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, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company 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 1, 2008 was 262,152,631.

 

 

PROLOGIS

INDEX

		Page
		Number(s)
PART I. Financial Information			3
Item 1. Financial Statements:			3
Consolidated Statements of Earnings and Comprehensive Income –Three months ended March 31, 2008 and 2007			4
Consolidated Balance Sheets – March 31, 2008 and December 31, 2007			5
Consolidated Statements of Cash Flows – Three months ended March 31, 2008 and 2007			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			42
Item 4. Controls and Procedures			43
PART II. Other Information			43
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			44
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
Certifications Pursuant to Section 906

PART 1.

Item 1. Financial Statements

PROLOGIS

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

		Three months ended
		March 31,
		2008				2007
Revenues:
Rental income		$	268,859			$	256,549
CDFS disposition proceeds:
Developed and repositioned properties			1,263,413				669,938
Acquired property portfolios			83,332				—
Property management and other fees and incentives			29,490				21,647
Development management and other income			7,157				7,439
Total revenues			1,652,251				955,573
Expenses:
Rental expenses			91,256				67,366
Cost of CDFS dispositions:
Developed and repositioned properties			985,307				438,991
Acquired property portfolios			83,332				—
General and administrative			56,472				48,342
Depreciation and amortization			77,550				77,860
Other expenses			2,470				2,866
Total expenses			1,296,387				635,425
Operating income			355,864				320,148
Other income (expense):
Earnings (losses) from unconsolidated property funds			(18,567	)			18,964
Earnings from CDFS joint ventures and other unconsolidated investees			3,272				544
Interest expense			(85,124	)			(88,651	)
Interest and other income, net			5,616				11,174
Total other income (expense)			(94,803	)			(57,969	)
Earnings before minority interest			261,061				262,179
Minority interest			(1,106	)			(173	)
Earnings before certain net losses			259,955				262,006
Foreign currency exchange losses, net			(36,701	)			(13,552	)
Earnings before income taxes			223,254				248,454
Income taxes:
Current income tax expense			24,832				18,100
Deferred income tax expense			2,500				3,321
Total income taxes			27,332				21,421
Earnings from continuing operations			195,922				227,033

(Continued)

PROLOGIS

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

		Three months ended
		March 31,
		2008				2007
Discontinued operations:
Income attributable to disposed properties and assets held for sale		$	494			$	2,107
Gains recognized on dispositions:
Non-CDFS business assets			3,813				4,964
CDFS business assets			130				8,341
Total discontinued operations			4,437				15,412
Net earnings			200,359				242,445
Less preferred share dividends			6,354				6,354
Net earnings attributable to common shares			194,005				236,091
Other comprehensive income items:
Foreign currency translation gains (losses), net			132,940				(375	)
Unrealized losses on derivative contracts, net			(15,508	)			(1,435	)
Comprehensive income		$	311,437			$	234,281
Weighted average common shares outstanding — Basic			258,946				254,253
Weighted average common shares outstanding — Diluted			268,131				265,019
Net earnings per share attributable to common shares — Basic:
Continuing operations		$	0.73			$	0.87
Discontinued operations			0.02				0.06
Net earnings per share attributable to common shares — Basic		$	0.75			$	0.93
Net earnings per share attributable to common shares — Diluted:
Continuing operations		$	0.71			$	0.83
Discontinued operations			0.02				0.06
Net earnings per share attributable to common shares — Diluted		$	0.73			$	0.89
Distributions per common share		$	0.5175			$	0.46

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

PROLOGIS

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

		March 31,
		2008				December 31,
		(Unaudited)				2007
ASSETS
Real estate		$	16,966,913			$	16,578,845
Less accumulated depreciation			1,427,831				1,368,458
			15,539,082				15,210,387
Investments in and advances to unconsolidated investees			2,384,226				2,345,277
Cash and cash equivalents			901,608				418,991
Accounts and notes receivable			373,930				340,039
Other assets			1,430,321				1,389,733
Discontinued operations — assets held for sale			—				19,607
Total assets		$	20,629,167			$	19,724,034
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt		$	11,096,922			$	10,506,068
Accounts payable and accrued expenses			922,631				933,075
Other liabilities			796,656				769,408
Discontinued operations — assets held for sale			—				424
Total liabilities			12,816,209				12,208,975
Minority interest			92,712				78,661
Shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50 per share; $0.01 par value; 2,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2008 and December 31, 2007			125,000				125,000
Common Shares; $0.01 par value; 260,299 shares issued and outstanding at March 31, 2008 and 257,712 shares issued and outstanding at December 31, 2007			2,603				2,577
Additional paid-in capital			6,518,505				6,412,473
Accumulated other comprehensive income			392,754				275,322
Retained earnings			456,384				396,026
Total shareholders’ equity			7,720,246				7,436,398
Total liabilities and shareholders’ equity		$	20,629,167			$	19,724,034

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,
		2008				2007
Operating activities:
Net earnings		$	200,359			$	242,445
Minority interest share in earnings			1,106				173
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(6,916	)			(13,168	)
Cost of share-based compensation awards			7,813				8,909
Depreciation and amortization			77,578				79,696
Share of losses or (equity in earnings) from unconsolidated investees			15,295				(19,508	)
Changes in operating receivables and distributions from unconsolidated investees			(287	)			10,736
Amortization of deferred loan costs			2,912				2,430
Amortization of debt premium, net			(592	)			(3,096	)
Gains recognized on dispositions of non-CDFS business assets			(3,813	)			(4,964	)
Gains recognized on dispositions of CDFS business assets included in discontinued operations			(130	)			(8,341	)
Unrealized foreign currency exchange losses, net			34,841				7,572
Deferred income tax expense			2,500				3,321
Increase in accounts and notes receivable and other assets			(66,785	)			(82,190	)
Increase in accounts payable and accrued expenses and other liabilities			84,780				60,535
Net cash provided by operating activities			348,661				284,550
Investing activities:
Real estate investments			(1,588,722	)			(1,062,837	)
Cash consideration paid in Parkridge acquisition, net of cash acquired			—				(708,085	)
Tenant improvements and lease commissions on previously leased space			(13,819	)			(15,724	)
Recurring capital expenditures			(6,662	)			(8,123	)
Proceeds from dispositions of real estate assets			1,327,213				760,531
Advances on notes receivable			—				(17,245	)
Proceeds from repayment of notes receivable			178				53,623
Investments in and net advances to unconsolidated investees			(28,682	)			(32,940	)
Return of investment from unconsolidated investees			31,040				26,231
Net cash used in investing activities			(279,454	)			(1,004,569	)
Financing activities:
Proceeds from sales and issuances of common shares under various common share plans			97,585				13,463
Distributions paid on common shares			(133,647	)			(117,763	)
Minority interest contributions (distributions)			13,343				(2,358	)
Dividends paid on preferred shares			(6,354	)			(6,354	)
Debt and equity issuance costs paid			(489	)			(7,329	)
Net proceeds (payments) from lines of credit and other credit facilities			607,865				(747,233	)
Proceeds from issuance of debt to finance Parkridge acquisition			—				600,110
Proceeds from issuance of convertible senior notes `			—				1,228,125
Proceeds from issuance of senior notes, secured and unsecured debt `			642				—
Payments on senior notes, secured debt, unsecured debt and assessment bonds			(177,786	)			(164,244	)
Net cash provided by financing activities			401,159				796,417
Effect of exchange rate changes on cash			12,251				2,318
Net increase in cash and cash equivalents			482,617				78,716
Cash and cash equivalents, beginning of period			418,991				475,791
Cash and cash equivalents, end of period		$	901,608			$	554,507

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) investment management; and (iii) CDFS business. Our property operations segment represents the direct long-term ownership of industrial distribution and retail properties. Our investment 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, 2008 and our results of operations and cash flows for the three months ended March 31, 2008 and 2007 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, 2007 Consolidated Financial Statements, as filed with the SEC in our Annual Report on Form 10-K, as amended.

     Certain amounts included in the accompanying consolidated financial statements for 2007 have been reclassified to conform to the 2008 financial statement presentation.

     Adoption of New Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No.157” (“FSP FAS 157-2”), that delays the effective date of SFAS 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of SFAS 157 for financial assets and liabilities, as of January 1, 2008, did not have a material impact on our financial position and results of operations. Fair value measurements identified in FSP FAS 157-2 will be effective for our fiscal year beginning January 1, 2009. We are currently assessing the impact of SFAS 157 for nonfinancial assets and liabilities on our financial position and results of operations.

Recent Accounting Pronouncements. In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

component of equity, which changes the accounting for transactions with noncontrolling interest holders. The provisions of SFAS 141R and SFAS 160 are effective for our fiscal year beginning January 1, 2009. SFAS 141R will be applied to business combinations occurring after the effective date and SFAS 160 will be applied prospectively to all changes in noncontrolling interests, including any that existed at the effective date. We are currently assessing what impact the adoption of SFAS 141R and SFAS 160 will have on our financial position and results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures related to derivatives and hedging activities. SFAS 161 will require disclosures relating to: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 must be applied prospectively and will be effective for our fiscal year beginning January 1, 2009, although early adoption is allowed. We are currently assessing what impact the adoption of SFAS 161 will have on our financial statements.

     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 resulting debt discount would be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption date) as additional non-cash interest expense. The proposed FSP, if ratified in its current form, would be effective January 1, 2009 and would be applied retrospectively to both new and existing convertible instruments, including the convertible notes that we issued in March 2007 and November 2007, and would result in us recognizing additional non-cash interest expense of between $55.8 million and $67.1 million per annum. At its March 26, 2008 meeting, the FASB reaffirmed the guidance of the proposed FSP and directed the staff to begin the balloting process for a final FSP, which is expected to be issued in its final form in May 2008.

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 $733.9 million in cash, $339.5 million of equity (4.8 million common shares valued for accounting purposes at $71.01 per share) and the remainder through the assumption of debt and other liabilities. The cash portion of the acquisition was funded with borrowings under our global senior credit facility (“Global Line”) and a new multi-currency senior unsecured facility.

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,
		2008				2007
Property funds		$	1,735,238			$	1,755,113
CDFS joint ventures and other unconsolidated investees			648,988				590,164
Totals		$	2,384,226			$	2,345,277

Property Funds

     We have recognized fees and incentives and our proportionate share of net earnings or losses, related to our investments in property funds, as follows (in thousands):

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

		Three months ended
		March 31,
		2008				2007
Earnings (losses) from unconsolidated property funds:
North America		$	(17,095	)		$	5,952
Europe			3,790				8,070
Asia			(5,262	)			4,942
Total earnings (losses) from unconsolidated property funds		$	(18,567	)		$	18,964
Property management and other fees and incentives:
North America		$	13,788			$	9,891
Europe			11,898				9,631
Asia			3,804				2,125
Total property management and other fees and incentives		$	29,490			$	21,647

     In our CDFS business segment, as further discussed in Note 12, we develop and acquire real estate properties primarily with the intent to contribute the properties to various property funds in which we have an ownership interest and act as manager. Upon contribution of properties to a property fund, we realize a portion of the profits from our CDFS activities while at the same time allowing us to maintain a long-term ownership interest in our CDFS properties. This business strategy also provides liquidity to fund our future development activities and enhances future fee income. We generally receive ownership interests in the property funds (based on our pre-contribution interest) as part of the proceeds generated by the contributions of properties. 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 recognize our proportionate share of the earnings or losses of each property fund, earn fees for acting as the manager, and 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.

     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		2008				2007				2008				2007
ProLogis California			50.0	%			50.0	%		$	104,744			$	106,630
ProLogis North American Properties Fund I			41.3	%			41.3	%			26,864				27,135
ProLogis North American Properties Fund VI			20.0	%			20.0	%			37,765				37,218
ProLogis North American Properties Fund VII			20.0	%			20.0	%			31,681				31,321
ProLogis North American Properties Fund VIII			20.0	%			20.0	%			14,654				14,982
ProLogis North American Properties Fund IX			20.0	%			20.0	%			14,071				13,986
ProLogis North American Properties Fund X			20.0	%			20.0	%			16,211				15,721
ProLogis North American Properties Fund XI			20.0	%			20.0	%			28,771				30,712
ProLogis North American Industrial Fund (1)			23.2	%			23.2	%			122,258				104,277
ProLogis North American Industrial Fund II (2)			36.9	%			36.9	%			247,167				274,238
ProLogis North American Industrial Fund III (3)			20.0	%			20.0	%			131,232				123,720
ProLogis Mexico Industrial Fund (4)			20.0	%			20.0	%			56,499				38,085
ProLogis European Properties (“PEPR”)			24.9	%			24.9	%			452,241				494,593
ProLogis European Properties Fund II (“PEPF II”) (5)			24.5	%			24.3	%			139,561				158,483
ProLogis Japan Properties Fund I			20.0	%			20.0	%			104,206				87,663
ProLogis Japan Properties Fund II (6)			20.0	%			20.0	%			186,791				189,584
ProLogis Korea Fund (7)			20.0	%			20.0	%			20,522				6,765
Totals										$	1,735,238			$	1,755,113

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):

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

		2008
		North
		America				Europe				Asia				Total
For the three months ended March 31, 2008:
Revenues		$	200.0			$	142.5			$	65.1			$	407.6
Net earnings (losses) (1)		$	(59.3	)		$	6.1			$	(32.7	)		$	(85.9	)
As of March 31, 2008:
Total assets		$	9,237.6			$	8,183.7			$	4,683.2			$	22,104.5
Amounts due to us (from us)		$	31.7			$	(1.9	)		$	122.6			$	152.4
Third party debt (2)		$	5,425.8			$	4,380.0			$	2,305.2			$	12,111.0
Total liabilities		$	5,735.5			$	4,941.3			$	3,113.5			$	13,790.3
Minority interest		$	17.7			$	14.4			$	—			$	32.1
Equity		$	3,484.4			$	3,228.0			$	1,569.7			$	8,282.1
Our weighted average ownership (3)			27.6	%			24.8	%			20.0	%			25.2	%
Our investment balance (4)		$	831.9			$	591.8			$	311.5			$	1,735.2
Deferred gains, net of amortization (5)		$	222.6			$	235.5			$	153.5			$	611.6

		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 December 31, 2007:
Total assets		$	9,034.7			$	6,526.4			$	3,810.5			$	19,371.6
Amounts due to us		$	24.8			$	70.0			$	109.1			$	203.9
Third party debt (2)		$	5,305.2			$	3,456.2			$	1,889.5			$	10,650.9
Total liabilities		$	5,678.5			$	4,057.7			$	2,550.7			$	12,286.9
Minority interest		$	17.4			$	10.8			$	—			$	28.2
Equity		$	3,338.8			$	2,457.8			$	1,259.9			$	7,056.5
Our weighted average ownership (3)			27.9	%			24.8	%			20.0	%			25.5	%
Our investment balance (4)		$	818.0			$	653.1			$	284.0			$	1,755.1
Deferred gains, net of amortization (5)		$	216.4			$	193.9			$	127.0			$	537.3

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

		Our				Notional				Swap
Entity		Ownership				Amounts				Rate				Fair Value
ProLogis North American Industrial Fund II			36.9	%		$	1,005,900				5.31 - 5.83	%		$	(111,847	)
ProLogis North American Industrial Fund III			20.0	%		$	118,000				5.79	%		$	(17,003	)

 

CDFS joint ventures and other unconsolidated investees

     At March 31, 2008, we had investments in entities that perform some of our CDFS business activities (the “CDFS joint ventures”) and certain other investments. These joint ventures include entities that develop and own distribution and retail properties and also include entities that perform land and mixed-use development activity. The other operating joint ventures primarily include entities that own a hotel property and office properties.

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

		Three months ended
		March 31,
		2008				2007
North America		$	2,264			$	1,849
Europe			(293	)			78
Asia			1,301				(1,383	)
Total earnings from CDFS joint ventures and other unconsolidated investees		$	3,272			$	544

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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

		March 31,				December 31,
		2008				2007
CDFS joint ventures:
North America		$	60,969			$	60,502
Europe			272,085				228,396
Asia			207,838				194,583
Total CDFS joint ventures		$	540,892			$	483,481
Other unconsolidated investees			108,096				106,683
Total		$	648,988			$	590,164

4. Long-Term Compensation:

     We recognized $7.8 million and $8.9 million of share-based compensation expense for the three months ended March 31, 2008 and 2007, respectively. This includes expense related to awards granted to our outside trustees and is net of $3.3 million and $2.5 million in 2008 and 2007, respectively, that was capitalized due to our development and leasing activities. The share-based compensation expense recognized in 2008 and 2007 also includes $1.7 million and $4.2 million, respectively, of expense related to accelerated vesting or a change in service period for share options and awards of employees who terminated employment with us or gave notice of future termination of employment.

     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. The full value awards include restricted share units (“RSUs”) and contingent performance shares (“CPSs”).

Summary of Activity

     The activity for the three months ended March 31, 2008, with respect to our share options, is as follows:

		Options Outstanding
		Number of				Weighted Average
		Options				Exercise Price				Options Exercisable
Balance at December 31, 2007			7,998,410			$	36.63				5,504,282
Granted			466				54.76
Exercised			(640,190	)			23.02
Forfeited			(28,763	)			48.21
Balance at March 31, 2008			7,329,923			$	37.78				4,872,930

     The activity for the three months ended March 31, 2008, with respect to our full value awards, is as follows:

		Number of				Weighted Average				Number of
		Shares				Original Value				Shares Vested
Balance at December 31, 2007			2,554,786
Granted (1)			307,848
Exercised			(198,803	)
Forfeited			(22,698	)
Balance at March 31, 2008			2,641,133			$	51.07				633,759

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries, which operate primarily in the CDFS business segment. This allows us to provide services that would otherwise be considered impermissible for REITs. 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. In the United States, we are taxed in certain states in which we operate. Accordingly, we recognize income tax expense for the federal and state income taxes incurred by our TRSs, taxes incurred in certain states and foreign jurisdictions and interest and penalties, if any, associated with our unrecognized tax benefit liabilities.

     Deferred income tax expense is generally a function of the period’s temporary differences, 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 for contributions to certain 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 to the deferred income tax liability recorded in connection with these acquisitions, related to tax uncertainties acquired, will be reflected as an adjustment to goodwill.

     Indemnification Agreements

     We have indemnification agreements related to most property funds operating outside of the United States for the contribution of certain properties. We enter into agreements whereby we indemnify the funds, or our fund partners, for taxes that may be assessed related to the capital gains associated with the step up in the value of the underlying real estate assets when we contribute to these funds.

     The ultimate outcome under these agreements is uncertain as it is dependent on the method and timing of dissolution of the related property fund or disposition of any properties by the property fund. Two of our previous agreements were terminated without any amounts being due or payable by us. We consider the probability, timing and amounts in estimating our potential liability under the agreements, which we have estimated as $31.3 million and $15.5 million at March 31, 2008 and December 31, 2007, respectively. We continue to monitor these agreements and the likelihood of the sale of assets that would result in recognition of a liability. We will adjust the potential liability in the future as facts and circumstances dictate.

6. Discontinued Operations:

     At March 31, 2008, we did not have any properties classified as held for sale and as of December 31, 2007, we had two properties that were classified as held for sale that were subsequently sold in the first quarter of 2008. The operations of the properties held for sale or disposed of to third parties during the first quarter of 2008 and the full year of 2007, including land subject to ground leases, 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. Interest expense is included in discontinued operations only if it is directly attributable to these properties.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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

		Three months ended
		March 31,
		2008				2007
Rental income		$	617			$	5,752
Rental expenses			(95	)			(1,809	)
Depreciation and amortization			(28	)			(1,836	)
Income attributable to disposed properties and assets held for sale		$	494			$	2,107

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

		Three months ended
		March 31,
		2008				2007
Non-CDFS business assets:
Number of properties			3				7
Net proceeds from dispositions		$	37,110			$	48,694
Net gains from dispositions		$	3,813			$	4,964
CDFS business assets:
Number of properties			—				1
Net proceeds from dispositions		$	—			$	67,488
Net gains from dispositions		$	130			$	8,341

7. Distributions and Dividends:

Common Share Distributions

     Cash distributions of $0.5175 per common share for the first quarter of 2008 were paid on February 29, 2008, to holders of common shares of record on February 15, 2008. Quarterly common share distributions paid in 2008 are based on the annual distribution level for 2008 of $2.07 per common share (as compared to $1.84 per common share in 2007) set by our Board of Trustees (“Board”) in December 2007. 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 quarter of 2008, 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
		March 31,
		2008				2007
Net earnings attributable to common shares		$	194,005			$	236,091
Minority interest (1)			1,151				988
Adjusted net earnings attributable to common shares		$	195,156			$	237,079
Weighted average common shares outstanding — Basic			258,946				254,253
Incremental weighted average effect of conversion of limited partnership units			5,053				5,140
Incremental weighted average effect of share options and awards (2)			4,132				5,626
Weighted average common shares outstanding — Diluted			268,131				265,019
Net earnings per share attributable to common shares — Basic		$	0.75			$	0.93
Net earnings per share attributable to common shares — Diluted		$	0.73			$	0.89

9. Real Estate:

     Real estate assets, including CDFS properties pending contribution or disposition, are presented at cost, and consist of the following (in thousands):

		March 31,				December 31,
		2008				2007
Distribution operating properties (1):
Improved land		$	2,216,155			$	2,200,761
Buildings and improvements			9,011,561				8,799,318
Retail operating properties (2):
Improved land			77,019				77,536
Buildings and improvements			252,118				250,884
Land subject to ground leases and other			489,564				458,782
Properties under development, including cost of land (3)			1,906,335				1,986,285
Land held for development (4)			2,374,544				2,152,960
Other investments (5)			639,617				652,319
Total real estate assets			16,966,913				16,578,845
Less accumulated depreciation			1,427,831				1,368,458
Net real estate assets		$	15,539,082			$	15,210,387

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 

     We 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, and South Korea).

     During the three months ended March 31, 2008, we acquired 15 distribution properties aggregating 4.0 million square feet with a combined purchase price of $138.3 million.

     Our largest customer and 25 largest customers accounted for 2.3% and 18.4%, respectively, of our annualized collected base rents at March 31, 2008.

10. Debt:

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

		March 31, 2008								December 31, 2007
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Unsecured lines of credit			3.18	%		$	2,857,384				3.20	%		$	1,955,138
Senior notes and other unsecured debt			5.41	%			4,583,179				5.43	%			4,891,106
Convertible notes			2.07	%			2,334,977				2.07	%			2,332,905
Secured debt			6.55	%			1,289,560				6.55	%			1,294,809
Assessment bonds			3.56	%			31,822				3.63	%			32,110
Totals			4.26	%		$	11,096,922				4.40	%		$	10,506,068

     Our Global Line commitment fluctuates in U.S. dollars based on the underlying currencies and was $3.9 billion at March 31, 2008. The funds may be drawn 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 that, when combined with the Global Line, provide available capacity to borrow approximately $1.2 billion at March 31, 2008. This includes available borrowing under a multi-currency senior unsecured facility that we entered into in connection with the Parkridge acquisition discussed in Note 2.

11. Shareholders’ Equity:

     During the three months ended March 31, 2008, 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			21			$	1,116
Long-term incentive plans			988			$	15,592
Continuous equity offering plan			1,578			$	88,691

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 to be 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. 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 all 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, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan, and South Korea).
	•		Investment 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. Along with the income recognized under the equity method, we include fees earned for services performed on behalf of the property funds, interest earned on advances to the property funds and incentives earned based on investors’ returns. We utilize our leasing and property management expertise to 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 investment management segment are in North America (Canada, 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 (Japan and South Korea).
	•		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 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 to third parties 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), in Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and in Asia (China, Japan and South Korea).

     We have other operating segments that do not meet the threshold criteria to disclose as a reportable segment, primarily the management of land subject to ground leases in the United States. Each ground lease is considered to be an individual operating segment.

     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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 investment management segment include our investments in and advances to the unconsolidated property funds.

     We generally present the operations and net gains associated with properties sold to third parties as 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 (loss) 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 (loss) 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:

		Three months ended
		March 31,
		2008				2007
Revenues:
Property operations (1):
North America		$	210,337			$	208,363
Europe			31,460				23,709
Asia			15,985				15,485
Total property operations segment			257,782				247,557
Investment management (2):
North America			(3,307	)			15,843
Europe			15,688				17,701
Asia			(1,458	)			7,067
Total investment management segment			10,923				40,611
CDFS business (3):
North America			236,691				126,711
Europe			811,672				273,444
Asia			306,465				280,100
Total CDFS business segment			1,354,828				680,255
Total segment revenues			1,623,533				968,423
Other – North America			11,077				8,992
Reconciling item (4)			17,641				(21,842	)
Total revenues		$	1,652,251			$	955,573

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

		Three months ended
		March 31,
		2008				2007
Net operating income (loss):
Property operations (5):
North America		$	140,872			$	153,586
Europe			16,115				16,464
Asia			11,831				13,026
Total property operations segment			168,818				183,076
Investment management (2):
North America			(3,307	)			15,843
Europe			15,688				17,701
Asia			(1,458	)			7,067
Total investment management segment			10,923				40,611
CDFS business (6):
North America			35,014				36,078
Europe			132,270				76,611
Asia			116,549				125,824
Total CDFS business segment			283,833				238,513
Total segment net operating income			463,574				462,200
Other – North America			8,785				6,107
Reconciling items:
Earnings from other unconsolidated investees			2,763				932
General and administrative expenses			(56,472	)			(48,342	)
Depreciation and amortization expense			(77,550	)			(77,860	)
Other expenses			(114	)			(115	)
Interest expense			(85,124	)			(88,651	)
Interest and other income, net			5,199				7,908
Total reconciling items			(211,298	)			(206,128	)
Total earnings before minority interest		$	261,061			$	262,179

		March 31,				December 31,
		2008				2007
Assets:
Property operations (7):
North America		$	7,848,917			$	7,971,582
Europe			2,372,228				1,900,327
Asia			1,184,643				898,375
Total property operations segment			11,405,788				10,770,284
Investment management:
North America			831,917				818,025
Europe			591,802				653,076
Asia			311,519				284,012
Total investment management segment			1,735,238				1,755,113
CDFS business:
North America			1,447,515				1,596,659
Europe			2,713,320				2,977,334
Asia			1,299,656				1,143,062
Total CDFS business segment			5,460,491				5,717,055
Total segment assets			18,601,517				18,242,452
Other – North America			650,770				636,073
Reconciling items:
Investments in and advances to other unconsolidated investees			108,096				106,683
Cash and cash equivalents			901,608				418,991
Accounts receivable			154,024				100,956
Other assets			213,152				199,272
Discontinued operations – assets held for sale			—				19,607
Total reconciling items			1,376,880				845,509
Total assets		$	20,629,167			$	19,724,034

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

		March 31, 2008
		Number of
		Properties				Investment
North America			87			$	908,665
Europe			89				1,691,667
Asia			72				1,030,805
Total			248			$	3,631,137

13. Supplemental Cash Flow Information:

     Non-cash investing and financing activities for the three months ended March 31, 2008 and 2007 are as follows:

	•		We received $133.4 million and $70.3 million of ownership interests in unconsolidated property funds as a portion of our proceeds from the contribution of properties to these property funds during the three months ended March 31, 2008 and 2007, respectively.
	•		We capitalized portions of the total cost of our share-based compensation awards of $3.3 million and $2.5 million to the investment basis of our real estate and other assets during the three months ended March 31, 2008 and 2007, respectively.
	•		We assumed $4.0 million and $16.0 million of secured debt and other liabilities during the three months ended March 31, 2008 and 2007, respectively, in connection with the acquisition of properties.
	•		During the three months ended March 31, 2008 and 2007, we recorded $1.0 million and $11.9 million, respectively, of minority interest liabilities associated with investments made in entities that we consolidate and own less than 100%.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

	•		During the three months ended March 31, 2008 and 2007, we recognized a net loss of $83.3 million and $8.4 million, respectively, in accumulated other comprehensive income related to foreign currency translation and derivative activity.
	•		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 in connection with the adoption of the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”.

     The amount of interest paid in cash, net of amounts capitalized, for the three months ended March 31, 2008 and 2007 was $36.1 million and $53.8 million, respectively.

     During the three months ended March 31, 2008 and 2007, cash paid for income taxes was $13.2 million and $5.4 million, respectively.

     See also the discussion of other non-cash items related to the Parkridge acquisition in Note 2.

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.

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

		For the three months ended March 31,
		2008												2007
		Foreign				Foreign				Interest				Foreign				Foreign				Interest
		Currency				Currency				Rate				Currency				Currency				Rate
		Put Options (1)				Forwards (2)				Swaps (3)				Put Options (1)				Forwards (2)				Swaps (3)
Notional amounts at January 1		$	—			$	360.7			$	—			$	54.7			$	661.0			$	—
New contracts			—				—				250.0				—				1,306.7				500.0
Matured or expired contracts.			—				(360.7	)			—				(29.9	)			(162.0	)			(500.0	)
Notional amounts at March 31		$	—			$	—			$	250.0			$	24.8			$	1,805.7			$	—

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 

Fair Value of Financial Instruments

     Effective January 1, 2008, we adopted SFAS 157, which defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

	•		Level 1 – Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
	•		Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
	•		Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

     Our derivative contracts are the only assets and liabilities that are measured and recognized at fair value using the SFAS 157 hierarchy. The derivative contracts use the Level 2 hierarchy and are recorded in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets for $8.9 million as of March 31, 2008.

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, 2008, the related consolidated statements of earnings and comprehensive income, and statements of cash flows for the three-month periods ended March 31, 2008 and 2007. 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 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, 2007, 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, 2008, 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, 2007, 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 6, 2008

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 2007 Annual Report on Form 10-K, as amended, “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 and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and phrases such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “designed to achieve”, 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 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 continue to be the need for greater distribution network efficiency and the continued growth in 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) investment management; and (iii) development or CDFS business. Our property operations segment represents the direct long-term ownership of distribution and retail properties. Our investment 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 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:

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Property Operations Segment — We earn rent from our customers, including reimbursements of certain operating costs, under long-term operating leases in the distribution and retail properties that we own directly. We expect to grow our revenue through the selective acquisition of properties and increases in rental rates and, to a limited extent, increases in occupancy rates in our existing properties. Our strategy is to achieve increases in rental rates and occupancy primarily through continued focus on our customers’ global needs for distribution space on the three continents in which we operate.

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Investment Management Segment — We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds. Along with the income recognized under the equity method, we recognize fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property funds. We earn fees for services provided to the property funds, such as property management, asset management, acquisition, financing, leasing and development fees. We may earn incentives

		based on the return provided to our 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 we provide as manager of the properties.
•		CDFS Business Segment — We recognize income primarily from the contributions of developed, rehabilitated and repositioned properties and acquired portfolios of 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 perform on their behalf; (ii) recognize interest income on notes receivable related to asset dispositions or development for third parties; (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 growth in income 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.

Summary of the three months ended March 31, 2008

     Although net operating income from our property operations segment decreased to $168.8 million for the three months ended March 31, 2008 from $183.1 million for the same period in 2007, the fundamentals of our business continued to be strong in 2008. The decrease was largely due to us owning a smaller operating portfolio during the first three months of 2008 over the same period in 2007 and an increase in insurance and other rental expenses, including certain amounts that are not recoverable from our customers, offset partially by an increase in same store net operating income (as defined below) for these assets. The increase in insurance expense of $6.0 million was due to a tornado that struck certain properties in Memphis, Tennessee in February 2008 that were owned by us and owned by the property funds and insured by us through our insurance company. In addition, rental expenses have increased due to the increased size of the portfolios we manage on behalf of the property funds. Our direct-owned operating portfolio decreased due to the timing of contributions and dispositions of properties offset by the acquisition and development of properties, resulting in a direct-owned operating portfolio of 1,409 properties at March 31, 2008 as compared with 1,493 properties at March 31, 2007.

     Our net operating income from the investment management segment was $10.9 million for the three months ended March 31, 2008, compared to $40.6 million for the same period in 2007. In the first quarter of 2008, we recognized $31.6 million that represented our share of losses recognized on certain interest rate swap contracts (see Note 3 to our Consolidated Financial Statements in Item 1). Excluding these losses, net operating income from this segment increased $1.9 million, or 4.7%, due primarily to an increase in the number of properties managed by us on behalf of the property funds, including several new property funds that were formed in the last half of 2007.

     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 industrial CDFS joint ventures, to 473.7 million square feet at March 31, 2008 from 459.5 million square feet at December 31, 2007. This increase is primarily in the portfolio of properties owned by the property funds due to contributions of properties from us and acquisitions from third parties. Our stabilized leased percentage (as defined below) was 94.6% at March 31, 2008, compared with 95.6% at December 31, 2007. Our same store net operating income increased by 3.3% in the first three months of 2008 over the same period in 2007. See below for a reconciliation of our consolidated rental income and rental expenses to same store net operating income.

     Net operating income of the CDFS business segment increased for the three months ended March 31, 2008 to $283.8 million from $238.5 million for the same period in 2007. This increase of 19.0% was due primarily to increased levels of contributions brought about by increased development and investment management activity. During the three months ended March 31, 2008, we started development on projects with a total expected cost at completion of $884.4 million and completed development projects with a total expected cost of $871.2 million. We believe our strong development and consistent leasing activity of new developments, along with access to capital through the property funds, will continue to support our contribution activity to the property funds.

Key Transactions in 2008

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In the first three months of 2008, we generated aggregate proceeds of $1.4 billion and recognized aggregate gains of $281.9 million from contributions and dispositions of properties, net of amounts deferred, as follows:

	o		We generated $1.3 billion of proceeds and $278.1 million of gains from the contributions of CDFS developed and repositioned properties and sales of land. This is net of the deferral of $76.8 million of gains related to our ongoing ownership in the property funds that acquired the properties. This also includes one property sold to a third party that was developed under a pre-sale agreement.
	o		We contributed acquired CDFS property portfolios at cost generating $83.3 million of proceeds. We acquired these portfolios of properties in 2007 and 2006 with the intent to contribute them to a new or existing property fund at, or slightly above, our cost.
	o		We disposed of three non-CDFS properties to third parties, all of which are included in discontinued operations, generating proceeds of $37.1 million and $3.8 million of gains.

	•		During the three months ended March 31, 2008, we acquired an aggregate 4.0 million square feet of operating properties with a combined purchase price of $138.3 million. These properties were primarily acquired for future contribution to a property fund, although we may hold certain properties for long-term investment.
	•		We started development on projects with a total expected cost at completion of $884.4 million and completed development projects with a total expected cost of $871.2 million. We also acquired 836 acres of land (or land use rights) for future development for an aggregate purchase price of $372.1 million.
	•		We generated $88.7 million from the issuance of 1.6 million common shares under our Continuous Equity Offering Plan.

Results of Operations

Three months ended March 31, 2008 and 2007

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

		2008				2007
Net earnings attributable to common shares (in thousands)		$	194,005			$	236,091
Net earnings per share attributable to common shares — Basic		$	0.75			$	0.93
Net earnings per share attributable to common shares — Diluted		$	0.73			$	0.89

     The decrease in net earnings in 2008 from 2007 is primarily due to the recognition of our share of losses from the property funds due to interest rate contracts (see Note 3 to our Consolidated Financial Statements in Item 1) and foreign currency exchange losses on the remeasurement of intercompany loans, offset by increased gains on contributions of CDFS properties to property funds.

     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.

Portfolio Information

     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, 2008								December 31, 2007								March 31, 2007
		Number of				Square				Number of				Square				Number of				Square
Reportable Business Segment		Properties				Feet				Properties				Feet				Properties				Feet
Property operations (1)			1,409				210,690				1,409				208,530				1,493				210,403
Investment management			1,167				255,589				1,131				244,150				865				187,249
CDFS business (2)			42				7,422				39				6,801				33				5,762
Totals			2,618				473,701				2,579				459,481				2,391				403,414