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 September 30, 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 (State or other jurisdiction of incorporation or organization)		74-2604728 (I.R.S. Employer Identification No.)

4545 Airport Way, Denver, Colorado		80239
(Address or principal executive offices)		(Zip Code)

(303) 567-5000
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     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 November 1, 2007 was 257,528,190.

 

 

PROLOGIS

INDEX

		Page
		Number(s)
PART I. Financial Information			3
Item 1. Financial Statements:			3
Consolidated Statements of Earnings and Comprehensive Income – Three and Nine months ended September 30, 2007 and 2006			3
Consolidated Balance Sheets – September 30, 2007 and December 31, 2006			5
Consolidated Statements of Cash Flows – Nine months ended September 30, 2007 and 2006			6
Notes to Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			49
PART II. Other Information			49
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			50
Item 4. Submission of Matters to a Vote of Security Holders			50
Item 5. Other Information			50
Item 6. Exhibits			50
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 Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART 1.

Item 1. Financial Statements

PROLOGIS

CONSOLIDATED STATEMENTS OF

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenues:
Rental income		$	282,579			$	232,495			$	813,114			$	673,040
CDFS disposition proceeds:
Developed and repositioned properties			735,428				311,840				2,092,081				1,050,704
Acquired property portfolios			2,406,795				—				2,406,795				—
Property management and other fees and incentives			27,095				20,421				72,679				79,318
Development management and other income			10,321				11,099				23,936				26,525
Total revenues			3,462,218				575,855				5,408,605				1,829,587
Expenses:
Rental expenses			73,473				58,547				212,664				170,723
Cost of CDFS dispositions:
Developed and repositioned properties			572,668				234,216				1,488,343				821,054
Acquired property portfolios			2,338,186				—				2,338,186				—
General and administrative			52,326				37,787				152,971				113,085
Depreciation and amortization			72,497				69,634				225,206				207,876
Other expenses			3,550				2,977				21,484				8,924
Total expenses			3,112,700				403,161				4,438,854				1,321,662
Operating income			349,518				172,694				969,751				507,925
Other income (expense):
Earnings from unconsolidated property funds			46,688				11,215				81,456				78,629
Earnings from CDFS joint ventures and other unconsolidated investees			4,679				9,590				6,996				47,011
Interest expense			(107,964	)			(77,417	)			(287,255	)			(216,933	)
Interest income on notes receivable			2,950				3,914				9,107				13,236
Interest and other income, net			8,663				5,313				23,415				10,596
Total other income (expense)			(44,984	)			(47,385	)			(166,281	)			(67,461	)
Earnings before minority interest			304,534				125,309				803,470				440,464
Minority interest			(1,855	)			(565	)			(2,751	)			(2,541	)
Earnings before certain net gains			302,679				124,744				800,719				437,923
Gains recognized on dispositions of certain non-CDFS business assets			21,289				—				145,374				13,709
Foreign currency exchange gains, net			991				9,202				10,145				16,449
Earnings before income taxes			324,959				133,946				956,238				468,081
Income taxes:
Current income tax expense			14,204				34,824				58,949				75,913
Deferred income tax expense (benefit)			11,892				(22,362	)			5,710				(16,780	)
Total income taxes			26,096				12,462				64,659				59,133
Earnings from continuing operations			298,863				121,484				891,579				408,948

(Continued)

PROLOGIS

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Discontinued operations:
Income attributable to disposed properties and assets held for sale			328				6,601				1,856				17,760
Gains recognized on dispositions:
Non-CDFS business assets			6,607				29,386				38,732				80,037
CDFS business assets			—				15,188				22,537				30,178
Total discontinued operations			6,935				51,175				63,125				127,975
Net earnings			305,798				172,659				954,704				536,923
Less preferred share dividends			6,354				6,354				19,065				19,062
Net earnings attributable to common shares			299,444				166,305				935,639				517,861
Other comprehensive income items:
Foreign currency translation gains			88,700				17,106				93,366				50,761
Unrealized losses on derivative contracts, net			(9,987	)			(17,447	)			(9,234	)			(15,080	)
Comprehensive income		$	378,157			$	165,964			$	1,019,771			$	553,542
Weighted average common shares outstanding — Basic			257,435				245,460				256,270				244,918
Weighted average common shares outstanding — Diluted			267,871				256,233				267,177				255,559
Net earnings per share attributable to common shares — Basic:
Continuing operations		$	1.13			$	0.47			$	3.40			$	1.59
Discontinued operations			0.03				0.21				0.25				0.52
Net earnings per share attributable to common shares — Basic		$	1.16			$	0.68			$	3.65			$	2.11
Net earnings per share attributable to common shares — Diluted:
Continuing operations		$	1.09			$	0.45			$	3.27			$	1.54
Discontinued operations			0.03				0.20				0.24				0.50
Net earnings per share attributable to common shares — Diluted		$	1.12			$	0.65			$	3.51			$	2.04
Distributions per common share		$	0.46			$	0.40			$	1.38			$	1.20

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

PROLOGIS

CONSOLIDATED BALANCE SHEETS

		September 30,
		2007				December 31,
		(Unaudited)				2006
ASSETS
Real estate		$	15,502,984			$	13,953,999
Less accumulated depreciation			1,340,046				1,280,206
			14,162,938				12,673,793
Investments in and advances to unconsolidated investees			2,209,254				1,299,697
Cash and cash equivalents			550,272				475,791
Accounts and notes receivable			400,993				439,791
Other assets			1,309,096				957,295
Discontinued operations — assets held for sale			18,519				57,158
Total assets		$	18,651,072			$	15,903,525
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt		$	9,574,635			$	8,386,886
Accounts payable and accrued expenses			790,791				518,651
Other liabilities			774,314				546,129
Discontinued operations — assets held for sale			385				1,012
Total liabilities			11,140,125				9,452,678
Minority interest			69,102				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 September 30, 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 September 30, 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 September 30, 2007 and December 31, 2006			125,000				125,000
Common Shares; $0.01 par value; 257,282 shares issued and outstanding at September 30, 2007 and 250,912 shares issued and outstanding at December 31, 2006			2,573				2,509
Additional paid-in capital			6,386,977				6,000,119
Accumulated other comprehensive income			301,054				216,922
Retained earnings (distributions in excess of net earnings)			401,241				(170,971	)
Total shareholders’ equity			7,441,845				6,398,579
Total liabilities and shareholders’ equity		$	18,651,072			$	15,903,525

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

PROLOGIS

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine months ended
		September 30,
		2007				2006
Operating activities:
Net earnings		$	954,704			$	536,923
Minority interest share in earnings			2,751				2,541
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(34,042	)			(25,683	)
Cost of share-based compensation awards			18,782				16,430
Depreciation and amortization			227,446				217,024
Amortization of deferred loan costs and net premium on debt			1,014				(5,272	)
Gains recognized on dispositions of non-CDFS business assets			(184,106	)			(93,746	)
Impairment charges			12,600				—
Equity in earnings from unconsolidated investees			(88,452	)			(125,640	)
Distributions from and changes in operating receivables of unconsolidated investees			50,258				86,118
Unrealized foreign currency exchange losses (gains)			11,706				(9,141	)
Deferred income tax expense (benefit)			5,710				(16,780	)
Increase in accounts receivable and other assets			(122,978	)			(235,438	)
Increase in accounts payable and accrued expenses and other liabilities			199,665				219,288
Net cash provided by operating activities			1,055,058				566,624
Investing activities:
Real estate investments			(3,662,646	)			(2,649,918	)
Purchase of Macquarie ProLogis Trust (“MPR”), net of cash acquired			(1,137,028	)			—
Purchase of ownership interests in property funds			—				(259,248	)
Cash paid in the Parkridge acquisition, net of cash acquired			(707,374	)			—
Tenant improvements and lease commissions on previously leased space			(50,095	)			(53,415	)
Recurring capital expenditures			(28,482	)			(21,752	)
Proceeds from dispositions of real estate assets			3,087,967				1,603,551
Proceeds from repayment of notes receivable, net			42,008				70,531
Increase in restricted cash for potential investment			—				(42,174	)
Investments in and advances to unconsolidated investees			(507,378	)			(126,129	)
Return of investment from unconsolidated investees			39,087				100,188
Net cash used in investing activities			(2,923,941	)			(1,378,366	)
Financing activities:
Proceeds from sales and issuances of common shares under various common share plans			26,664				123,926
Distributions paid on common shares			(354,152	)			(293,829	)
Minority interest distributions			(7,065	)			(10,219	)
Dividends paid on preferred shares			(19,065	)			(19,062	)
Debt and equity issuance costs paid			(8,602	)			(8,727	)
Net proceeds from lines of credit			119,017				701,870
Proceeds from issuance of debt to finance MPR and Parkridge acquisitions			1,719,453				—
Proceeds from issuance of convertible senior notes			1,228,125				—
Proceeds from issuance of senior notes, secured and unsecured debt			6,459				1,101,236
Payments on senior notes, secured and unsecured debt and assessment bonds			(787,391	)			(473,829	)
Net cash provided by financing activities			1,923,443				1,121,366
Effect of exchange rate changes on cash			19,921				5,810
Net increase in cash and cash equivalents			74,481				315,434
Cash and cash equivalents, beginning of period			475,791				203,800
Cash and cash equivalents, end of period		$	550,272			$	519,234

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

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 September 30, 2007 and our results of operations for the three and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 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 were 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 was 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 further information.

     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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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.

     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 assessing the impact, if any, of the provisions of SFAS 159 on our financial position and results of operations.

     Proposed Accounting Pronouncements. The FASB has issued proposed FASB Staff Position No. APB-14a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (the “proposed FSP”) that would require, if ratified, separate accounting for the debt and equity components of convertible instruments. The proposed FSP would require that the value assigned to the debt component would be the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The debt would subsequently be accreted to its par value over its expected life with a rate of interest being reflected in earnings that reflects the market rate at issuance. The proposed FSP, if ratified in the form expected, would be effective January 1, 2008 and would be applied retrospectively to both new and existing convertible instruments, including the convertible notes that we issued in March 2007, and would result in approximately $28.0 million to $33.0 million of additional interest expense per annum.

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 $741.2 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 $194.9 million in debt and other liabilities. The assumption of debt includes $113.0 million of loans made by us 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 senior unsecured facility (see Note 10 for more information on the credit facilities).

     The acquisition included 6.3 million square feet of operating distribution properties, including developments under construction, and 1,139 acres of land, primarily in Central Europe and the United Kingdom. We allocated the purchase price based on estimated fair values and recorded approximately $739.3 million of real estate assets, $156.3 million of investments in CDFS joint ventures and other unconsolidated investees, $58.1 million of cash and other tangible assets and $321.9 million of goodwill and other intangible assets included in Other Assets in our Consolidated Balance Sheet. 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 allocation 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 nine months ended September 30, 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 $106.4 million at September 30, 2007) upon the successful completion of pending land entitlements or achievement of certain incremental development profit targets.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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):

		September 30,				December 31,
		2007				2006
Property funds		$	1,722,778			$	981,840
CDFS joint ventures and other unconsolidated investees			486,476				317,857
Totals		$	2,209,254			$	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):

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Earnings from unconsolidated property funds:
North America		$	5,163			$	5,874			$	16,804			$	53,731
Europe			37,167				2,973				51,635				16,622
Asia			4,358				2,368				13,017				8,276
Total earnings from unconsolidated property funds		$	46,688			$	11,215			$	81,456			$	78,629
Property management and other fees and incentives:
North America		$	11,487			$	9,545			$	31,258			$	46,554
Europe			10,139				9,128				31,031				26,076
Asia			5,469				1,748				10,390				6,688
Total property management and other fees and incentives		$	27,095			$	20,421			$	72,679			$	79,318

     In our CDFS business segment, we develop real estate properties primarily with the intent to contribute to a property fund in which we have an ownership interest and act as manager, or to sell to third parties. Additionally, we acquire properties with the intent to rehabilitate and/or reposition the property in the CDFS business segment prior to contributing to a property fund. This includes us acquiring a portfolio of properties with the intent of contributing the portfolio to an existing or future property fund. See Note 12 for further discussion of our CDFS business segment.

     Upon contribution of developed properties to a property fund, we 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 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 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.

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
		September 30,				December 31,				September 30,				December 31,
Property Fund		2007				2006				2007				2006
ProLogis California			50.0	%			50.0	%		$	111,123			$	112,915
ProLogis North American Properties Fund I			41.3	%			41.3	%			28,006				30,902
ProLogis North American Properties Fund V (1)			—				11.3	%			—				53,331
ProLogis North American Properties Fund VI			20.0	%			20.0	%			37,184				39,149
ProLogis North American Properties Fund VII			20.0	%			20.0	%			31,594				31,816
ProLogis North American Properties Fund VIII			20.0	%			20.0	%			15,231				15,397
ProLogis North American Properties Fund IX			20.0	%			20.0	%			14,075				14,076
ProLogis North American Properties Fund X			20.0	%			20.0	%			15,623				15,399
ProLogis North American Properties Fund XI			20.0	%			20.0	%			31,016				31,871
ProLogis North American Industrial Fund (2)			23.3	%			20.0	%			102,169				72,053
ProLogis North American Industrial Fund II (1)			36.9	%			—				296,927				—
ProLogis North American Industrial Fund III (3)			20.0	%			—				134,490				—
ProLogis Mexico Industrial Fund (4)			20.0	%			—				34,603				—
ProLogis European Properties (“PEPR”) (5)			24.9	%			24.0	%			520,817				430,761
ProLogis European Properties Fund II (“PEPF II”) (6)			24.4	%			—				74,594				—
ProLogis Japan Properties Fund I			20.0	%			20.0	%			84,102				87,705
ProLogis Japan Properties Fund II (7)			20.0	%			20.0	%			184,438				46,465
ProLogis Korea Fund (8)			20.0	%			—				6,786				—
Totals										$	1,722,778			$	981,840

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 September 30, 2007:
Revenues		$	161.6			$	120.8			$	47.3			$	329.7
Net earnings (1)		$	9.1			$	148.6			$	17.1			$	174.8
For the nine months ended September 30, 2007:
Revenues		$	441.1			$	361.0			$	120.5			$	922.6
Net earnings (1)		$	42.6			$	202.5			$	53.2			$	298.3
As of September 30, 2007:
Total assets		$	8,947.9			$	5,997.7			$	3,690.5			$	18,636.1
Amounts due to us		$	29.7			$	16.3			$	109.9			$	155.9
Third party debt (2)		$	5,230.8			$	3,186.1			$	1,801.5			$	10,218.4
Total liabilities		$	5,515.1			$	3,465.4			$	2,045.2			$	11,025.7
Minority interest		$	17.3			$	11.0			$	—			$	28.3
Equity		$	3,415.5			$	2,521.3			$	1,645.3			$	7,582.1
Our weighted average ownership (3)			28.0	%			24.8	%			20.0	%			25.4	%
Our investment balance (4)		$	852.1			$	595.4			$	275.3			$	1,722.8
Deferred proceeds, net of amortization (5)		$	209.0			$	173.9			$	127.5			$	510.4

		2006
		North
		America				Europe				Asia				Total
For the three months ended September 30, 2006:
Revenues		$	126.0			$	107.6			$	33.0			$	266.6
Net earnings		$	26.3			$	11.3			$	8.9			$	46.5
For the nine months ended September 30, 2006:
Revenues		$	360.8			$	304.9			$	86.9			$	752.6
Net earnings (6)		$	247.9			$	71.1			$	33.7			$	352.7
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 (2)		$	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
Minority interest		$	5.5			$	6.6			$	—			$	12.1
Equity		$	2,100.1			$	1,881.4			$	904.1			$	4,885.6
Our weighted average ownership (3)			23.1	%			24.0	%			20.0	%			23.0	%
Our investment balance (4)		$	416.8			$	430.8			$	134.2			$	981.8
Deferred proceeds, net of amortization (5)		$	112.8			$	123.7			$	66.2			$	302.7

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     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 North American Industrial Fund, which was formed in February 2006 (see above). In connection with these transactions, we recognized the following amounts in the respective financial statement line items during the first quarter of 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 – developed and repositioned properties (1)		$	12,492
Property management and other fees and incentives (2)		$	21,958
Earnings from unconsolidated property funds (3)		$	37,113

CDFS joint ventures and other unconsolidated investees

     At September 30, 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 develop land, multi-use, retail and residential projects. The other unconsolidated investees primarily include entities that own a hotel property and office properties.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     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								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
North America (1)		$	949			$	8,560			$	5,016			$	44,013
Europe			399				593				979				1,700
Asia			3,331				437				1,001				1,298
Total earnings from CDFS joint ventures and other unconsolidated investees		$	4,679			$	9,590			$	6,996			$	47,011

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

		September 30,				December 31,
		2007				2006
CDFS joint ventures:
North America		$	58,063			$	75,197
Europe (1)			165,624				8,499
Asia			158,151				119,614
Total CDFS joint ventures			381,838				203,310
Other unconsolidated investees			104,638				114,547
Total		$	486,476			$	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 nine months ended September 30, 2007 and 2006, we recognized $18.8 million and $16.4 million of share based compensation expense, respectively. This includes expense related to awards granted to our outside trustees and is net of $7.9 million and $5.3 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 September 30, 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 shares 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 options granted to our outside trustees generally vest immediately. Share options are valued at the grant date using a Black-Scholes pricing model and compensation expense is recognized over the vesting period.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Full Value Awards

Restricted Share Units

     Restricted share units (“RSUs”), are granted at a rate of one common share per RSU to certain employees. The RSUs are valued based upon the market price of a common share on the 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 Trust’s (“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 performance period, and may range from zero to twice the targeted award, which, at September 30, 2007, was a maximum of 555,000 shares. 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 individual and company performance criteria. 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 nine months ended September 30, 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
Granted			4,656			$	64.82
Exercised			(989,462	)		$	26.82
Forfeited			(101,021	)		$	47.39
Balance at September 30, 2007			7,378,226			$	33.08				5,442,159

     The activity for the nine months ended September 30, 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			262,973
Exercised			(386,873	)
Forfeited			(24,225	)
Balance at September 30, 2007			2,116,751			$	46.67				487,195

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 nine months ended September 30, 2007 and 2006, cash paid for income taxes was $22.6 million and $36.9 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 recognize 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 nine months ended September 30, 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 and various state taxing authorities. As these audits are completed, the outcome may impact the liability for unrecognized tax benefits, as discussed below.

     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 our 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 $189.5 million and $163.4 million, which included accrued interest of approximately $65.6 million and $45.2 million, at September 30, 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.

     Indemnification Agreements

     In connection with the formation of two of the property funds, ProLogis Mexico Industrial Fund and PEPF II, we entered into indemnification agreements, whereby we indemnify the funds for certain future capital gains tax liabilities that could be incurred by the funds associated with contributions of properties to the funds after a

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

specified date. Our contributions to the funds are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liabilities associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to the funds at contribution. We have indemnified the funds to the extent that the funds: (i) incur capital gains tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) are required to grant a discount to the buyer of shares under a share transfer transaction as a result of the funds transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. The agreements limit the amount that is subject to our indemnification with respect to each property to 100% of the actual capital gains tax liabilities that are deferred and transferred by us to the funds at the time of the initial contribution. In addition, we have an indemnification to PEPR related to the properties that were contributed to PEPR since its IPO. In connection with our acquisition of MPR, we are no longer obligated under an indemnification we previously provided to ProLogis North American Properties Fund V and, accordingly, we recognized a deferred tax benefit of $6.3 million during the third quarter of 2007 for the reversal of the obligation. Pursuant to the indemnification agreements, we have recognized a liability of $20.0 million and $5.9 million at September 30, 2007 and December 31, 2006, respectively.

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. Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. 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 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 costs to sell the assets.

     The operations of the 71 properties disposed of to third parties during 2007, as well as land subject to a ground lease, 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 (also see the table below). In addition, the operations of 89 properties disposed of to third parties during the year ended December 31, 2006 are presented as discontinued operations for the three and nine months ended September 30, 2006. At September 30, 2007 and December 31, 2006, we had one and eight 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 property held for sale at September 30, 2007 are included in discontinued operations for all periods presented in our Consolidated Statements of Earnings and Comprehensive Income. Interest expense, if any, 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								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Rental income		$	549			$	11,412			$	7,066			$	50,316
Rental expenses			(213	)			(2,724	)			(2,970	)			(22,534	)
Depreciation and amortization			(8	)			(2,087	)			(2,240	)			(9,148	)
Interest expense			—				—				—				(874	)
Income attributable to disposed properties and assets held for sale		$	328			$	6,601			$	1,856			$	17,760

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     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								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Non-CDFS business assets:
Number of properties			16				17				67				53
Net proceeds from dispositions		$	33,679			$	80,014			$	199,879			$	433,747
Net gains from dispositions		$	6,607			$	29,386			$	38,732			$	80,037
CDFS business assets:
Number of properties			—				7				4				12
Net proceeds from dispositions		$	—			$	117,161			$	173,298			$	222,612
Net gains from dispositions		$	—			$	15,188			$	22,537			$	30,178

7. Distributions and Dividends:

Common Share Distributions

     Cash distributions of $0.46 per common share for each of the first, second and third quarters of 2007 were paid on February 28, 2007, May 31, 2007 and August 31, 2007, respectively, to holders of common shares of record on February 14, 2007, May 16, 2007 and August 16, 2007, respectively. 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.

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, second and third quarters 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 effect from all outstanding potentially dilutive instruments.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     The following table sets forth the computation of our basic and diluted earnings per share (in thousands, except per share amounts):

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Net earnings attributable to common shares		$	299,444			$	166,305			$	935,639			$	517,861
Minority interest (1)			947				565				3,409				2,541
Adjusted net earnings attributable to common shares		$	300,391			$	166,870			$	939,048			$	520,402
Weighted average common shares outstanding — Basic			257,435				245,460				256,270				244,918
Incremental weighted average effect of conversion of limited partnership units			5,011				5,142				5,086				5,218
Incremental weighted average effect of share options and awards (2)			5,425				5,631				5,821				5,423
Weighted average common shares outstanding — Diluted			267,871				256,233				267,177				255,559
Net earnings per share attributable to common shares — Basic		$	1.16			$	0.68			$	3.65			$	2.11
Net earnings per share attributable to common shares — Diluted		$	1.12			$	0.65			$	3.51			$	2.04

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):

		September 30,				December 31,
		2007				2006
Distribution operating properties (1):
Improved land		$	2,190,354			$	2,227,953
Buildings and improvements			8,579,926				8,195,296
Retail operating properties (2):
Improved land			77,446				77,808
Buildings and improvements			249,774				227,380
Land subject to ground leases and other			466,800				472,412
Properties under development, including cost of land (3)			1,242,359				964,842
Land held for development (4)			2,241,569				1,397,081
Other investments (5)			454,756				391,227
Total real estate assets			15,502,984				13,953,999
Less accumulated depreciation			1,340,046				1,280,206
Net real estate assets		$	14,162,938			$	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 nine months ended September 30, 2007, we acquired 33 distribution properties aggregating 5.1 million square feet with a combined purchase price of $253.9 million, excluding the properties acquired in the Parkridge acquisition discussed in Note 2 and the MPR acquisition discussed in Note 3. During the nine months ended September 30, 2006, we acquired 62 distribution properties aggregating 11.5 million square feet with a combined purchase price of $627.1 million.

     During the nine months ended September 30, 2007 and 2006, we recognized gains of $145.4 million and $13.7 million, respectively, on the contribution of certain non-CDFS properties to the property funds (77 in 2007 and 12 in 2006), from our property operations segment. In addition, we recognized previously deferred proceeds related to properties sold to a third party by a property fund. Due to our continuing involvement through our ownership in the property funds, these dispositions are not included in discontinued operations and the gains recognized represent the portion attributable to the third party ownership in the property funds that acquired the properties.

     Included in other expenses for the nine months ended September 30, 2007, is an impairment charge of $12.6 million related to certain properties held and used in our property operations segment.

     For our direct-owned properties, the largest customer and the 25 largest customers accounted for 2.8% and 20.3%, respectively, of our annualized collected base rents at September 30, 2007.

10. Debt:

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

		September 30, 2007								December 31, 2006
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Global line			3.87	%		$	2,533,087				3.56	%		$	2,462,796
Senior notes and other unsecured debt			5.76	%			4,490,765				5.51	%			4,445,092
Secured debt			6.55	%			1,287,518				6.66	%			1,445,021
Convertible notes			2.25	%			1,230,356				—				—
Assessment bonds			3.72	%			32,909				3.85	%			33,977
Totals			4.91	%		$	9,574,635				5.13	%		$	8,386,886

     Our Global Line commitment fluctuates in U.S. dollars based on the underlying currencies and was $3.6 billion at September 30, 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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 $70.9 million at September 30, 2007.

     In February 2007 in connection with the Parkridge acquisition, as discussed in Note 2, we entered into a new 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. In September 2007, the outstanding balance was paid down with proceeds from the contribution of certain of the Parkridge properties to PEPF II. As of September 30, 2007, the outstanding balance was $358.8 million and is included in senior notes and other unsecured debt above. Borrowings under this facility bear interest at a variable rate based upon the London Interbank Offered Rate (“LIBOR”) plus a margin and the facility 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. As of September 30, 2007, we had available capacity to borrow $276.4 million under this 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, our common shares or a combination of cash and our 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 of 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. Based on the conversion rate, 16.3 million shares would be required to settle the principal amount in shares. Such potentially dilutive shares, and the corresponding adjustment to interest expense, are not included in our computation of diluted earnings per share. 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 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”, and therefore, we have accounted for the debt as a single instrument and not bifurcated the derivative instrument. See Note 1 for information on a proposed accounting pronouncement that, if issued in its current form, would impact our accounting for the Convertible Notes.

11. Shareholders’ Equity:

     During the nine months ended September 30, 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			50			$	3,095
Long-term incentive plans			1,339			$	25,697
Employee share purchase plan			23			$	1,138

     Limited partnership units were redeemed for 128,000 common shares during the nine months ended September 30, 2007.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

       In February 2007, we issued 4.8 million common shares in connection with the Parkridge acquisition that is discussed in 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 (the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Sweden and the United Kingdom) and Asia (China, Japan, South Korea, and Singapore).
	•		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, Slovakia, Spain, Sweden, and the United Kingdom), and Asia (Korea and 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 contributing to a property fund. The proceeds and related costs of these dispositions are presented as Developed and Repositioned Properties in the Consolidated Statements of Earnings and Comprehensive Income. In addition, we occasionally acquire a portfolio of properties with the intent of contributing the portfolio to an existing or future property fund. The proceeds and related costs of these dispositions are presented as Acquired Property Portfolios in the Consolidated Statements of Earnings and Comprehensive Income. We engage in mixed-use development activities, including redevelopment of military bases and airports. 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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 September 30, 2007, we had one property 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 total assets 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								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenues:
Property operations (1):
North America		$	229,453			$	203,756			$	659,066			$	603,050
Europe			33,300				10,006				86,239				23,943
Asia			9,234				9,185				36,774				20,057
Total property operations segment			271,987				222,947				782,079				647,050
Fund management (2):
North America			16,650				15,419				48,062				100,285
Europe			47,306				12,101				82,666				42,698
Asia			9,827				4,116				23,407				14,964
Total fund management segment			73,783				31,636				154,135				157,947
CDFS business (3):
North America			2,311,787				40,534				2,752,240				337,725
Europe			844,567				6,863				1,125,590				444,887
Asia			2,917				289,141				656,114				351,281
Total CDFS business segment			3,159,271				336,538				4,533,944				1,133,893
Total segment revenues			3,505,041				591,121				5,470,158				1,938,890
Other – North America			10,592				9,548				31,035				25,990
Reconciling item (4)			(53,415	)			(24,814	)			(92,588	)			(135,293	)
Total revenues		$	3,462,218			$	575,855			$	5,408,605			$	1,829,587
Net operating income:
Property operations (5):
North America		$	169,955			$	152,027			$	471,663			$	450,965
Europe			24,609				7,253				65,506				16,486
Asia			6,621				8,288				29,101				17,994
Total property operations segment			201,185				167,568				566,270				485,445
Fund management (2):
North America			16,650				15,419				48,062				100,285
Europe			47,306				12,101				82,666				42,698
Asia			9,827				4,116				23,407				14,964
Total fund management segment			73,783				31,636				154,135				157,947
CDFS business (6):
North America			96,593				21,187				234,635				119,339
Europe			145,084				5,867				223,854				102,375
Asia			3,304				72,405				240,386				82,545
Total CDFS business segment			244,981				99,459				698,875				304,259
Total segment net operating income			519,949				298,663				1,419,280				947,651
Other – North America			7,921				6,380				21,580				16,872
Reconciling items:
Earnings (losses) from other unconsolidated investees			902				(95	)			4,971				3,583
General and administrative expenses			(52,326	)			(37,787	)			(152,971	)			(113,085	)
Depreciation and amortization expense			(72,497	)			(69,634	)			(225,206	)			(207,876	)
Other expenses			(114	)			(114	)			(344	)			(344	)
Interest expense			(107,964	)			(77,417	)			(287,255	)			(216,933	)
Interest and other income, net			8,663				5,313				23,415				10,596
Total reconciling items			(223,336	)			(179,734	)			(637,390	)			(524,059	)
Total earnings before minority interest		$	304,534			$	125,309			$	803,470			$	440,464