The origins of the Prairie Theatre Exchange can be traced back to the closing of the Manitoba Theatre Centre's drama school in 1972. The school had achieved considerable success offering recreational drama classes but by the early 1970's it was a financial burden that MTC, saddled with a rising deficit caused by recent expansion, could no longer afford to keep open.

When the announcement was made in the summer of 1972, a group of students, parents and other interested Winnipeggers formed a committee to investigate the possibility of opening up a new independent theatre school. This committee became the basis for the first board of the Manitoba Theatre Workshop. Its first chairman was the lawyer Charles Huband whose son David had been a student at the MTC school. Colin Jackson, a former teacher at the MTC school, was appointed as the Workshop's first director.

The Manitoba Theatre Workshop opened for classes on 9 October 1973 in the old Grain Exchange building at 160 Princess Street. This historic structure, which had been empty since 1964, was leased from the City of Winnipeg for $1 a year. Extensive renovations were made with the aid of a $12,000 Opportunities for Youth (OFY) grant.

Like its predecessor, the Manitoba Theatre Workshop's classes were designed for "enthusiastic amateurs" rather than aspiring professional actors. MTW's primary goal was "to make theatre arts accessible and sensible to as many young people as possible." Operating on the philosophy that "involvement, or contact, with the arts is necessary for society", the Workshop hoped to dispel the notion that drama was the exclusive domain of the elite.

In 1973-74, its first season of operation, the Workshop had an enrolment of 210 full-time and 100 part-time students. An infusion of grant money in January narrowly averted a potential financial disaster and allowed MTW to hire additional staff and organize touring programs for the province's schools.

The Manitoba Theatre Workshop initially devoted a large proportion of its resources towards the promotion of drama in both the school system and the larger community. It provided workshops for both teachers and students as well as serving as a resource for corporations, hospitals and other organizations interested in theatre and theatre education. In an effort to reach a wider audience it became involved in the production of "Let's Go", a CKY television program that featured MTW students doing improvisational exercises around a central theme. The Workshop also took over the sponsorship of the annual Junior & Senior High School Drama Festival from MTC.

Many of these activities had to be cut or severely curtailed for the 1975-76 season as a result of CKY's decision to produce "Let's Go" by itself and the decision of the Department of Education to drop its funding for the Drama Festival. The Festival was re-introduced in 1978 and in January 1979 the Manitoba Drama Festivals was incorporated as an official body supported by lottery monies. The festival was expanded the following year to include community theatre groups as well.

In keeping with MTW's educational mandate, its theatre productions were generally oriented towards a younger audience. The Workshop's first shows were student-produced cabarets designed as fundraisers. Canada Council grants were used to establish a puppet troupe that eventually went off on its own in 1976 as the Manitoba Puppet Theatre.
The first adult productions performed at MTW were presented by Confidential Exchange, a studio theatre group of local actors formed in 1974. Their December 1975 production of "Sandhills" was the first show produced at the Workshop under a full Actor's Equity contract. This show was part of the Workshop's first full season of alternative adult theatre, consisting of three Confidential Exchange productions and four touring productions. MTW's formal relationship with Confidential Exchange ended in August 1976 and the group disbanded soon afterward.

The 1977-78 season saw the introduction of The Neighbourhood Theatre (TNT), the province's first professional children's theatre company. Under the artistic leadership of director Deborah Baer Quinn, TNT presented three seasons of high-quality children's and youth theatre. An emphasis was placed on using original and locally-produced material and many of the shows were collective collaborations of the director and actors. A full subscription season was offered for the first time in 1978-79.

The Manitoba Theatre Workshop also hosted numerous touring productions and promoted concerts by popular children's entertainers such as Raffi and Fred Penner.
In September 1981 the Manitoba Theatre Workshop officially changed its name to Prairie Theatre Exchange, signalling a new direction for the company. Gordon McCall succeeded Deborah Quinn as artistic director and David Gillies was appointed as the company's first playwright-in-residence.

The new Prairie Theatre Exchange would offer adult as well as youth and children's programming with the aim of becoming the province's second fully professional theatre company. Its extremely successful first season in 1981-82 was highlighted by a production of George Ryga's "The Ecstasy of Rita Joe" in which all the principal native roles were played by native actors. This fact aroused nation-wide interest and the show was featured on the national news telecasts of both CBC and CTV as well as in a number of other national media outlets. After its Winnipeg run was completed, the show was taken on a five-week tour in southern British Columbia.

An all-Canadian season featuring five world premieres, three of them by Manitoba playwrights, was announced for the following year. This emphasis on local plays, however, proved to be unpopular with the public and resulted in a $20,000 loss.

A new artistic director, Kim McCaw of Saskatoon's Globe Theatre, was brought in for the 1983-84 season. He outlined a new "populist" policy for the PTE that emphasized the production of "contemporary, committed, socially connected work." Under McCaw's direction, the company enjoyed several remarkably successful years and gained a reputation for producing contemporary plays dealing with timely issues. By 1987 it had solidly established itself as the province's younger and hipper alternative to the more conservative Manitoba Theatre Centre. The headline of an article in the 26 June 1987 issue of the Globe & Mail proclaimed: "Prairie Exchange is hot, elaborate theatres are not." For the 1986-87 season PTE announced a balanced budget of $1.2 million, the first time that it had gone over the $1 million mark.

By 1987 it was also obvious that it was no longer feasible for PTE to remain in the old Grain Exchange building. Although the building's historic charm and relaxed atmosphere had become one of the theatre's main selling points, it was simply too small to support a major repertory company.

In November 1987 the PTE announced that it would be moving into a 2100-square-metre space on the third floor of the new Portage Place shopping centre. Kim McCaw defended this somewhat unorthodox juxtaposition of culture and capitalism as a move that would help to bring the arts from the fringes to the centre of the city. Construction began in March of 1989 and the first public performance in the new state-of-the-art 364-seat theatre took place on 12 October 1989.

The new quarters were also designed to accomodate the PTE Theatre School which by the early 1990's boasted an enrollment of well over 400 students. PTE has also continued to offer workshops through the public schoo system as well as curriculum workshops for teachers. In December 1988 PTE was approved as a Teaching Centre by the University of Manitoba.

In 1991 the Quebec director and playwright Michael Springate was named as the PTE's new artistic director, replacing Kim McCaw. Springate's emphasis on the staging of new plays by unknown writers resulted in a drop in attendance and he was replaced in 1995 by Montreal-based freelance director Allen MacInnis. MacInnis announced that a concerted effort would be made to increase attendance by appealing to a wider audience. His first full season as artistic director, 1996-1997, was highlighted by an elaborate staging of "My Fair Lady" and the hosting of the extremely popular touring production "2 Pianos, 4 Hands".