UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

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

For the transition period from                      to                     

PROLOGIS

(Exact name of registrant as specified in its charter)

Maryland		74-2604728
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4545 Airport Way, Denver, Colorado		80239
(Address or principal executive offices)		(Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Yes þ       No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes o No þ

     The number of shares outstanding of the Registrant’s common shares as of May 2, 2007 was 256,595,666.

 

 

PROLOGIS

INDEX

						Page
						Number(s)
PART I. Financial Information
		Item 1.		Financial Statements:
				Consolidated Statements of Earnings and Comprehensive Income – Three Months ended March 31, 2007 and 2006		3
				Consolidated Balance Sheets – March 31, 2007 and December 31, 2006		5
				Consolidated Statements of Cash Flows – Three Months ended March 31, 2007 and 2006		6
				Notes to Consolidated Financial Statements		7
				Report of Independent Registered Public Accounting Firm		24
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		40
		Item 4.		Controls and Procedures		41
PART II. Other Information
		Item 1.		Legal Proceedings		41
		Item 1A.		Risk Factors		42
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		42
		Item 3.		Defaults Upon Senior Securities		42
		Item 4.		Submission of Matters to a Vote of Security Holders		42
		Item 5.		Other Information		42
		Item 6.		Exhibits		42
Form of 2.25% Convertible Notes Due 2037
Computation of Ratio of Earnings to Fixed Charges
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends
KPMG LLP Awareness Letter
Certification of CEO
Certification of CFO
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PROLOGIS

CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2007				2006
Revenues:
Rental income		$	259,409			$	220,482
CDFS disposition proceeds			669,938				305,010
Property management and other fees and incentives			21,647				38,568
Development management and other income			7,439				4,168
Total revenues			958,433				568,228
Expenses:
Rental expenses			66,325				58,425
Cost of CDFS dispositions			438,991				238,286
General and administrative			50,142				33,788
Depreciation and amortization			78,823				70,879
Merger integration and relocation expenses			—				2,372
Other expenses			2,866				2,526
Total expenses			637,147				406,276
Operating income			321,286				161,952
Other income (expense):
Earnings from unconsolidated property funds			18,964				56,445
Earnings from CDFS joint ventures and other unconsolidated investees			544				3,517
Interest expense			(88,651	)			(70,853	)
Interest income on notes receivable			3,266				5,036
Interest and other income, net			7,908				4,574
Total other income (expense)			(57,969	)			(1,281	)
Earnings before minority interest			263,317				160,671
Minority interest			(173	)			(1,125	)
Earnings before certain net gains			263,144				159,546
Gains recognized on dispositions of certain non-CDFS business assets			—				13,709
Foreign currency exchange expenses and losses, net			(13,552	)			(1,322	)
Earnings before income taxes			249,592				171,933
Income taxes:
Current income tax expense			18,100				13,197
Deferred income tax expense			3,321				169
Total income taxes			21,421				13,366
Earnings from continuing operations			228,171				158,567

(Continued)

PROLOGIS

CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME (CONTINUED)
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2007				2006
Discontinued operations:
Income attributable to disposed properties and assets held for sale			969				9,499
Gains recognized on dispositions:
Non-CDFS business assets			4,964				16,428
CDFS business assets			8,341				5,019
Total discontinued operations			14,274				30,946
Net earnings			242,445				189,513
Less preferred share dividends			6,354				6,354
Net earnings attributable to common shares			236,091				183,159
Other comprehensive income items:
Foreign currency translation gains (losses)			(375	)			(4,473	)
Unrealized losses on derivative contracts, net			(1,435	)			(420	)
Comprehensive income		$	234,281			$	178,266
Weighted average common shares outstanding — Basic			254,253				244,282
Weighted average common shares outstanding — Diluted			265,019				255,146
Net earnings per share attributable to common shares — Basic:
Continuing operations		$	0.87			$	0.62
Discontinued operations			0.06				0.13
Net earnings per share attributable to common shares — Basic		$	0.93			$	0.75
Net earnings per share attributable to common shares — Diluted:
Continuing operations		$	0.84			$	0.60
Discontinued operations			0.05				0.12
Net earnings per share attributable to common shares — Diluted		$	0.89			$	0.72
Distributions per common share		$	0.46			$	0.40

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

		March 31,
		2007				December 31,
		(Unaudited)				2006
ASSETS
Real estate		$	14,948,957			$	13,953,999
Less accumulated depreciation			1,322,497				1,280,206
			13,626,460				12,673,793
Investments in and advances to unconsolidated investees			1,552,838				1,299,697
Cash and cash equivalents			554,507				475,791
Accounts and notes receivable			338,181				439,791
Other assets			1,315,295				957,295
Discontinued operations — assets held for sale			74,076				57,158
Total assets		$	17,461,357			$	15,903,525
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt		$	9,333,443			$	8,386,886
Accounts payable and accrued expenses			584,926				518,651
Other liabilities			617,734				546,129
Discontinued operations — assets held for sale			971				1,012
Total liabilities			10,537,074				9,452,678
Minority interest			62,100				52,268
Shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50.00 per share; $0.01 par value; 2,000 shares issued and outstanding at March 31, 2007 and December 31, 2006			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2007 and December 31, 2006			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2007 and December 31, 2006			125,000				125,000
Common Shares; $0.01 par value; 256,510 shares issued and outstanding at March 31, 2007 and 250,912 shares issued and outstanding at December 31, 2006			2,565				2,509
Additional paid-in capital			6,356,420				6,000,119
Accumulated other comprehensive income			215,112				216,922
Distributions in excess of net earnings			(61,914	)			(170,971	)
Total shareholders’ equity			6,862,183				6,398,579
Total liabilities and shareholders’ equity		$	17,461,357			$	15,903,525

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2007				2006
Operating activities:
Net earnings		$	242,445			$	189,513
Minority interest share in earnings			173				1,125
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(13,168	)			(8,822	)
Cost of share-based compensation awards			8,909				4,162
Depreciation and amortization			79,696				74,829
Amortization of deferred loan costs and net premium on debt			(666	)			(2,226	)
Gains recognized on dispositions of non-CDFS business assets			(4,964	)			(30,137	)
Equity in earnings from unconsolidated investees			(19,508	)			(59,962	)
Distributions from and changes in operating receivables of unconsolidated investees			10,736				29,084
Adjustments to foreign currency exchange amounts recognized			7,572				1,811
Deferred income tax expense			3,321				169
Increase in accounts receivable and other assets			(82,190	)			(62,379	)
Increase in accounts payable and accrued expenses and other liabilities			60,535				24,924
Net cash provided by operating activities			292,891				162,091
Investing activities:
Real estate investments			(1,071,178	)			(870,461	)
Purchase of ownership interests in property funds			—				(259,248	)
Cash paid in the Parkridge acquisition, net of cash acquired			(708,085	)			—
Tenant improvements and lease commissions on previously leased space			(15,724	)			(18,407	)
Recurring capital expenditures			(8,123	)			(4,460	)
Proceeds from dispositions of real estate assets			760,531				540,936
Advances on notes receivable			(17,245	)			—
Proceeds from repayment of notes receivable			53,623				36,855
Investments in unconsolidated investees			(32,940	)			(110,661	)
Return of investment from unconsolidated investees			26,231				8,473
Net cash used in investing activities			(1,012,910	)			(676,973	)
Financing activities:
Proceeds from sales and issuances of common shares under various common share plans			13,463				13,233
Distributions paid on common shares			(117,763	)			(97,672	)
Minority interest distributions			(2,358	)			(6,231	)
Dividends paid on preferred shares			(6,354	)			(6,354	)
Debt and equity issuance costs paid			(7,329	)			(5,377	)
Net payments on lines of credit			(747,233	)			(148,589	)
Proceeds from issuance of senior notes, secured and unsecured debt `			600,110				844,428
Proceeds from issuance of convertible senior notes `			1,228,125				—
Payments on senior notes, secured debt and assessment bonds			(164,244	)			(29,108	)
Net cash provided by financing activities			796,417				564,330
Effect of exchange rate changes on cash			2,318				847
Net increase in cash and cash equivalents			78,716				50,295
Cash and cash equivalents, beginning of period			475,791				203,800
Cash and cash equivalents, end of period		$	554,507			$	254,095

See Note 13 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

     Business. ProLogis, collectively with our consolidated subsidiaries (we, our, us, the Company or ProLogis), is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly and through our unconsolidated investees) primarily industrial distribution properties in North America, Europe and Asia. Our business consists of three reportable business segments: (i) property operations, (ii) fund management; and (iii) CDFS business. Our property operations segment represents the direct long-term ownership of industrial distribution and retail properties. Our fund management segment represents the long-term investment management of property funds and the properties they own. Our CDFS business segment primarily encompasses our development or acquisition of real estate properties that are generally contributed to a property fund in which we have an ownership interest and act as manager, or sold to third parties. See Note 12 for further discussion of our business segments.

     Basis of Presentation. The accompanying Consolidated Financial Statements, presented in the U.S. dollar, are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. All material intercompany transactions with consolidated entities have been eliminated.

     The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2007 and our results of operations and cash flows for the three months ended March 31, 2007 and 2006 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our December 31, 2006 Consolidated Financial Statements, as filed with the SEC in our Annual Report on Form 10-K.

     Certain amounts included in the accompanying Consolidated Financial Statements for 2006 have been reclassified to conform to the 2007 financial statement presentation.

     Adoption of New Accounting Pronouncements. In July 2006, Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on various income tax accounting issues, including derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 were effective for our fiscal year beginning January 1, 2007 and was applied to all tax positions upon initial adoption. Only tax positions that meet the “more-likely-than-not” recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 is to be reported as an adjustment to the opening balance of retained earnings for the year of adoption. We adopted the provisions of FIN 48 and, as a result, we recognized a $9.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. See Note 5 for more detail.

     Recent Accounting Pronouncements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for our fiscal year beginning January 1, 2008. We are currently assessing what impact, if any, the adoption of SFAS 157 will have on our financial position and results of operations.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for our fiscal year beginning January 1, 2008. We are currently evaluating the impact, if any, of the provisions of SFAS 159 on our financial position and results of operations.

2. Mergers and Acquisitions:

     In February 2007, we purchased the industrial business and made a 25% investment in the retail business of Parkridge Holdings Limited (“Parkridge”), a European developer. The total purchase price was $1.3 billion, which was financed with $740.5 million in cash, the issuance of 4.8 million common shares (valued for accounting purposes at $71.01 per share for a total of $339.5 million) and the assumption of $178.9 million in debt and other liabilities. The assumption of debt includes $113.0 million of loans made to certain affiliates of Parkridge in November 2006, which were included in accounts and notes receivable in our Consolidated Balance Sheet at December 31, 2006. The cash portion of the acquisition was funded with borrowings under our global senior credit facility (“Global Line”) and a new $600.0 million senior credit facility (see Note 10 for detail on the new credit facility).

     The acquisition included 6.3 million square feet of operating distribution properties, including 0.7 million square feet of developments under construction, and 706 acres of land, primarily in Central Europe and the United Kingdom. We allocated the purchase price based on estimated fair values and recorded approximately $721.2 million of real estate assets, $193.5 million in investments in CDFS joint ventures and other unconsolidated investees, $54.0 million of cash and other tangible assets and $290.2 million of goodwill and other intangible assets. The allocation of the purchase price was based upon preliminary estimates and assumptions and, accordingly, these allocations are subject to revision when final information is available. Revisions to the fair value allocations, which may be significant, will be recorded as adjustments to the purchase price allocations in subsequent periods and should not have a significant impact on our overall financial position or results of operations. The Parkridge acquisition would not have had a material impact on our consolidated results of operations for the three months ended March 31, 2007 and 2006, and as such, we have not presented any pro forma financial information.

     We may be required to make additional payments to the selling shareholders over the next several years (primarily through the issuance of our common shares) of up to £52.3 million (the currency equivalent of $102.8 million at March 31, 2007) upon the successful completion of pending land entitlements or achievement of certain incremental development profit targets.

3. Unconsolidated Investees:

Summary of Investments

     Our investments in and advances to unconsolidated investees, which are accounted for under the equity method, are summarized by type of investee as follows (in thousands):

		March 31,				December 31,
		2007				2006
Property funds		$	1,048,316			$	981,840
CDFS joint ventures and other unconsolidated investees			504,522				317,857
Totals		$	1,552,838			$	1,299,697

Property Funds

     We recognize earnings or losses from our investments in unconsolidated property funds consisting of our proportionate share of the net earnings or losses of the property funds, including interest income on advances made to these investees, if any. In addition, we earn fees for providing services to the property funds. The amounts we have recognized from our investments in property funds are summarized as follows (in thousands):

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Earnings from unconsolidated property funds:
North America		$	5,952			$	42,482
Europe			8,070				11,199
Asia			4,942				2,764
Total earnings from unconsolidated property funds		$	18,964			$	56,445
Property management and other fees and incentives:
North America		$	9,891			$	28,629
Europe			9,631				7,399
Asia			2,125				2,540
Total property management and other fees and incentives		$	21,647			$	38,568

     Contributions of developed properties to a property fund allow us to realize a portion of the profits from our development activities while at the same time allowing us to maintain a long-term ownership interest in our developed properties. This business strategy also provides liquidity to fund our future development activities and enhances future fee income. The property funds generally own operating properties that we have contributed to them, although certain of the property funds have also acquired properties from third parties. We generally receive additional ownership interests in the property funds as part of the proceeds generated by the contributions of properties to maintain our ownership interest. We recognize our proportionate share of the earnings or losses of each property fund, earn fees for acting as the manager, and may earn additional fees and incentives by providing other services including, but not limited to, acquisition, development, construction management, leasing and financing activities. We may also earn incentive performance returns based on the investors’ returns over a specified period.

     On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (collectively “Funds II-IV”) from our fund partner. On March 1, 2006, we contributed substantially all of these assets and associated liabilities to the ProLogis North American Industrial Fund (the “North American Industrial Fund”), which was formed in February 2006 (see below). In connection with these transactions, we recognized the following amounts in the respective financial statement line items for the three months ended March 31, 2006, after deferral of $17.9 million due to our then 20% ownership interest in the North American Industrial Fund (in thousands):

CDFS disposition proceeds (1)		$	12,492
Property management and other fees and incentives (2)		$	21,958
Earnings from unconsolidated property funds (3)		$	37,113

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

Information about our investments in the property funds is as follows (dollars in thousands):

		Ownership Percentage								Investment in and Advances to
		March 31,				December 31,				March 31,				December 31,
Property Fund		2007				2006				2007				2006
ProLogis California			50.0	%			50.0	%		$	111,529			$	112,915
ProLogis North American Properties Fund I			41.3	%			41.3	%			30,774				30,902
ProLogis North American Properties Fund V (1)			11.3	%			11.3	%			55,979				53,331
ProLogis North American Properties Fund VI			20.0	%			20.0	%			38,666				39,149
ProLogis North American Properties Fund VII			20.0	%			20.0	%			31,672				31,816
ProLogis North American Properties Fund VIII			20.0	%			20.0	%			15,532				15,397
ProLogis North American Properties Fund IX			20.0	%			20.0	%			14,287				14,076
ProLogis North American Properties Fund X			20.0	%			20.0	%			15,858				15,399
ProLogis North American Properties Fund XI			20.0	%			20.0	%			31,351				31,871
ProLogis North American Industrial Fund (2)			20.8	%			20.0	%			78,176				72,053
ProLogis European Properties (“PEPR”) (3)			24.7	%			24.0	%			457,557				430,761
ProLogis Japan Properties Fund I			20.0	%			20.0	%			90,914				87,705
ProLogis Japan Properties Fund II (4)			20.0	%			20.0	%			76,021				46,465
Totals										$	1,048,316			$	981,840

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     Summarized financial information of the property funds (for the entire entity, not our proportionate share) and our investment in such funds is presented below (dollars in millions):

		2007
		North
		America				Europe				Asia				Total
For the three months ended March 31, 2007:
Revenues		$	138.2			$	110.3			$	34.1			$	282.6
Net earnings		$	17.8			$	30.7			$	21.7			$	70.2
As of March 31, 2007:
Total assets		$	5,539.7			$	5,096.4			$	2,282.8			$	12,918.9
Amounts due to us		$	8.7			$	17.3			$	80.6			$	106.6
Third party debt (1)		$	3,171.5			$	2,826.6			$	1,017.1			$	7,015.2
Total liabilities		$	3,394.7			$	3,177.3			$	1,188.3			$	7,760.3
Equity		$	2,131.2			$	1,910.5			$	1,094.5			$	5,136.2
Our weighted average ownership (2)			23.1	%			24.7	%			20.0	%			23.2	%
Our investment balance (3)		$	423.8			$	457.6			$	166.9			$	1,048.3
Deferred proceeds, net of amortization (4)		$	118.6			$	140.1			$	87.0			$	345.7

		2006
		North
		America				Europe				Asia				Total
For the three months ended March 31, 2006:
Revenues		$	111.0			$	97.7			$	24.9			$	233.6
Net earnings (5)		$	204.2			$	50.7			$	11.6			$	266.5
As of December 31, 2006:
Total assets		$	5,462.7			$	4,856.0			$	1,958.3			$	12,277.0
Amounts due to us		$	6.7			$	14.0			$	75.2			$	95.9
Third party debt (1)		$	3,113.8			$	2,615.6			$	904.2			$	6,633.6
Total liabilities		$	3,357.1			$	2,968.0			$	1,054.2			$	7,379.3
Equity		$	2,100.1			$	1,881.4			$	904.1			$	4,885.6
Our weighted average ownership (2)			23.1	%			24.0	%			20.0	%			23.0	%
Our investment balance (3)		$	416.8			$	430.8			$	134.2			$	981.8
Deferred proceeds, net of amortization (4)		$	112.8			$	123.7			$	66.2			$	302.7

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

CDFS joint ventures and other unconsolidated investees

     At March 31, 2007, we had investments in entities that perform some of our CDFS business activities (the “CDFS joint ventures”) and investments in other unconsolidated investees. The CDFS joint ventures include entities that develop and own distribution properties and also include entities that perform land, multi-use, retail and residential development activity. The other unconsolidated investees primarily include entities that own a hotel property and office properties.

     The amounts we have recognized as our proportionate share of the earnings (or losses) from our investments in CDFS joints ventures and other unconsolidated investees are summarized as follows (in thousands):

		Three Months Ended
		March 31,
		2007				2006
North America		$	1,849			$	3,306
Europe			78				(172	)
Asia			(1,383	)			383
Total earnings from CDFS joint ventures and other unconsolidated investees		$	544			$	3,517

     Our investments in and advances to these entities are as follows (in thousands):

		March 31,				December 31,
		2007				2006
CDFS joint ventures:
North America		$	78,232			$	75,197
Europe (1)			192,258				8,499
Asia			128,522				119,614
Total CDFS joint ventures			399,012				203,310
Other unconsolidated investees			105,510				114,547
Total		$	504,522			$	317,857

4. Long-Term Compensation:

     We account for share based compensation in accordance with SFAS No. 123R, “Share Based Payment”, which we adopted January 1, 2006, utilizing the modified retrospective transition method. During the three months ended March 31, 2007 and 2006, we recognized $8.9 million and $4.2 million of compensation expense, respectively. This includes expense related to awards granted to our outside trustees and is net of $2.5 million and $1.5 million in 2007 and 2006, respectively, that was capitalized due to our development and leasing activities. The share based compensation expense recognized in 2007 also includes $4.2 million of expense related to accelerated vesting of share options and awards of employees who terminated employment with us in March 2007.

     Our long-term incentive plans provide for grants of share options, stock appreciation rights, full value awards and cash incentive awards to employees and other persons, including outside trustees. As of March 31, 2007, we have the following awards outstanding:

Share Options

     We have granted various share options to our employees and trustees, subject to certain conditions. Each share option is exercisable into one common share. The holders of share options granted before 2001 earn dividend equivalent units (“DEUs”) each year until the earlier of the date the underlying share option is exercised or the expiration date of the underlying share option. Share options granted to employees generally have graded vesting over a four-year period and have an exercise price equal to the market price on the date of grant. Share options granted to employees since September 2006 have an exercise price equal to the closing market price of our common stock on the date at grant. Prior to September 2006, the exercise price was based on the average of the high and low prices on the date of grant. Share

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

options granted to our outside trustees generally vest immediately. Share options are valued at grant date using a Black-Scholes pricing model and compensation expense is recognized over the vesting period.

Full Value Awards

Restricted Share Units

     Restricted share units (“RSUs”), are granted at a rate of one common share per RSU to our employees. The RSUs are valued based upon the market price of a common share on grant date. We recognize the value of the RSUs granted as compensation expense over the applicable vesting period, which generally is four or five years. In addition, annually we issue fully vested deferred share units to our trustees, which are expensed at the time of grant.

Contingent Performance Shares and Performance Share Awards

     Certain employees are granted contingent performance shares (“CPSs”) and performance share awards (“PSAs”). The CPSs are earned based on our ranking in a defined subset of companies in the National Association of Real Estate Investment Trusts’ (“NAREIT’s”) published index. These CPSs generally vest over a three-year period and the recipient must continue to be employed by us until the end of the vesting period. The amount of CPSs to be issued will be based on our ranking at the end of the three-year performance period, and may range from zero to twice the targeted award, or a maximum of 568,000 shares at March 31, 2007. For purposes of calculating compensation expense, we consider the CPSs to have a market condition and therefore we have estimated the grant date fair value of the CPSs using a pricing valuation model. We recognize the value of the CPSs granted as compensation expense utilizing the grant date fair value and the target shares over the vesting period.

     There were grants of PSAs through December 31, 2005 based on performance criteria, established in advance, for each employee eligible for the grant. If a PSA is earned based on the performance criteria, the recipient must continue to be employed by us until the end of the vesting period before any portion of the grant is vested, generally two years. The PSAs are valued based upon the market price of a common share on grant date. We recognize the value of the PSAs granted as compensation expense over the vesting period.

     These full value awards carry no voting rights during the vesting period, but do earn DEUs that are vested according to the underlying award. We account for DEUs as dividends, which are charged to retained earnings and factored into the computation of the fair value of the underlying share award at grant date.

Summary of Activity

     The activity for the three months ended March 31, 2007, with respect to our share options, is as follows.

		Options Outstanding
		Number of				Weighted Average
		Options				Exercise Price				Options Exercisable
Balance at December 31, 2006			8,464,053			$	32.50
Exercised			(490,822	)		$	24.97
Forfeited			(53,333	)		$	47.01
Balance at March 31, 2007			7,919,898			$	32.87				5,093,798

     The activity for the three months ended March 31, 2007, with respect to our full value awards, is as follows:

						Weighted
						Average				Number of
		Number of				Original				Shares
		Shares				Value				Vested
Balance at December 31, 2006			2,264,876
Granted			10,301
Exercised			(310,187	)
Forfeited			(9,317	)
Balance at March 31, 2007			1,955,673			$	45.26				538,209

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

5. Income Taxes:

     We and one of our consolidated subsidiaries have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, (the “Code”), and are not generally required to pay federal income taxes if we make distributions in excess of taxable income and meet the REIT requirements of the Code. We have elected taxable REIT subsidiary (“TRS”) status for certain of our consolidated subsidiaries, which operate primarily in the CDFS business segment. This enables us to provide services and enter into certain other types of transactions that would otherwise be considered impermissible for REITs. We recognize current income tax expense for the federal and state income taxes incurred by our TRSs and we are taxed in certain states in which we operate. In addition, many of the foreign countries where we have operations do not recognize REITs or do not accord REIT status under their respective tax laws to our entities that operate in their jurisdiction. Accordingly, we recognize income taxes for these jurisdictions, as appropriate. We also include interest and penalties, if any, associated with our unrecognized tax benefit liabilities in current income tax expense. During the three months ended March 31, 2007 and 2006, cash paid for income taxes was $5.4 million and $13.7 million, respectively.

     Deferred income tax expense is a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that had been previously recognized as deferred income tax assets and deferred income tax liabilities related to indemnification agreements related to certain contributions to property funds.

     For federal income tax purposes, certain acquisitions have been treated as tax-free transactions resulting in a carry-over basis for tax purposes. For financial reporting purposes and in accordance with purchase accounting, we record all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our TRSs, we recognized the deferred income tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair value of the tangible assets at the date of acquisition. As taxable income is generated in these subsidiaries, we recognize a deferred income tax benefit in earnings as a result of the reversal of the deferred income tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. Any increases or decreases that result from a change in circumstances in the deferred income tax liability recorded in connection with these acquisitions will be reflected as an adjustment to goodwill. During the three months ended March 31, 2007, we reduced deferred tax liabilities and goodwill by $16.3 million.

     The statute of limitations for our tax returns is generally three years, with our major tax jurisdictions being the United States, Luxembourg and the United Kingdom. As such, our tax returns that remain subject to examination are primarily from 2003 and thereafter, except for Catellus Development Corporation (“Catellus”) that we acquired in 2005. Certain 1999 and later federal and state income tax returns of Catellus are still open for audit or are currently under audit by the Internal Revenue Service (“IRS”) and various state taxing authorities.

     As discussed in Note 1, we adopted the provisions of FIN 48 on January 1, 2007 and, as a result, we recognized a $9.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The term “unrecognized tax benefits” in FIN 48 refers to the differences between a tax position taken or expected to be taken in a tax return and the benefit measured and recognized in the financial statements. The unrecognized tax benefit liability of $176.6 million and $163.4 million, which included accrued interest of approximately $52.8 million and $45.2 million, at March 31, 2007 and December 31, 2006, respectively, principally includes estimated federal and state income tax liabilities associated with acquired companies. Any increases or decreases in the liabilities for unrecognized tax benefits associated with the potential income taxes related to an acquired company will be reflected as an adjustment to goodwill recorded as part of the transaction.

6. Discontinued Operations:

     Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The results of operations of the component of the property or a business are reported as discontinued operations for all periods presented. A property is classified as held for sale when certain criteria are met. At such time, the respective assets and liabilities are presented separately on our balance

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

sheet and depreciation and amortization is no longer recognized. Assets held for sale are reported at the lower of their carrying amount or their estimated fair value less the estimated costs to sell the assets.

     The operations of the properties disposed of to third parties during 2007 and the aggregate net gains recognized upon their disposition are presented as discontinued operations in our Consolidated Statements of Earnings and Comprehensive Income for all periods presented. In addition, the operations of 89 properties disposed of during 2006 (15 of which were CDFS business assets) are presented as discontinued operations for the three months ended March 31, 2006. At March 31, 2007 and December 31, 2006, we had 24 and 8 properties, respectively, that were classified as held for sale and accordingly, the respective assets and liabilities are presented separately in our Consolidated Balance Sheets. The operations of the properties held for sale at March 31, 2007 are included in discontinued operations for all periods presented in our Consolidated Statements of Earnings and Comprehensive Income. Interest expense included in discontinued operations represents interest directly attributable to these properties.

     Income attributable to discontinued operations is summarized as follows (in thousands):

		Three Months Ended
		March 31,
		2007				2006
Rental income		$	2,892			$	26,538
Rental expenses			(1,050	)			(12,455	)
Depreciation and amortization			(873	)			(3,950	)
Interest expense			—				(634	)
Income attributable to disposed properties and assets held for sale		$	969			$	9,499

     The following information relates to properties disposed of to third parties, during the periods presented, and recorded as discontinued operations (in thousands, except number of properties):

		Three Months Ended
		March 31,
		2007				2006
Non-CDFS business assets:
Number of properties			7				29
Net proceeds from dispositions		$	48,694			$	137,747
Net gains from dispositions		$	4,964			$	16,428
CDFS business assets:
Number of properties (A)			1				2
Net proceeds from dispositions		$	67,488			$	47,765
Net gains from dispositions		$	8,341			$	5,019

7. Distributions and Dividends:

Common Share Distributions

     Cash distributions of $0.46 per common share for the first quarter of 2007 were paid on February 28, 2007 to holders of common shares of record on February 14, 2007. Quarterly common share distributions paid in 2007 are based on the annual distribution level for 2007 of $1.84 per common share (as compared to $1.60 per common share in 2006) set by our Board of Trustees (“Board”) in December 2006. The payment of common share distributions is subject to the discretion of the Board and is dependent upon our financial condition and operating results, and may be adjusted at the discretion of the Board during the year.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

Preferred Share Dividends

     The annual dividends on our cumulative redeemable preferred shares are $4.27 per share (Series C) and $1.6875 per share (Series F and Series G). For the first quarter of 2007, we paid quarterly dividends of $1.0675 per share (Series C) and $0.4219 per share (Series F and Series G). Such dividends are payable quarterly in arrears on the last day of March, June, September and December. Dividends on preferred shares are payable when, and if, they have been declared by the Board, out of funds legally available for the payment of dividends.

8. Earnings Per Common Share:

     We determine basic earnings per share based on the weighted average number of common shares outstanding during the period. We determine diluted earnings per share based on the weighted average number of common shares outstanding combined with the incremental weighted average common shares that would have been outstanding assuming all potentially dilutive instruments were converted into common shares at the earliest date possible. The following table sets forth the computation of our basic and diluted earnings per share (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2007				2006
Net earnings attributable to common shares		$	236,091			$	183,159
Minority interest (1)			988				1,125
Adjusted net earnings attributable to common shares		$	237,079			$	184,284
Weighted average common shares outstanding — Basic			254,253				244,282
Incremental weighted average effect of conversion of limited partnership units			5,140				5,363
Incremental weighted average effect of potentially dilutive instruments (2)			5,626				5,501
Weighted average common shares outstanding — Diluted			265,019				255,146
Net earnings per share attributable to common shares — Basic		$	0.93			$	0.75
Net earnings per share attributable to common shares — Diluted		$	0.89			$	0.72

9. Real Estate:

     Real estate assets owned directly by us primarily consist of income producing properties, properties under development and land held for future development. Our real estate assets, presented at cost, include the following (in thousands):

		March 31,				December 31,
		2007				2006
Distribution operating properties (1):
Improved land		$	2,312,781			$	2,227,953
Buildings and improvements			8,749,731				8,195,296
Retail operating properties (2):
Improved land			79,916				77,808
Buildings and improvements			230,350				227,380
Land subject to ground leases and other			441,814				472,412
Properties under development, including cost of land (3)			1,021,613				964,842
Land held for development (4)			1,792,273				1,397,081
Other investments (5)			320,479				391,227
Total real estate assets			14,948,957				13,953,999
Less accumulated depreciation			1,322,497				1,280,206
Net real estate assets		$	13,626,460			$	12,673,793

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     We directly own real estate assets in North America (Canada, Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan, South Korea and Singapore).

     During the three months ended March 31, 2007, we acquired 13 distribution properties aggregating 2.1 million square feet with a combined purchase price of $153.6 million, excluding the properties acquired in the Parkridge acquisition discussed in Note 2. During the three months ended March 31, 2006, we acquired seven distribution properties aggregating 1.5 million square feet with a combined purchase price of $100.3 million.

     For our direct-owned properties, the largest customer and the 25 largest customers accounted for 2.6% and 20.2%, respectively, of our annualized collected base rents at March 31, 2007.

10. Debt:

     Our debt consisted of the following (dollars in thousands):

		March 31, 2007								December 31, 2006
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Global Line			3.16	%		$	1,719,112				3.56	%		$	2,462,796
Senior notes and other unsecured debt			5.56	%			4,907,731				5.51	%			4,445,092
Secured debt			6.50	%			1,444,623				6.66	%			1,445,021
Convertible senior notes			2.25	%			1,228,174				—				—
Assessment bonds			3.83	%			33,803				3.85	%			33,977
Totals			4.82	%		$	9,333,443				5.13	%		$	8,386,886

     Our Global Line fluctuates in U.S. dollars based on the underlying currencies and has a total commitment of $3.5 billion at March 31, 2007. The funds may be drawn under the Global Line in U.S. dollar, euro, Japanese yen, British pound sterling, Chinese renminbi, South Korean won and Canadian dollar. The weighted average interest rate represents the weighted average interest rates using local currency rates on borrowings outstanding at the end of the period. In addition, we also have other credit facilities with total commitments of $69.0 million at March 31, 2007.

     In February 2007 in connection with the Parkridge acquisition, as discussed in Note 2, we entered into a new $600.0 million multi-currency senior credit facility. This facility fluctuates in U.S. dollars based on the underlying currencies and the funds may be drawn in U.S. dollar, euro, Japanese yen and British pound sterling. The outstanding balance is

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

included in senior notes and other unsecured debt above. This debt bears interest at a variable rate based on LIBOR plus a margin and matures in October 2009. This debt can be repaid at our option prior to maturity. The facility provides us the ability to re-borrow, within a specified period of time, any amounts repaid on the facility.

     On March 26, 2007, in a private placement, we issued $1.25 billion aggregate principal amount of 2.25% convertible senior notes due 2037, including the exercise of an over-allotment option (“Convertible Notes”). The aggregate net proceeds from this offering, after underwriters’ discounts, were approximately $1.23 billion. We used the net proceeds of the offering to repay a portion of the outstanding balance under our Global Line and for general corporate purposes.

     The Convertible Notes are senior unsecured obligations of ProLogis and are convertible, under certain circumstances, for cash, ProLogis common shares or a combination of cash and ProLogis common shares, at our option, at a conversion rate of 13.0576 shares per $1,000 of principal amount of the notes. The initial conversion price of $76.58 represents a premium of 20% over the March 20, 2007 closing price of $63.82 for our common shares. The notes are redeemable at our option beginning in 2012 for the principal amount plus accrued and unpaid interest and at any time prior to maturity to the extent necessary to preserve our status as a REIT. Holders of the notes have the right to require us to repurchase their notes every five years beginning in 2012, and at any time prior to their maturity upon certain limited circumstances.

     We intend to settle the principal balance of the Convertible Notes in cash and, therefore, we have not included the effect of the conversion of these notes in our computation of diluted earnings per share. In the event that we determine that we will share settle the principal portion of the debt, we will assume the conversion of the debt in our computation of diluted earnings per share, which will result in an adjustment to interest expense and 16.3 million of potentially dilutive shares. The amount in excess of the principal balance of the notes (the “Conversion Spread”) will be settled in cash or, at our option, ProLogis common shares. When the Conversion Spread becomes dilutive to our earnings per share, (i.e. when our share price exceeds $76.58) we will include the shares in our computation of diluted earnings per share. The conversion option associated with the notes, when analyzed as a free standing instrument, meets the criteria to be classified as equity under the Emerging Issues Task Force No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Common Stock”, as outlined in paragraphs 12-32, and therefore, we have accounted for the debt as a single instrument and not bifurcated the derivative instrument.

11. Shareholders’ Equity:

     During the three months ended March 31, 2007, we sold and/or issued common shares under various common share plans, including share-based compensation plans, as follows (in thousands):

		Shares				Proceeds
1999 dividend reinvestment and share purchase plan			17			$	1,005
Long-term incentive plans			801			$	12,458

     In February 2007, we issued 4.8 million common shares in connection with the Parkridge acquisition, see Note 2.

12. Business Segments:

     We have three reportable business segments:

•

Property operations — representing the direct long-term ownership of industrial distribution and retail properties. Each operating property is considered an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Included in this segment are properties we developed and properties we acquired and rehabilitated or repositioned within the CDFS business segment with the intention of contributing the property to a property fund or selling to a third party. All of the costs of our property management function for both our direct-owned portfolio and the properties owned by the property funds and managed by us are reported in rental expenses in the property operations segment. Our operations in the property operations business segment are in North America (Canada, Mexico and the United States), Europe (properties are located in the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Sweden and the United Kingdom and are generally pending contribution to a property fund or sale to a third party) and Asia (properties are located in China, Japan, South Korea, and Singapore and in general will be contributed to a property fund or sold to a third party).

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

	•		Fund management — representing the long-term investment management of property funds and the properties they own. We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds operating in North America, Europe and Asia. Along with the income recognized under the equity method, we include fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property funds, if any. We utilize our leasing and property management expertise to efficiently manage the properties and the funds, and we report the costs as part of rental expenses in the property operations segment. Each investment in a property fund is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Our operations in the fund management segment are in North America (Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Spain, Sweden, and the United Kingdom), and Asia (Japan).
	•		CDFS business — primarily encompasses our development of real estate properties that are subsequently contributed to a property fund in which we have an ownership interest and act as manager, or sold to third parties. Additionally, we acquire properties with the intent to rehabilitate and/or reposition the property in the CDFS business segment prior to being contributed to a property fund. We engage in mixed-use development activities generally with the intention of selling the land or completed projects to third parties. We also have investments in several unconsolidated entities that perform development activities and we include our proportionate share of their earnings or losses in this segment. Additionally, we include fees earned for development activities performed on behalf of customers or third parties, interest income earned on notes receivable related to asset sales and gains on the disposition of land parcels, including land subject to ground leases. The separate activities in this segment are considered to be individual operating segments having similar economic characteristics that are combined within the reportable segment based upon geographic location. Our CDFS business segment operations are in North America (Canada, Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan and South Korea).

     The assets of the CDFS business segment generally include our properties under development, land held for development and investments in and advances to CDFS joint ventures. During the period between the completion of development, rehabilitation or repositioning of a property and the date the property is contributed to a property fund or sold to a third party, the property and its associated rental income and rental expenses are included in the property operations segment because the primary activity associated with the property during that period is leasing. Upon contribution or sale, the resulting gain is included in the income of the CDFS business segment. The assets of the fund management segment include our investments in and advances to the unconsolidated property funds.

     We present the operations and net gains associated with properties sold to third parties generally as discontinued operations. In addition, as of March 31, 2007, we had 24 properties classified as assets held for sale, whose operations are included in discontinued operations. Accordingly, these amounts are excluded from the segment presentation. See Note 6.

     Reconciliations are presented below for: (i) each reportable business segment’s revenue from external customers to our total revenues; (ii) each reportable business segment’s net operating income from external customers to our earnings before minority interest; and (iii) each reportable business segment’s assets to our total assets. Our chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of our revenues, earnings before minority interest and assets, excluding discontinued operations, are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are reflected as reconciling items. The following reconciliations are presented in thousands:

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Revenues:
Property operations (1):
North America		$	210,908			$	201,016
Europe			23,709				8,240
Asia			15,485				2,590
Total property operations segment			250,102				211,846
Fund management (2):
North America			15,843				71,111
Europe			17,701				18,598
Asia			7,067				5,304
Total fund management segment			40,611				95,013
CDFS business (3):
North America			126,711				103,619
Europe			273,444				152,027
Asia			280,100				61,624
Total CDFS business segment			680,255				317,270
Total segment revenues			970,968				624,129
Other – North America			9,307				8,636
Reconciling item (4)			(21,842	)			(64,537	)
Total revenues		$	958,433			$	568,228
Net operating income:
Property operations (5):
North America		$	155,372			$	149,147
Europe			18,264				5,706
Asia			13,026				2,167
Total property operations segment			186,662				157,020
Fund management (2):
North America			15,843				71,111
Europe			17,701				18,598
Asia			7,067				5,304
Total fund management segment			40,611				95,013
CDFS business (6):
North America			36,078				34,810
Europe			76,611				32,113
Asia			125,824				9,650
Total CDFS business segment			238,513				76,573
Total segment net operating income			465,786				328,606
Other – North America			6,422				5,037
Reconciling items:
Earnings from other unconsolidated investees			932				461
General and administrative expenses			(50,142	)			(33,788	)
Depreciation and amortization expense			(78,823	)			(70,879	)
Merger integration and relocation expenses			—				(2,372	)
Other expenses			(115	)			(115	)
Interest expense			(88,651	)			(70,853	)
Interest and other income, net			7,908				4,574
Total reconciling items			(208,891	)			(172,972	)
Total earnings before minority interest		$	263,317			$	160,671

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		March 31,				December 31,
		2007				2006
Assets:
Property operations (7):
North America		$	7,993,574			$	7,960,432
Europe			1,796,607				1,295,207
Asia			673,328				633,623
Total property operations segment			10,463,509				9,889,262
Fund management:
North America			423,824				416,909
Europe			457,557				430,761
Asia			166,935				134,170
Total fund management segment			1,048,316				981,840
CDFS business:
North America			1,342,393				1,312,883
Europe			2,331,836				1,456,064
Asia			869,053				802,464
Total CDFS business segment			4,543,282				3,571,411
Total segment assets			16,055,107				14,442,513
Other – North America			462,088				488,987
Reconciling items:
Investments in and advances to other unconsolidated investees			105,510				114,547
Cash and cash equivalents			554,507				475,791
Accounts receivable			23,303				129,880
Other assets			186,766				194,649
Discontinued operations – assets held for sale			74,076				57,158
Total reconciling items			944,162				972,025
Total assets		$	17,461,357			$	15,903,525

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

13. Supplemental Cash Flow Information:

     Non-cash investing and financing activities for the three months ended March 31, 2007 and 2006 are as follows:

	•		We received $70.3 million and $35.4 million of equity interests in unconsolidated property funds from the contribution of properties to these property funds during the three months ended March 31, 2007 and 2006, respectively.
	•		We capitalized portions of the total cost of our share-based compensation awards of $2.5 million and $1.5 million to the investment basis of our real estate and other assets during the three months ended March 31, 2007, and 2006, respectively.
	•		We assumed $16.0 million of secured debt during the three months ended March 31, 2007 in connection with the acquisition of properties.
	•		As partial consideration for properties we contributed in March 2006 to the North American Industrial Fund, we received ownership interests of $62.1 million, representing a 20% ownership interest, and the property fund assumed $677.2 million of secured debt and short-term borrowings. See Note 3 for further discussion of this transaction.
	•		In connection with the purchase in January 2006 of the 80% ownership interests from our fund partner in Funds II-IV, we assumed $418.0 million of secured debt. See Note 3 for further discussion of this transaction.
	•		As partial consideration for certain property contributions, we received $1.9 million in the form of notes receivable from ProLogis North American Properties Fund V during the three months ended March 31, 2006 (all of which was repaid in 2006).
	•		During the three months ended March 31, 2007, we recognized $11.9 million of minority interest liabilities on investments in entities in which we consolidate and own less than 100%.
	•		We recognized net foreign currency translation losses of $8.4 million and $7.1 million during the three months ended March 31, 2007 and 2006, respectively.

     The amount of interest paid in cash, net of amounts capitalized, for the three months ended March 31, 2007 and 2006 was $53.8 million and $57.6 million, respectively.

     See also the discussion of the Parkridge Acquisition in Note 2 and the discussion of FIN48 and other income tax matters in Note 5.

14. Derivative Financial Instruments:

     We use derivative financial instruments to manage our risk associated with interest and foreign currency exchange rate fluctuations on existing or anticipated obligations and transactions. We do not use derivative financial instruments for trading purposes.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     The following table summarizes the activity in our derivative instruments (in millions):

		For the Three Months Ended
		March 31,
		2007												2006
		Foreign				Foreign								Foreign				Foreign				Interest
		Currency				Currency				Interest				Currency				Currency				Rate
		Put Options (1)				Forwards (2)				Rate Swaps (3)				Put Options (1)				Forwards (2)				Swaps (3)
Notional amount at January 1,		$	54.7			$	661.0			$	—			$	—			$	—			$	—
New contracts			—				1,306.7				500.0				99.7				—				—
Matured or expired contracts			(29.9	)			(162.0	)			(500.0	)			(19.1	)			—				—
Notional amounts at March 31,		$	24.8			$	1,805.7			$	—			$	80.6			$	—			$	—

15. Subsequent Event:

     On April 16, 2007, we entered into an agreement relating to a proposed acquisition of all of the units in MPR, an Australian listed property trust that has an 88.7% ownership interest in ProLogis North American Properties Fund V. The completion of the transaction is subject to a number of conditions, including the approval of MPR unitholders. The estimated time frame for the formal vote of the unitholders is late June or early July 2007. If approved and completed, based on the offer price of A$1.43 (approximately $1.20) per outstanding unit, the cash consideration is A$1.2 billion (or approximately $1.0 billion). The total consideration, including assumed debt and transaction costs, is estimated to be approximately $1.9 billion. We have obtained a commitment from a bank to provide financing of the cash portion of the proposed acquisition. Upon completion of this transaction, we will own 100% of ProLogis North American Properties Fund V (see Note 3).

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
ProLogis:

We have reviewed the accompanying consolidated balance sheet of ProLogis and subsidiaries as of March 31, 2007, and the related consolidated statements of earnings and comprehensive income for the three-month periods ended March 31, 2007 and 2006 and the related consolidated statements of cash flows for the three-month periods ended March 31, 2007 and 2006. These consolidated financial statements are the responsibility of ProLogis’ management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ProLogis and subsidiaries as of December 31, 2006, and the related Consolidated Statements of Earnings, shareholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Denver, Colorado
May 9, 2007

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 1 of this report and our 2006 Annual Report on Form 10-K.

     Certain statements contained in this discussion or elsewhere in this report may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future – including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of developed properties, general conditions in the geographic areas where we operate and the availability of capital in existing or new property funds – are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates; (ii) changes in financial markets, interest rates and foreign currency exchanges rates; (iii) increased or unanticipated competition for our properties; (iv) risks associated with acquisitions; (v) maintenance of real estate investment trust (“REIT”) status; (vi) availability of financing and capital; (vii) changes in demand for developed properties; and (viii) those additional factors discussed in “Item 1A. Risk Factors” of our 2006 Annual Report on Form 10-K. Unless the context otherwise requires, the terms “we”, “us” and “our” refer to ProLogis and our consolidated subsidiaries.

     Management’s Overview

     We are a self-administered and self-managed REIT that operates a global network of real estate properties, primarily industrial distribution properties. The primary business drivers across the globe continue to be the need for greater distribution network efficiency and the growing focus on global trade. Our focus on our customers’ expanding needs has enabled us to become the world’s largest owner, manager and developer of industrial distribution properties.

     Our business is organized into three reportable business segments: (i) property operations; (ii) fund management; and (iii) CDFS business. Our property operations segment represents the direct long-term ownership of distribution and retail properties. Our fund management segment represents the long-term investment management of property funds and the properties they own. Our CDFS business segment primarily encompasses our development or acquisition of real estate properties that are rehabilitated and/or repositioned, and subsequently contributed to a property fund in which we have an ownership interest and act as manager, or sold to third parties.

     We generate and seek to increase revenues, earnings, funds from operations (“FFO”), as defined below, and cash flows through our segments primarily as follows:

•		Property Operations Segment — We earn rent from our customers under long-term operating leases, including reimbursements of certain operating costs, in the distribution and retail properties that we own directly in North America, Europe and Asia. We expect to grow our revenue through the selective acquisition of properties and increases in occupancy rates and rental rates in our existing properties. Our strategy is to achieve these increases in occupancy and rental rates primarily through continued focus on our customers’ global needs for distribution space on the three continents in which we operate and use of the ProLogis Operating System®.
•		Fund Management Segment — We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds operating in North America, Europe and Asia. Along with the income recognized under the equity method, we include fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property funds in this segment. We earn

		fees for services provided to the property funds, such as property management, asset management, acquisition, financing and development fees. We may earn incentives based on the return provided to the fund partners. We expect growth in income recognized to come from newly created property funds and growth in existing property funds. The growth in the existing property funds is expected to come primarily from additional properties the funds will acquire, generally from us, and increased rental revenues in the property funds due, in part, to the leasing and property management efforts from our property operations segment.
•		CDFS Business Segment — We recognize income primarily from the contributions of developed, rehabilitated and repositioned properties to the property funds and from dispositions to third parties. In addition, we: (i) earn fees from our customers or other third parties for development activities that we provide on their behalf; (ii) recognize interest income on notes receivable related to asset dispositions; (iii) recognize net gains from the disposition of land parcels, including land subject to ground leases; and (iv) recognize our proportionate share of the earnings or losses generated by development joint ventures in which we have an investment. We expect increases in this segment to come primarily from the continued development of high-quality distribution and retail properties in our key markets in North America, Europe and Asia, resulting in the contribution to property funds or sale to third parties. In addition, we expect to increase our land and other mixed-use development activities for development management fees and sales to third parties.

Summary of the three months ended March 31, 2007

     The fundamentals of our business continued to be strong in 2007. We increased our net operating income from our property operations segment to $186.7 million for the three months ended March 31, 2007 from $157.0 million from the same period in 2006. The increase was primarily a result of the growth in our direct-owned operating portfolio, as well as an increase in same store net operating income (as defined below) for these assets. Our direct-owned operating portfolio increased due to acquisitions and development of operating properties, offset partially by dispositions.

     Our net operating income from the fund management segment was $40.6 million for the three months ended March 31, 2007, compared to $95.0 million for the same period in 2006. In 2006, we recognized $59.1 million of earnings and incentives associated with the termination of three of the unconsolidated property funds as further discussed below. Excluding these items in 2006, net operating income from this segment increased $4.7 million, or 13.1%, due to an increase in the properties managed by us on behalf of the property funds.

     We increased our total operating portfolio of distribution and retail properties owned or managed, including direct-owned properties, and properties owned by the property funds and CDFS joint ventures, to 403.4 million square feet at March 31, 2007 from 391.4 million square feet at December 31, 2006. Our stabilized leased percentage (as defined below) was 95.4% at March 31, 2007, compared with 95.3% at December 31, 2006. Our same store net operating income increased by 5.6% in the first three months of 2007 over the same period in 2006 and our same store average occupancy increased by 3.6% for the three months ended March 31, 2007, compared to the same period in 2006. Same store rental rates increased 6.9% in the first three months of 2007, compared to the same period of 2006.

     Net operating income of the CDFS business segment increased in the three months ended March 31, 2007 to $238.5 million, compared to $76.6 million for the same period in 2006, due primarily to increased levels of contributions brought about by increased development activity and higher gains on the sale of land parcels. During the three months ended March 31, 2007, we started development on projects with a total expected cost at completion of $598.3 million and completed development projects with a total expected cost of $515.0 million. We believe our strong development and leasing activity throughout 2006 and into 2007, along with the access to capital through the property funds, will continue to support increased contribution activity to the property funds.

Key Transactions during the three months ended March 31, 2007

•

In February 2007, we purchased the industrial business and made a 25% investment in the retail business of Parkridge Holdings Limited (“Parkridge”), a European developer. The total purchase price was $1.3 billion and resulted in the addition of 6.3 million square feet of operating distribution properties, including 0.7 million square feet under development, and 706 acres of land for

			development in the United Kingdom and Central Europe (see Note 2 to our Consolidated Financial Statements in Item 1).
	•		In March 2007, we issued $1.25 billion 2.25% convertible senior notes (including the exercise of an over-allotment option) due 2037 (see Note 10 to our Consolidated Financial Statements in Item 1).
	•		In the first quarter of 2007, we generated net proceeds of $669.9 million and gains of $230.9 million from contributions of CDFS properties and sales of land, excluding discontinued operations. We disposed of seven CDFS and non-CDFS properties and one parcel of land subject to a ground lease to third parties, which are included in discontinued operations, generating net proceeds of $116.2 million and resulting in the recognition of $13.3 million of gains.
	•		During the three months ended March 31, 2007, in addition to the Parkridge acquisition, we acquired 2.1 million square feet of operating properties with a total expected investment of $160.1 million, primarily for future contribution to a property fund or to be held for long-term investment.

Results of Operations

Three months ended March 31, 2007 and 2006

     Information for the three months ended March 31, regarding net earnings attributable to common shares was as follows:

		2007				2006
Net earnings attributable to common shares (in thousands)		$	236,091			$	183,159
Net earnings per share attributable to common shares — Basic		$	0.93			$	0.75
Net earnings per share attributable to common shares — Diluted		$	0.89			$	0.72

     The increase in net earnings in 2007 over 2006 is primarily due to increased gains on contributions of properties to property funds, improved property operating performance and increased gains on sales of land.

Portfolio Information

     In the discussion that follows, we present the results of operations by reportable business segment. See Note 12 to our Consolidated Financial Statements in Item 1 for further description of our segments. Our total operating portfolio of properties includes distribution and retail properties owned by us and distribution properties owned by the property funds and CDFS joint ventures. Our operating portfolio also includes properties that were developed or acquired in our CDFS business segment and are pending contribution to a property fund or disposition to a third party. The operating portfolio does not include properties under development or any other properties owned by the CDFS joint ventures, other than distribution properties, and was as follows (square feet in thousands):

		March 31, 2007								December 31, 2006								March 31, 2006
		Number of				Square				Number of				Square				Number of				Square
Reportable Business Segment		Properties				Feet				Properties				Feet				Properties				Feet
Property operations (1)			1,493				210,403				1,473				204,674				1,436				188,520
Fund management			865				187,249				843				181,273				780				166,869
CDFS business (2)			33				5,762				32				5,474				26				4,314
Totals			2,391				403,414				2,348				391,421				2,242				359,703

		Number of Properties				Square Feet
March 31, 2007			220				50,118
December 31, 2006			205				49,792
March 31, 2006			131				33,217

     The stabilized operating properties owned by us, the property funds and CDFS joint ventures were 95.4% leased at March 31, 2007, 95.3% leased at December 31, 2006 and 95.2% leased at March 31, 2006. The stabilized properties are those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions or the marketing programs in the case of newly developed properties, have been completed and in effect for a sufficient period of time to achieve stabilization. A property generally enters the stabilized pool at the earlier of 12 months from acquisition or completion or when it becomes substantially occupied, which we generally define as 93.0%.

Same Store Analysis

     We evaluate the operating performance of the properties included in each of our three reportable business segments using a “same store” analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include properties owned directly and indirectly, by the property funds and by the CDFS joint ventures, in the same store analysis. Accordingly, we define the same store portfolio of operating properties for each period as those properties that have been in operation throughout the full period in both the current and prior year. When a property is disposed of to a third party, it is removed from the population for the full quarter in which it was disposed and the corresponding period of the prior year. The same store portfolio aggregated 341.7 million square feet at March 31, 2007.

     Same store results were as follows:

	•		Net operating income generated by the same store portfolio (defined for the same store analysis as rental income, excluding termination and renegotiation fees, less rental expenses) increased 5.6% for the three months ended March 31, 2007 over the same period in 2006, due to a 4.9% increase in rental income, partially offset by a 2.5% increase in rental expenses.
	•		Average occupancy in the same store portfolio increased 3.6% for the three months ended March 31, 2007 over the same period in 2006.
	•		The same store portfolio’s rental rates associated with leasing activity for space that has been previously leased by us increased for the three months ended March 31, 2007 by 6.9% over the same period in 2006.

     We believe the factors that impact net operating income, rental rates and average occupancy in the same store portfolio are the same as for the total portfolio. The percentage change presented is the weighted average of the measure computed separately for us and each property fund and CDFS joint venture with the weighting based on each entity’s proportionate share of the combined component on which the change is computed. In order to derive an appropriate measure of period-to-period operating performance, the percentage change computation removes the effects of foreign currency exchange rate movements by computing each property’s components in that property’s functional currency.

     Rental income computed under GAAP applicable to the properties included in the same store portfolio is adjusted to remove the net termination and renegotiation fees recognized in each period. Net termination and renegotiation fees and adjustments excluded from rental income for the same store portfolio (including properties directly owned and properties owned by the property funds and CDFS joint ventures) were $(0.4) million and $1.9 million for the three months ended March 31, 2007 and 2006, respectively. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their lease, offset by the write-off of the asset recognized due to the adjustment to straight-line rents over the lease term, if any. Removing the net termination fees from the same store calculation of rental income allows us to evaluate the growth or decline in each property’s rental income without regard to items that are not indicative of the property’s recurring operating performance.

     In computing the percentage change in rental expenses, the rental expenses applicable to the properties in the same store portfolio include property management expenses for our direct-owned properties. These expenses are

based on the property management fee that is provided for in the individual agreements under which our wholly owned management company provides property management services to each property (generally, the fee is based on a percentage of revenues). On consolidation, the management fee income earned by the management company and the management fee expense recognized by the properties are eliminated and the direct costs of providing property management services are recognized as part of our rental expenses reported under GAAP.

Operational Outlook

     Changes in economic conditions will generally affect customer leasing decisions and absorption of new distribution properties. Since late 2004, we have experienced strong customer demand and continued strengthening in occupancies across our global markets. Growth in global trade continues to support strong market fundamentals, which in turn, supports the acceleration of leasing activity in our global development pipeline. During the twelve-month period ending March 31, 2007, we executed 94.2 million square feet of leases, including 27.3 million square feet of initial leasing activity in new developments and repositioned acquisitions, bringing our stabilized portfolio to 95.4% leased at March 31, 2007. Market rental rates are increasing in most of our markets and we have experienced positive rental rate growth, in the aggregate, for the past four quarters. As a result, we expect to continue to see increasing rents in most of our markets. We expect absorption of available space to continue to be strong throughout 2007. An important fundamental to our long-term growth is repeat business with our global customers. Historically, approximately half of the space leased in our newly developed properties is with repeat customers.

Property Operations Segment

     The net operating income of the property operations segment consists of rental income and rental expenses from the distribution and retail operating properties that we own directly. The costs of our property management function for both our direct-owned portfolio and the properties owned by the property funds are all reported in rental expenses in the property operations segment. The net earnings or losses generated by operating properties that were developed or acquired in the CDFS business segment are included in the property operations segment during the interim period from the date of completion or acquisition through the date the properties are contributed or sold. See Note 12 to our Consolidated Financial Statements in Item 1 for a reconciliation of net operating income to earnings before minority interest. The net operating income from the property operations segment, excluding rental income and rental expenses associated with the properties that are presented as discontinued operations in our Consolidated Financial Statements, was as follows (in thousands).

		Three Months Ended
		March 31,
		2007				2006
Rental income		$	250,102			$	211,846
Rental expenses			63,440				54,826
Total net operating income — property operations segment		$	186,662			$	157,020

     Rental income includes net termination and renegotiation fees and rental expense recoveries of $48.1 million and $43.1 million for the three months ended March 31, 2007 and 2006, respectively. The number and composition of operating properties that we own throughout the periods and the timing of contributions impact rental income and rental expenses for each period. When a property is contributed to a property fund, we begin reporting our share of the earnings of the property under the equity method in the fund management segment. However, the overhead costs incurred by us to provide the management services to the property fund continue to be reported as part of rental expenses. The increases in rental income and rental expenses, in 2007 over 2006, are due primarily to the increase in properties owned and increases in the net operating income of the same store properties we own directly. The increase in the number of properties under management has also contributed to the increase in rental expenses.

Fund Management Segment

     The net operating income of the fund management segment consists of: (i) earnings or losses recognized under the equity method from our investments in the property funds; (ii) fees and incentives earned for services performed on behalf of the property funds; and (iii) interest earned on advances to the property funds, if any. The net earnings or losses of the property funds include the following income and expense items of the property funds,

in addition to rental income and rental expenses: (i) interest income and interest expense; (ii) depreciation and amortization expenses; (iii) general and administrative expenses; (iv) income tax expense; (v) foreign currency exchange gains and losses; and (vi) gains on dispositions of properties. The fluctuations in income we recognize in any given period are generally the result of: (i) variances in the income and expense items of the property funds; (ii) the size of the portfolio and occupancy levels in each period; (iii) changes in our ownership interest; and (iv) fluctuations in foreign currency exchange rates at which we translate our share of net earnings to U.S. dollars, if applicable. The costs of the property management function for the properties owned by the property funds and performed by us are reported in the property operations segment and the costs of the fund management function are included in our general and administrative expenses. See Notes 3 and 12 to our Consolidated Financial Statements in Item 1 for additional information on the property funds and for a reconciliation of net operating income to earnings before minority interest.

     The net operating income from the fund management segment was as follows (in thousands):

		Three Months Ended
		March 31,
		2007				2006
North American property funds (1)		$	15,843			$	71,111
ProLogis European Properties (“PEPR”) (2)			17,701				18,598
Japan property funds (3)			7,067				5,304
Total net operating income — fund management segment		$	40,611			$	95,013