased for an approximately  ten-year term and the remaining 41,574 square
feet of space being leased to two tenants for terms of approximately  two years.
Under one of these leases we received prepaid rent of $1.1 million.

      On March 10, 2003, we obtained a $195.0 million loan (the "Loan")  secured
by a  first  mortgage  encumbering  our  One  IBM  Plaza  office  property  (the
"Property").  The Loan  retired  both the existing  senior and  mezzanine  loans
encumbering the Property.  The Loan has a term of three years, with two one-year
extension  options  exercisable  for a fee of 0.25% of the Loan  amount for each
extension. The Loan does not require any scheduled repayments of principal prior
to maturity.  The Loan has an interest  rate of 285 basis points over  one-month
LIBOR  provided,  that,  the first $160.0 million of principal of the Loan has a
minimum LIBOR rate of 2.0% and the  remaining  $35.0 million of principal of the
Loan has a minimum LIBOR rate of 3.0%.  This results in a blended minimum annual
interest rate for the entire Loan of 5.03%.  As required by the Loan  documents,
we obtained an interest  rate cap of LIBOR at 6.6% for the term of the Loan.  At
closing, 330 LLC paid the lender a


<PAGE>


20.  Subsequent Events (continued)

financing fee of 1.0% of the principal  amount of the Loan.  The loan may not be
prepaid  during the first twelve months of the Loan term,  but may be prepaid in
whole or in part thereafter, without any prepayment penalty.

      We used  the net  proceeds  from  the  Loan to (i)  repay  in full a $30.3
million mezzanine loan relating to the Property which accrued interest at 11.75%
per year,  (ii) repay in full a $150.8 million first mortgage loan (including an
exit fee of $0.8 million) encumbering the Property which accrued interest at 170
basis  points  over  one-month  LIBOR per year,  (iii)  fund  real  estate  tax,
insurance and capital  improvement escrows of $2.5 million as required under the
terms of the  Loan,  and  (iv) pay $8.5  million  in  partial  repayment  of the
Exchangeable  Note from SCPG plus $0.4 million of accrued interest and a $60,000
exit fee.

      Our Operating  Partnership  has  guaranteed  $4.0 million of the principal
amount  of the Loan and the cost of any  remediation  of  asbestos  required  in
connection  with the  leasing  of the  Property  up to a maximum  amount of $6.0
million. We are required under the Loan to place $3.0 million in escrow from the
cash flow from the Property in 24 equal  installments of $125,000  commencing in
January 2004 to secure the cost of any necessary  remediation in the future. The
Property currently contains asbestos in the form of spray-on  insulation located
on the  decking  and  beams  of the  building.  We  have  been  informed  by our
environmental  consultants  that the asbestos in the Property is not friable and
no remediation of the asbestos is necessary.


      The  parking  garage  for the  Property  is located on land which we lease
under  a  ground  lease  with  a  third  party.   In  order  to  obtain  certain
modifications to the ground lease that were required by the lender, we agreed to
increase  the rent under the ground  lease from $10,278 per month to $18,389 per
month for its remaining term which ends in April 2019. One year of this rent was
required to be prepaid at closing.

      Pursuant to the terms of the Loan, we are required to make monthly  escrow
deposits  for real  estate  taxes,  insurance  and  ground  rent.  In  addition,
commencing in January 2004, the lesser of $450,000 or available cash flow of the
property  per  month  is to  be  deposited  into  a  tenant  improvement/leasing
commission  reserve account (the "Account").  If there is available cash flow in
excess of  $450,000,  any  amounts  in excess of  $450,000  are  required  to be
deposited into the Account to the extent any prior  month(s)  deposits were less
than  $450,000.  If a  certain  leasing  benchmark  provided  by the Loan is not
satisfied at the Property by August 9, 2005, all net cash flow from the property
is required to be deposited into the Account until an aggregate of $15.0 million
has been deposited in the Account.  However,  in such event,  if an aggregate of
$9.0  million has not been  deposited  in the account by August 9, 2005,  we are
required to deposit any shortfall into the Account at that time. If an aggregate
of $15.0  million has not been  deposited by August 9, 2006,  we are required to
deposit any shortfall into the Account at that time. If the leasing benchmark is
satisfied  by August 9, 2005,  $6.0 million  must have been  deposited  into the
Account and, if not, we are required to deposit any  shortfall  into the Account
at that  time.  330  LLC  and  the  Operating  Partnership,  as  guarantor,  are
responsible  for any  shortfalls.  Letters of credit may be  provided in lieu of
cash deposits to the Account.

      On March 19, 2003, we closed a $75.0 million mezzanine loan provided by an
affiliate of LNR Property  Corporation ("LNR Loan").  The LNR Loan is secured by
an  assignment  of  membership  interests in our  affiliate  owning the Bank One
Corporate Center property.  The LNR Loan,  combined with $1.5 million of our own
funds,  retired an  existing  mezzanine  loan  ("Retired  Loan")  related to the
property and related accrued  interest.  Our guarantees and financial  covenants
under the LNR Loan are  substantially the same as those contained in the Retired
Loan, except as discussed below.

      The LNR Loan matures on January 5, 2004, and may be extended for one year,
provided certain conditions are satisfied, including payment of a 0.5% extension
fee and the extension or refinancing of the  construction  loan  encumbering the
Property.  The LNR Loan has a 15% annual  interest  rate with a 10%  current pay
rate,  plus a 1% exit fee.  Commencing  April 1, 2003, and through and including
January 1,  2004,  we are  required  to deposit  $0.8  million  per month into a
reserve  account to fund  commissions  and other  costs  related to the  Citadel
Obligation.  This deposit is subject to adjustment as additional leasing related
to the Citadel  Obligation is achieved.  Additionally,  if certain  requirements
contained in the loan  documents  are not  satisfied by April 9, 2003,  then the
lender  under the LNR Loan will earn an  additional  $1.0  million fee which has
been placed in escrow.

      On March  19,  2003,  we  purchased  all of our  joint  venture  partner's
ownership  interest in the entity that owns Bank One Corporate  Center making us
the sole owner of the property.  We paid $9.2 million for the interest, of which
$0.5 million was  deposited  into an escrow  account that is to be released upon
the  satisfaction  of certain  post  closing  obligations  of our joint  venture
partner (and in all events on the first  anniversary of the closing  date).  Our
joint  venture  partner also agreed to continue to provide  certain  development
services for a period of up to one year (or a lesser period as determined by us)
for a monthly  fee.  Simultaneously  with  this  transaction  our joint  venture
partner  paid us in full a loan  previously  made by us to them of $1.0  million
plus accrued interest of $0.2 million.

      The Internal  Revenue Service (the "Service") has conducted an examination
of the federal  income tax returns filed by certain of our  affiliated  entities
for the taxable year ended December 31, 1999. The Service's examination included
the review of certain  transactions  involving  our  acquisition  of the One IBM
office property located in Chicago, Illinois, which was reported on the examined
returns  as  acquired  in  connection  with a  non-taxable,  like-kind  exchange
involving  an interest in the 77 West Wacker Drive  office  property  located in
Chicago,  Illinois  (the "1999  transaction").  On March 13,  2003,  the Service
issued preliminary  reports proposing that the 1999 Transaction  constituted the
taxable sale of an interest in 77 West Wacker  Drive.  According to the Service,
the nature of the 1999 Transaction  required  recognition of a long-term capital
gain in the approximate amount of $94.6 million,  of which  approximately  $12.1
million  would be allocated to us, and the remainder of which would be allocated
to the other parties who were partners in our Operating  Partnership  during the
taxable year ended  December 31, 1999.  The Service's  preliminary  reports also
proposed  the  imposition  of an  accuracy-related  penalty  equal to 20% of the
additional tax due in this matter.

      The 1999  Transaction  was  structured in a  conventional  manner with the
advice of our legal and accounting tax advisors.  We, based upon advice from our
outside counsel and tax advisors, believe that the Service's position is without
merit  and is based on a  misinterpretation  of the law.  We  disagree  with the
proposed adjustments set for in the Service's  preliminary reports and intend to
seek administrative  relief by appealing the findings of the preliminary reports
(or any final  examination  reports issued in this matter) to the Appeals Office
of the Service. We intend to vigorously  challenge any proposed adjustments that
cannot be  resolved.  At this time,  we are not able to  determine or to predict
with any degree of certainty whether the issues will be agreed and resolved.  It
is possible that the issues will be the subject of a final administrative notice
asserting  liability,  which  would  likely  result in us filing a  petition  or
complaint  for relief in either the United  States Tax Court,  the United States
Court of Federal Claims, or a United States District Court. We have not recorded
a liability related to this matter.

      On March 25, 2003, we and PGI and one of PGI's affiliates  entered into an
amendment to the environmental  remediation and indemnity  agreement  previously
entered into by PGI and us in November 1997. Pursuant to the existing agreement,
PGI has agreed to indemnify us against certain environmental liabilities related
to our  Chicago,  Hammond  and  East  Chicago  Industrial  parks.  The  existing
agreement  also  provides  that PGI is entitled to use the proceeds from certain
pending litigation we have against third parties relating to these environmental
liabilities.  The amendment to the agreement provides,  among other things, that
all of the  proceeds  from  the  litigation  will  not be  funded  to PGI or its
affiliate, but instead that if any proceeds are recovered in connection with the
litigation,  sufficient  proceeds  (if  recovered)  will instead by placed in an
escrow to be used to fund the environmental remediation costs.

<PAGE>

<PAGE>

<TABLE>
<CAPTION>




                                                                     PRIME GROUP REALTY TRUST

                                                       SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                                                     AS OF DECEMBER 31, 2002
                                                                      (DOLLARS IN THOUSANDS)


                                                            Cost
                                             Initial        Capitalized Subsequent
                             Encumbrances(1)  Cost          to Acquisition
                             --------------- -------------- -----------------------                      Accumulated  Date of
                                                  Buildings                                                Depreci-  Acquisition (A)
                                                    and             Buildings          Building          ation at  Contribution(c)
                               December 31        Improve-             and                and             December 31 Placed in
                                  2002     Land   ements   Land  Improvements  Land   Improvements  Total    2002(2)   Service(P)
                              ------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>      <C>      <C>    <C>        <C>        <C>       <C>        <C>      <C>
Office
280 Shuman Blvd (3) ..........$       - $  1,261 $ 5,056  $   -  $     346  $  1,261 $    5,402  $   6,663     865    Nov. 1997 (A)
1701 Golf Road ...............   69,192   21,780  87,324    136     17,179    21,916    104,503    126,419  15,873    Dec. 1997 (A)
4343 Commerce Court(4).......         -    5,370  21,394    192      5,797     5,562     27,191     32,753   5,287    Nov. 1997 (A)
1600-1700 167th St............    2,704    1,073   4,291     70      1,080     1,143      5,371      6,514     966    Nov. 1997 (A)
1301 E. Tower Road(4).........        -    1,005   4,020     60      1,824     1,065      5,844      6,909     626    Nov. 1997 (A)
208 South LaSalle Street (5)..   43,734   12,310  49,042     20      7,306    12,330     56,348     68,678   8,871    Mar. 1998 (A)
33 West Monroe Street (6).....   67,000    5,619  95,850      1      1,111     5,620     96,961    102,581   9,669    Jan. 1999 (A)
National City Center  (5) (8).   64,810   14,806  90,300      -    (15,476)   14,806     74,824     89,630   9,631    Feb. 1999 (A)
800-810 Jorie Blvd  (5).......   22,484    5,619  24,089      -        417     5,619     24,506     30,125   2,128    Aug. 1999 (A)
IBM Plaza (7).................  150,000   39,664 208,898      -      5,278    39,664    214,176    253,840  17,400    Dec. 1999 (A)
Brush Hill Office Court.......    8,047    2,617  10,469      -        406     2,617     10,875     13,492     918    Dec. 1999 (A)
Enterprise Center II..........    5,916    1,783   7,376      -          -     1,783      7,376      9,159     553    Jan. 2000 (A)
7100 Madison Avenue...........    3,840    1,360   4,000      -          9     1,360      4,009      5,369     267    Apr. 2000 (A)
180 North LaSalle Street......   60,000   29,409  73,276      -     17,995    29,409     91,271    120,680   8,522    Aug. 2000 (A)
Bank One Corporate Center.....  208,198   22,622 302,586      -     11,058    22,622    313,644    336,266       0    Nov. 2002 (P)
                              ----------------------------------------------------------------------------------------
Total Office..................$ 705,925 $166,298 $987,971 $  479 $  54,330  $166,777 $1,042,301 $1,209,078  81,576
                              ------------------------------------- ----------------------------------------------------------------

</TABLE>


<PAGE>

<TABLE>
<CAPTION>



                                                           PRIME GROUP REALTY TRUST

                                               SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                                          AS OF DECEMBER 31, 2002
                                                          (DOLLARS IN THOUSANDS)

                                                            Cost
                                             Initial        Capitalized Subsequent
                             Encumbrances(1)  Cost          to Acquisition
                             --------------- -------------- -----------------------                      Accumulated  Date of
                                                  Buildings                                                Depreci-  Acquisition (A)
                                                    and             Buildings          Building          ation at  Contribution(c)
                               December 31        Improve-             and                and             December 31 Placed in
                                  2002     Land   ements   Land  Improvements  Land   Improvements  Total    2002(2)   Service(P)
                              ------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>     <C>   <C>        <C>       <C>        <C>        <C>         <C>
Industrial (Continued)
East Chicago Enterprise
   Center (3).................  $     -  $    7   $   139 $    - $      2   $     7   $    141  $     148  $      59   Nov. 1997 (C)
EC I (3)......................    2,900     595         -    62         -       657          -        657        166   Nov. 1997 (C)
EC II (3).....................    5,000      18     2,360     4     2,624        22      4,984      5,006      1,915   Nov. 1997 (C)
EC III (3)....................    4,500      20     7,038     6       672        26      7,710      7,736      2,399   Nov. 1997 (C)
EC IV (3).....................    2,600      11     1,217     2       539        13      1,756      1,769        646   Nov. 1997 (C)
Hammond Enterprise Center (3).        -      26       614     -       103        26        717        743        337   Nov. 1997 (C)
EC V (3)......................    5,000      81     2,883     -       263        81      3,146      3,227      1,429   Nov. 1997 (C)
EC VI (3).....................    4,900     101     2,936     -     1,385       101      4,321      4,422      1,623   Nov. 1997 (C)
Chicago Enterprise Center (3).        -     748       975    27        24       775        999      1,774        580   Nov. 1997 (C)
EC VII (3)....................        -     517     4,968    31     6,920       548     11,888     12,436      2,630   Nov. 1997 (C)
EC VIII (3)...................        -     124     2,493    27     2,575       151      5,068      5,219      2,511   Nov. 1997 (C)
EC IX (3) ....................        -     269     1,127     -       251       269      1,378      1,647        373   Nov. 1997 (C)
EC X (3) .....................        -     248     2,836    27       483       275      3,319      3,594      1,362   Nov. 1997 (C)
Arlington Heights I (3).......        -     617     2,638     -        27       617      2,665      3,282        800   Nov. 1997 (C)
Arlington Heights II(3).......        -     456     2,062     -        17       456      2,079      2,535        589   Nov. 1997 (C)
Arlington Heights III(3)......        -     452     1,938     -        18       452      1,956      2,408        553   Nov. 1997 (C)
1051 N. Kirk Road(4) (9)......        -     911     3,325     -    (1,913)      911      1,412      2,323        333   Nov. 1997 (A)
4211 Madison Street(4)........        -     690     2,745     -        10       690      2,755      3,445        357   Nov. 1997 (A)
200 E. Fullerton(4)...........        -     525     2,100     -       338       525      2,438      2,963        343   Nov. 1997 (A)
350 Randy Road(4).............        -     267     1,063     -       111       267      1,174      1,441        161   Nov. 1997 (A)
4300,4248,4250 Madison
   Street(4)..................        -   1,147     4,588     -       148     1,147      4,736      5,883        674   Nov. 1997 (A)
370 Carol Lane(4).............        -     527     2,107     9        47       536      2,154      2,690        275   Nov. 1997 (A)
388 Carol Lane(4).............        -     332     1,329     -       193       332      1,522      1,854        199   Nov. 1997 (A)
342-346 Carol Lane(4).........        -     600     2,398     -        72       600      2,470      3,070        324   Nov. 1997 (A)
343 Carol Lane(4).............        -     350     1,398     6        66       356      1,464      1,820        203   Nov. 1997 (A)
11039 Gage Avenue(4)..........        -     191       767     -        37       191        804        995        103   Nov. 1997 (A)
11045 Gage Avenue(4)..........        -   1,274     5,092     -       274     1,274      5,366      6,640        697   Nov. 1997 (A)
1401 S. Jefferson(4)..........        -     171       685     -        22       171        707        878        106   Nov. 1997 (A)
4160-4190 W  Madison Street(4)        -     931     3,708   132       606     1,063      4,314      5,377        500   Nov. 1997 (A)
550 Kehoe Blvd.(4)............        -     686     2,743    13        71       699      2,814      3,513        359   Nov. 1997 (A)
555 Kirk Road ................    1,551     520     2,108     -         -       520      2,108      2,628        142   Apr. 2000 (A)
1543 Abbott Drive.............      835     280     1,148     -         -       280      1,148      1,428         77   Apr. 2000 (A)
1455 Sequoia Drive (6)........    5,710   1,474     7,686     6       199     1,480      7,885      9,365        511   Aug. 2000 (P)
200 S. Mitchell...............    4,124   1,596     4,488     -        15     1,596      4,503      6,099        151   Aug. 2001 (A)
                                -------------------------------------------------------------------------------------
Total Industrial..............   37,120  16,762    85,702   352    16,199    17,114    101,901    119,015     23,487
                                -------------------------------------------------------------------------------------
Other Corporate Assets........   56,937       -       476     -     9,756         -     10,232     10,232      5,324
                                -------------------------------------------------------------------------------------
         Total................ $799,982$183,060$1,074,149  $831  $ 80,285 $ 183,891 $1,154,434  1,338,325    110,387
                                ====================================================================================

</TABLE>

<PAGE>


                            PRIME GROUP REALTY TRUST
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                             AS OF DECEMBER 31, 2002
                             (DOLLARS IN THOUSANDS)

(1)  See Note 5 - Mortgages and Notes  Payable,  Bonds Payable and  Construction
     Financing to these Consolidated  Financial  Statements for a description of
     our 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......................          3-7 years

(3)  These properties cross-collateralize the letters-of-credit that enhance the
     industrial revenue bonds.

(4)  These properties cross-collateralize a $44.9 million mortgage note payable.

(5)  A pledge of certain  ownership  interests in the  entities  which own these
     properties are collateral for a $20.0 million mortgage note payable.

(6)  A pledge of 100% of the  ownership  interest in the entity  which owns this
     property is collateral for a $12.5 million mortgage note payable.

(7)  A pledge of 100% of the  ownership  interest in the entity  which owns this
     property is collateral for a $27.1 million mortgage note payable.

(8)  A $19.4 million  provision for asset  impairment  was recognized in 2002 in
     order to reflect its fair market value at December 31, 2002.

(9)  Mr. Nardi and certain of his  affiliates  are  obligated to pay us rent for
     this  property  under a master  lease  agreement  that expires on March 31,
     2003.  We have  recorded  this  rent as a  reduction  of our  basis  in the
     property.


      The aggregate  gross cost of the properties  included  above,  for federal
income tax purposes,  approximated $1.3 billion as of December 31, 2002. We have
$21.1 million in property held or under  development  at December 31, 2002,  for
which the basis for federal  income tax purposes  approximated  $10.7 million at
December 31, 2002. The aggregate gross cost of our investment in  unconsolidated
real estate joint  ventures,  for federal income tax purposes was $108.7 million
at December 31, 2002.

      The following table reconciles the Company's historical cost for the years
ended December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>


                                                                    Year ended December 31
                                                            2002             2001              2000
                                                     ------------------------------------------------------
<S>                                                  <C>                   <C>              <C>
Balance, beginning of period.......................       $1,206,516        $1,180,206      $ 1,151,094
Additions during period............................          341,664            28,763          190,810
Property reclassified as held for sale.............                -                 -          (23,714)
Disposals during the period........................         (190,467)             (953)        (137,984)
Property impairments recorded during period........          (19,388)           (1,500)               -
                                                     ------------------------------------------------------
Balance, close of period...........................       $1,338,325        $1,206,516       $1,180,206
                                                     ======================================================

</TABLE>

       The following table reconciles the accumulated depreciation for the years
ended December 31, 2002, 2001 and 2000.

<TABLE>
<CAPTION>


                                                                    Year ended December 31
                                                            2002             2001              2000
                                                     ------------------------------------------------------
<S>                                                   <C>                 <C>              <C>
Balance at beginning of period.....................     $     97,495      $     61,855     $     37,977
Depreciation and amortization for the period.......           33,428            35,665           33,022
Property reclassified as held for sale.............                -                 -             (977)
Disposals during the period........................          (20,536)              (25)          (8,167)
                                                     ------------------------------------------------------
Balance, close of period...........................      $   110,387      $     97,495     $     61,855
                                                     ======================================================

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                       EXHIBIT 12.1

                                          PRIME GROUP REALTY TRUST AND THE PREDECESSOR

                                     STATEMENTS REGARDING COMPUTATION OF RATIOS OF EARNINGS
                                 TO COMBINED FIXED CHARGES AND PREFERRED SHARE DISTRIBUTIONS

                                                   (DOLLARS IN THOUSANDS)



                                                                 Year Ended December 31
                                    ------------------------------------------------------------------
                                        2002         2001         2000         1999         1998

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

<S>                                 <C>             <C>        <C>          <C>          <C>
Earnings (1) (2):
  (Loss) income from
   continuing operations
   before minority interest
   per  the consolidated
   financial statements .........   $  (25,932)  $  (16,181)   $  16,208    $  20,912   $  18,168
  Interest expense...............       40,212       43,214       47,174       37,018      27,826
  Amortization of debt issuance
   costs.........................        4,359        3,919        6,172        4,214       3,341
                                    ------------------------------------------------------------------
Earnings.........................   $   18,639   $   30,952    $  69,554    $  62,144   $  49,335
                                    ==================================================================

Fixed Charges (1) (2):
  Interest expense...............   $   40,212   $   43,214   $   47,174    $  37,018   $  27,826
  Capitalization of interest
    expense......................       29,946       23,874       14,232        7,986       2,498
  Amortization of debt issuance
   costs.........................        4,359        3,919        6,172        4,214       3,341
  Preferred share distributions..       11,280       12,150       12,147       12,103       7,971
                                    ------------------------------------------------------------------
Total fixed charges..............   $   85,797   $   83,157   $   79,725    $  61,321   $  41,636
                                    ==================================================================
  Ratio of earnings to combined
   fixed charges and preferred
   share distributions..........           -            -            -            1.01        1.18
                                    ==================================================================
  (Deficit) excess of earnings
    to combined fixed charges
    and preferred share
    distributions................   $  (67,158)  $  (52,205)  $  (10,171)  $       823  $   7,699
                                    ==================================================================
Funds from Operations (1) (2):
  Funds from operations..........   $   28,279   $   17,450   $   40,462    $  52,295    $ 45,865
  Interest expense...............       40,212       43,214       47,174       37,018      27,826
  Amortization of debt issuance
   costs.........................        4,359        3,919        6,172        4,214       3,341
  Preferred share distributions..       11,280       12,150       12,147       12,103       7,971
                                    ------------------------------------------------------------------
Adjusted funds from operations...   $   84,130   $   76,733    $ 105,955    $ 105,630   $  85,003
                                    ==================================================================
Fixed Charges (1) (2):
  Interest expense...............   $   40,212   $   43,214    $  47,174    $  37,018   $  27,826
  Capitalization of interest
    expense......................       29,946       23,874       14,232        7,986       2,498
  Amortization of debt issuance
   costs.........................        4,359        3,919        6,172        4,214       3,341
  Preferred share distributions..       11,280       12,150       12,147       12,103       7,971
                                    ------------------------------------------------------------------
Total fixed charges..............   $   85,797   $   83,157   $   79,725    $  61,321   $  41,636
                                    ==================================================================
  Ratio of funds from
   operations to combined
   fixed charges and preferred
   share distributions.........              -            -        1.33          1.73        2.04
                                    ==================================================================
  (Deficit) excess of funds from
    operations to combined
    fixed charges and preferred
    share distributions..........  $    (1,667) $   (6,424)   $  26,230     $  44,309   $  43,367
                                    ==================================================================

</TABLE>


(1)  Information for the years ended December 31, 2001, 2000, 1999 and 1998 have
     been restated for the effect of adopting SFAS 144 for the  reclassification
     of the operations of properties sold during 2002 from continuing operations
     to discontinued operations.

(2)  Amortization  of debt issuance costs for the years ended December 31, 2001,
     2000, 1999 and 1998 have been restated for the effects of adopting SFAS 145
     by $0.2 million, $3.5 million, $1.8 million and $2.1 million, respectively,
     for the  reclassification  of extinguishment of debt from  extraordinary to
     continuing operations.


<PAGE>


                                  EXHIBIT 21.1

                            PRIME GROUP REALTY TRUST

                         SUBSIDIARIES OF THE REGISTRANT

                                DECEMBER 31, 2002

      The following  represents the Prime Group Realty  Trust's (the  "Company")
and  Prime  Group  Realty,  L.P.'s  (the  "Operating   Partnership")   operating
subsidiaries (the Company and the Operating Partnership have a majority interest
or control) and related properties as of December 31, 2002:

<TABLE>
<CAPTION>

                        Entity                                                 Property
--------------------------------------------------------------------------------------------------------------
<S>                                                      <C>
33 N. Dearborn SPC, Inc. (11)                            Former member of 33 N. Dearborn, L.L.C.
33 N. Dearborn, L.L.C. (3), (7)                          Former owner of 33 N. Dearborn
33 W. Monroe, L.L.C. (3), (7)                            33 W. Monroe Street
33 W. Monroe - I, L.L.C. (7)                             Member of 33 W. Monroe, L.L.C.
43 Hintz Road, L.L.C. (7)                                Former owner of 43-47 Hintz Road
77 West Wacker Drive, L.L.C. (7)                         77 West Wacker Drive
77 West Wacker Limited Partnership (1), (3), (8)         IBM Plaza, Brush Hill Office Center
180 Kehoe Blvd., L.L.C. (4), (7)                         Former owner of certain property held for
                                                            development
180 N. LaSalle, L.L.C. (3), (7)                          Owns mortgage note receivables on 180 N. LaSalle
200 E. Fullerton, L.L.C. (3), (7)                        200 E. Fullerton
200 S. Mitchell Court, L.L.C. (7)                        200 S. Mitchell Court
280 Shuman Blvd., L.L.C. (7)                             280 Shuman Blvd. (Atrium)
330 N. Wabash Avenue, L.L.C. (7)                         IBM Plaza
330 N. Wabash Mezzanine, L.L.C. (7)                      Member of 330 N. Wabash Avenue, L.L.C.
342 Carol Lane, L.L.C. (3), (7)                          342-346 Carol Lane
343 Carol Lane, L.L.C. (3), (7)                          343 Carol Lane
350 Randy Road, L.L.C. (3),(7)                           350 Randy Road
370 Carol Lane, L.L.C. (3),(7)                           370 Carol Lane
371 N. Gary Avenue, L.L.C. (3)(7)                        Former owner of 371-385 N. Gary Avenue
388 Carol Lane, L.L.C. (3),(7)                           388 Carol Lane
455 Academy Drive, L.L.C. (7)                            Former owner of 455 Academy Drive
475 Superior Avenue, L.L.C. (7)                          Former owner of 475 Superior Avenue
550 Kehoe Blvd., L.L.C. (3), (7)                         550 Kehoe Blvd.
555 Kirk Road, L.L.C. (7)                                555 Kirk Road
800 Jorie Blvd., L.L.C. (3), (7)                         800-810 Jorie Blvd.
800 Jorie Blvd. Mezzanine, L.L.C. (7)                    Member of 800 Jorie Blvd., L.L.C.
1051 N. Kirk Road, L.L.C. (3), (7)                       1051 N. Kirk Road


</TABLE>
<PAGE>



<TABLE>
<CAPTION>


                        Entity                                                 Property
--------------------------------------------------------------------------------------------------------------
<S>                                                      <C>
1301 E. Tower Road, L.L.C. (3), (7)                      1301 E. Tower Road (Narco Tower)
1401 S. Jefferson, L.L.C. (3), (7)                       1401 S. Jefferson
1455 Sequoia Drive, L.L.C. (7)                           1455 Sequoia Drive
1543 Abbott Drive, L.L.C. (7)                            1543-1547 Abbott Drive
1600 167th Street, L.L.C. (3), (7)                       1600-1700 167th Street (Narco River Business Center)
1699 E. Woodfield Road, L.L.C. (3), (7)                  1699 E. Woodfield Road (Citibank Office Plaza)
1990 Algonquin Road, L.L.C. (7)                          1990 Algonquin Road (Sun Annex)
2000 USG Drive, L.L.C. (7)                               Former owner of Libertyville Business Park, 2000
                                    USG Drive
2000 York Road, L.L.C. (3), (7)                          2000 York Road (2000 York Brook)
2010 Algonquin Road, L.L.C. (7)                          2000-2060 Algonquin Road (Salt Creek Office Center)
2100 Swift Drive, L.L.C. (3), (7)                        2100 Swift Drive
2305 Enterprise Drive, L.L.C. (7)                        Owner of 2305 Enterprise Drive
2675 N. Mayfair Road, L.L.C. (7)                         Former owner of 2675 N. Mayfair Road (Wauwatosa
                                    Building)
4100 Madison Street, L.L.C. (3), (7)                     Former owner of 4100 West Madison Street
4160 Madison Street, L.L.C. (3), (7)                     4160-4190 West Madison Street
4211 Madison Street, L.L.C. (3), (7)                     4211 Madison Street
4300 Madison Street, L.L.C. (3),(7)                      4300, 4248, 4250 Madison Street
4343 Commerce Court, L.L.C. (3), (7)                     4343 Commerce Court (The Olympian Office Center)
6400 Shafer Court, L.L.C. (3), (7)                       6400 Shafer Court
6700 Touhy Avenue, L.L.C. (7)                            Former owner of 6700 Touhy Avenue
7100 Madison, L.L.C. (7)                                 7100 Madison
11039 Gage Avenue, L.L.C. (3), (7)                       11039 Gage Avenue
11045 Gage Avenue, L.L.C. (3), (7)                       11045 Gage Avenue
Arlington Heights I, L.P. (1), (8)                       425 E. Algonquin Road
Arlington Heights II, L.P. (1), (8)                      425 E. Algonquin Road
Arlington Heights III, L.P. (1), (8)                     425 E. Algonquin Road
BRE/City Center, L.L.C. (7)                              National City Center
Brush Hill Office Center, L.L.C. (7)                     Brush Hill Office Court
Centre Square II, Ltd. (1) (9)                           Former owner of 625 Gay St.
Dearborn Center, L.L.C. (4), (7)                         Bank One Corporate Center
DeKalb Business Park, L.L.C. (4), (7)                    Property held for development
East Chicago Enterprise Center Limited Partnership
   (1), (2), (8)                                         4440 and 4635 Railroad Avenue
Enterprise Center I, L.P. (1), (4), (8)                  4407 Railroad Avenue
Enterprise Center II, L.P. (1), (8)                      4407 Railroad Avenue (Bldg 2)
Enterprise Center III, L.P. (1), (8)                     4407 Railroad Avenue (Bldg 3)
Enterprise Center IV, L.P. (1), (8)                      4407 Railroad Avenue (Bldg 4)
Enterprise Center V, L.P. (1), (8)                       4531 Columbia Avenue
Enterprise Center VI, L.P. (1), (8)                      4527 and 4531 Columbia Avenue
Enterprise Center VII, L.P. (1), (8)                     13535 - B South Torrence Avenue
Enterprise Center VIII, L.P. (1), (8)                    13535 - A and D South Torrence Avenue
Enterprise Center IX, L.P. (1), (8)                      13535 - E, F and G South Torrence Avenue



</TABLE>

<PAGE>

<TABLE>
<CAPTION>



                        Entity                                                 Property
--------------------------------------------------------------------------------------------------------------
<S>                                                      <C>
Enterprise Center X, L.P. (1), (8)                       13535 - C and H South Torrence Avenue
Enterprise Drive, L.L.C. (7)                             2205-2255 Enterprise Drive (Enterprise Office
                                     Center)
Hammond Enterprise Center Limited Partnership (1),
   (2), (8)                                              4507 and 4527 Columbia Avenue
Kemper/Prime Industrial Partners (1), (2), (4),
   (10)                                                  13535 South Torrence Avenue
Kimberly East, L.L.C. (4), (7)                           Former owner of certain property under development
Kimberly West, L.L.C. (7)                                Former owner of Vacant Land in Carol Stream,
                                    Illinois
LaSalle-Adams, L.L.C. (3), (7)                           208 South LaSalle Street
Libertyville Corporate Office Park, L.L.C. (4),          Pine Meadows Center
   (7)
Libertyville Corporate Office Park II, L.L.C. (7)        Owner of Vacant Land adjacent to 80 Pine Meadow
                                                            Corporate Office Park
Libertyville Corporate Office Park III, L.L.C. (7)       1000 Technology Way, Building D
Libertyville Industrial, L.L.C. (7)                      Libertyville Business Park
Michigan-Adams, L.L.C. (7)                               Former owner of floors 8-20, the penthouse and
                                                            68.44% of common elements of 122 S. Michigan
Monroe-Wacker, L.L.C. (4), (7)                           Former owner of Monroe/Wacker Development Property
Monroe-Wacker Office, L.L.C. (7)                         Holder of option to acquire interest in FrankMon,
                                                            L.L.C., owner of Monroe/Wacker Development Parcel
Nashville Office Building I, Ltd. (1) (9)                Former owner of 201 4th Ave. N.
Oak Brook Business Center, L.L.C. (6), (7)               None
Old Kingston Properties, Ltd. (1) (9)                    Former owner of 4823 Old Kingston Pike
PGR Finance I, Inc. (11)                                 Member of Wilke-Ventura, L.L.C.
PGR Finance II, Inc. (11)                                Member of LaSalle-Adams, L.L.C.
PGR Finance III, Inc. (11)                               Member of Eight of  the L.L.C's described above
PGR Finance IV, Inc. (11)                                Member of 371 N. Gary Avenue, L.L.C. former owner
                                                            of 371-385 N. Gary Avenue and Member of 1600
                                                            167th Street., L.L.C.
PGR Finance V, Inc. (11)                                 Member of 1699 E. Woodfield Road, L.L.C.
PGR Finance VII, Inc. (11)                               Member of 6400 Shafer Court, L.L.C.
PGR Finance VIII, Inc. (11)                              Limited Partner of 77 West Wacker Limited
                                                            Partnership
PGR Finance IX, Inc. (11)                                Member of 2000 York Road, L.L.C.
PGR Finance X, Inc. (11)                                 Member of Two Century Center, L.L.C.
PGR Finance XI, Inc. (11)                                Member of 180 N. LaSalle, L.L.C.
PGR Finance XII, Inc. (11)                               Member of 33 W. Monroe, L.L.C.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>





                        Entity                                                 Property
--------------------------------------------------------------------------------------------------------------
<S>                                                      <C>
PGR Finance XIII, Inc. (11)                              Member of Six of the L.L.C.'s described above
PGR Finance XIV, Inc. (11)                               Member in 1051 N. Kirk Road, L.L.C. of 4343
                                                            Commerce Court, L.L.C.
PGR Finance XV, L.L.C. (7)                               Member of Brush Hill Office Center, L.L.C.
PGR Finance XVI, Inc. (11)                               None
PGR Finance XVII, Inc. (11)                              Member of 800 Jorie Blvd., L.L.C.
PGR Finance XXI, L.L.C. (7)                              Member of 2305 Enterprise, L.L.C.
PGR Finance VI, Inc. (11)                                Member of 2100 Swift Drive, L.L.C.
PGR Finance XX, Inc. (11)                                None
PGR Finance XIX, Inc. (11)                               None
PGR Finance XVIII, Inc. (11)                             None
Phoenix Office, L.L.C. (7)                               Investment in Plumcor/Thistle, L.L.C., owner of
                                                            Thistle Landing in Phoenix, Arizona
Pine Meadow, L.L.C. (4), (7)                             Building E in development in Pine Meadows Corporate
                                                            Office Park
Prime Aurora, L.L.C. (4), (7)                            Property under development
Prime/Beitler Development Company, L.L.C. (4),
   (5), (7)                                              Sole member of Dearborn Center, L.L.C.
Prime Columbus Industrial, L.L.C. (7)                    Former owner of 6 Ohio Properties

Prime Group Management, L.L.C. (7)                       Manager of Continental Towers
Prime Rolling Meadows, L.L.C. (4), (7)                   Property held for development
Professional Plaza, Ltd. (1), (9)                        620 Market Street (Professional Plaza)
Triad Parking Company, Ltd. (1) (9)                      Former owner of 398-Unit Parking Facility
Two Century Centre, L.L.C. (3), (7)                      1700 East Golf Road (Two Century Centre)
Wilke - Venture, L.L.C. (3), (7)                         3800 and 3850 North Wilke Road and 3930 Ventura
                                                            Drive (Commerce Point)

</TABLE>


(1)    Represents  entities and properties  previously  owned by the Predecessor
       and  whose  operations  were  included  in  the  Predecessor's   combined
       financial statements.
(2)    These entities have divided the ownership of the related properties.
(3)    We have an indirect  ownership  interest in these entities through wholly
       owned  subsidiaries  (PGR  Finance  I-XIV and  XVI-XVII,  Inc.  and 33 N.
       Dearborn SPC, Inc.).
(4)    These  entities own parcels of land that are currently  held for or under
       development.
(5)    We own  approximately  90% of the  entity  and  the  remaining  ownership
       interest has been reflected as minority  interest-  other at December 31,
       1999.
(6)    These subsidiaries currently do not own any property.
(7)    Delaware Limited liability Company
(8)    Illinois Limited Partnership
(9)    Tennessee Limited Partnership
(10)   Illinois General Partnership
(11)   Delaware Corporation
(12)   Illinois Limited Liability Company
(13)   Arizona Limited Liability Company
(14)   Delaware Limited Partnership


<PAGE>


                                  EXHIBIT 23.1







                         CONSENT OF INDEPENDENT AUDITORS

      We consent to the incorporation by reference in the Registration Statement
(Form S-3 No.  333-70369)  of Prime Group Realty  Trust and in the  Registration
Statement  (Form S-8  No.333-67940)  pertaining  to the Prime Group Realty Trust
Share  Incentive Plan of our report dated March 19, 2003 (except for Note 20, as
to which the date is March 25, 2003), with respect to the consolidated financial
statements of Prime Group Realty Trust included in the Annual Report (Form 10-K)
for the year ended December 31, 2002.



                                                          /s/ Ernst & Young LLP

Chicago, Illinois
March 26, 2003