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, 2006

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

For the transition period from                                          to                                         

Commission File Number 01-12846

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 (Address or principal executive offices)		80239 (Zip Code)

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

14100 East 35^th Place, Aurora, Colorado 80011
(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. (Check one):

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

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

Yes o No þ

     The number of shares outstanding of the Registrant’s common shares as of May 4, 2006 was 244,975,819.

 

 

PROLOGIS

INDEX

						Page
						Number(s)
PART I.		Financial Information
		Item 1.		Financial Statements:
				Consolidated Statements of Earnings and Comprehensive Income — Three Months Ended March 31, 2006 and 2005			3
				Consolidated Balance Sheets – March 31, 2006 and December 31, 2005			5
				Consolidated Statements of Cash Flows – Three Months Ended March 31, 2006 and 2005			6
				Notes to Consolidated Financial Statements			7
				Report of Independent Registered Public Accounting Firm			23
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			40
		Item 4.		Controls and Procedures			40
PART II.		Other Information
		Item 1.		Legal Proceedings			40
		Item 1A.		Risk Factors			40
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			40
		Item 3.		Defaults In Senior Securities			40
		Item 4.		Submission of Matters to a Vote of Security Holders			41
		Item 5.		Other Information			41
		Item 6.		Exhibits			41
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 Finanical Officer
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PROLOGIS

CONSOLIDATED STATEMENTS OF

		Three Months Ended
		March 31,
		2006				2005
Revenues:
Rental income		$	233,033			$	131,203
CDFS dispositions proceeds			305,010				282,591
Property management and other fees and incentives			38,568				16,527
Development management and other income			4,168				131
Total revenues			580,779				430,452
Expenses:
Rental expenses			64,171				37,521
Cost of CDFS dispositions			238,286				227,250
General and administrative			33,788				23,934
Depreciation and amortization			72,554				41,470
Merger integration and relocation expenses			2,372				2,751
Other expenses			2,526				1,913
Total expenses			413,697				334,839
Operating income			167,082				95,613
Other income (expense):
Earnings from unconsolidated property funds			56,445				11,771
Earnings from CDFS joint ventures and other unconsolidated investees			3,517				498
Interest expense			(70,853	)			(36,493	)
Interest income on long-term notes receivable			5,036				—
Interest and other income			4,574				1,147
Total other income (expense)			(1,281	)			(23,077	)
Earnings before minority interest			165,801				72,536
Minority interest			(1,125	)			(1,341	)
Earnings before certain net gains (expenses/losses)			164,676				71,195
Gains recognized on dispositions of certain non-CDFS business assets, net			13,709				—
Foreign currency exchange expenses/losses, net			(1,322	)			(114	)
Earnings before income taxes			177,063				71,081
Income taxes:
Current income tax expense			13,197				1,173
Deferred income tax expense			169				839
Total income taxes			13,366				2,012
Earnings from continuing operations			163,697				69,069

(Continued)

PROLOGIS

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

		Three Months Ended
		March 31,
		2006				2005
Discontinued operations:
Income attributable to disposed properties and assets held for sale			4,369				1,961
Losses related to temperature-controlled distribution assets			—				(11,370	)
Gains (losses) recognized on dispositions, net:
Non-CDFS business assets			16,428				2,207
CDFS business assets			5,019				(439	)
Total discontinued operations			25,816				(7,641	)
Net earnings			189,513				61,428
Less preferred share dividends			6,354				6,354
Net earnings attributable to common shares			183,159				55,074
Other comprehensive income items:
Foreign currency translation adjustments			(4,473	)			(15,196	)
Unrealized gains (losses) on derivative contracts, net			(420	)			400
Comprehensive income		$	178,266			$	40,278
Weighted average common shares outstanding — Basic			244,282				186,154
Weighted average common shares outstanding — Diluted			255,146				196,180
Net earnings (loss) per share attributable to common shares — Basic:
Continuing operations		$	0.64			$	0.34
Discontinued operations			0.11				(0.04	)
Net earnings per share attributable to common shares — Basic		$	0.75			$	0.30
Net earnings (loss) per share attributable to common shares — Diluted:
Continuing operations		$	0.62			$	0.33
Discontinued operations			0.10				(0.04	)
Net earnings per share attributable to common shares — Diluted		$	0.72			$	0.29
Distributions per common share		$	0.40			$	0.37

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

PROLOGIS

CONSOLIDATED BALANCE SHEETS

		March 31,
		2006				December 31,
		(Unaudited)				2005
ASSETS
Real estate		$	12,002,993			$	11,875,130
Less accumulated depreciation			1,149,705				1,118,547
			10,853,288				10,756,583
Investments in and advances to unconsolidated investees			1,189,097				1,049,743
Cash and cash equivalents			254,095				191,716
Accounts and notes receivable			301,861				327,214
Other assets			808,042				788,840
Discontinued operations — assets held for sale			258,236				—
Total assets		$	13,664,619			$	13,114,096
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt		$	7,054,628			$	6,677,880
Accounts payable and accrued expenses			328,208				332,339
Other liabilities			600,343				557,210
Discontinued operations — assets held for sale			46,652				—
Total liabilities			8,029,831				7,567,429
Minority interest			53,546				58,644
Shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50.00 per share; $0.01 par value; 2,000,000 shares issued and outstanding at March 31, 2006 and December 31, 2005			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000,000 shares issued and outstanding at March 31, 2006 and December 31, 2005			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000,000 shares issued and outstanding at March 31, 2006 and December 31, 2005			125,000				125,000
Common Shares; $0.01 par value; 244,817,298 shares issued and outstanding at March 31, 2006 and 243,781,142 shares issued and outstanding at December 31, 2005			2,448				2,438
Additional paid-in capital			5,618,632				5,606,017
Accumulated other comprehensive income			144,693				149,586
Distributions in excess of net earnings			(534,531	)			(620,018	)
Total shareholders’ equity			5,581,242				5,488,023
Total liabilities and shareholders’ equity		$	13,664,619			$	13,114,096

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

PROLOGIS

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2006				2005
Operating activities:
Net earnings		$	189,513			$	61,428
Minority interest share in earnings			1,125				1,341
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(8,821	)			(1,731	)
Cost of share-based compensation awards			5,199				4,773
Depreciation and amortization			74,829				43,782
Amortization of deferred loan costs and net premium on debt			(1,815	)			1,179
Gains recognized on dispositions of non-CDFS business assets, net			(30,137	)			(2,207	)
Impairment charge on assets held for sale			—				13,084
Equity in earnings from unconsolidated investees			(59,962	)			(12,269	)
Distributions from and changes in operating receivables of unconsolidated investees			29,084				14,488
Purchases of derivative contracts			(1,007	)			(965	)
Adjustments to foreign currency exchange amounts recognized			1,811				285
Deferred income tax expense			169				839
Increase in accounts receivable and other assets			(61,784	)			(20,565	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities			37,008				(4,481	)
Net cash provided by operating activities			175,212				98,981
Investing activities:
Real estate investments			(870,651	)			(538,841	)
Purchase of ownership interests in property funds			(259,248	)			—
Tenant improvements and lease commissions on previously leased space			(18,407	)			(12,495	)
Recurring capital expenditures			(4,460	)			(2,706	)
Proceeds from dispositions of real estate assets			540,936				255,871
Proceeds from repayment of notes receivable related to dispositions of assets			36,855				59,991
Net investments in unconsolidated investees			(102,188	)			(16,764	)
Net cash used in investing activities			(677,163	)			(254,944	)
Financing activities:
Net proceeds from sales and issuances of common shares under various common share plans			13,233				12,403
Distributions paid on common shares			(97,672	)			(68,894	)
Minority interest redemptions and distributions			(6,231	)			(2,128	)
Dividends paid on preferred shares			(6,354	)			(6,354	)
Debt and equity issuance costs paid			(5,377	)			—
Net (payments on) proceeds from lines of credit and short-term borrowings			(148,589	)			351,893
Proceeds from issuance of senior notes `			844,428				—
Payments on senior notes, secured debt and assessment bonds			(29,108	)			(20,046	)
Net cash provided by financing activities			564,330				266,874
Net increase in cash and cash equivalents			62,379				110,911
Cash and cash equivalents, beginning of period			191,716				236,529
Cash and cash equivalents, end of period		$	254,095			$	347,440

See Note 12 for information on non-cash investing and financing activities and other information.

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  General:

     Business. ProLogis, collectively with our consolidated subsidiaries (we, our, us, the Company or Prologis), is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly and through our unconsolidated investees) primarily industrial distribution properties in North America, Europe and Asia. Our business consists of three reportable business segments: (i) property operations, (ii) fund management and (iii) corporate distribution facilities services and other real estate development business (“CDFS business”). Our property operations segment represents the direct long-term ownership, and the management and leasing of industrial distribution and retail properties, both directly and indirectly owned. Our fund management segment represents the long-term investment management of unconsolidated 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 an unconsolidated property fund, in which we have an ownership interest and act as manager, or sold to third parties. See Note 11 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, 2006 and our results of operations and cash flows for the three months ended March 31, 2006 and 2005 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, 2005 audited Consolidated Financial Statements, as filed with the SEC on Form 10-K.

     Certain amounts included in the accompanying consolidated financial statements for 2005 have been reclassified to conform to the 2006 financial statement presentation. These amounts include reclassifications in the consolidated statement of cash flows resulting in an increase to operating cash flows of $13.2 million, a decrease to investing cash flows of $14.2 million and an increase to financing activities of $1.0 million, which we believe are immaterial to 2005.

     Adoption of New Accounting Pronouncements. The Emerging Issues Task Force (“EITF”) reached a consensus in June 2005 regarding EITF Issue 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain Rights.” The EITF agreed on a framework for evaluating when a general partner controls a limited partnership and whether the partnership should be consolidated. The Financial Accounting Standards Board (the “FASB”) ratified the consensus that was effective June 29, 2005 for all new or modified partnerships and effective January 1, 2006 for all existing partnerships. We adopted EITF 04-5 on January 1, 2006. As such, we performed an evaluation of each of our unconsolidated investees. We first determined whether or not the entity needed to be evaluated under EITF 04-5 based on the ownership and legal structure. Next, we evaluated whether the limited partners had substantive kick-out rights or participating rights, both as defined under EITF 04-5. We concluded that the unconsolidated investees that were subject to EITF 04-5 and needed to be evaluated should be accounted for under the equity method of accounting based on the rights provided to the limited partners under the governing documents of the respective entity.

     On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123R “Share Based Payment” (“SFAS 123R”) that required companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the award’s fair value on the grant date and recognize the cost over the period during which an employee is required to provide service in exchange for the award, generally the vesting period. We

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

adopted SFAS 123R on January 1, 2006 using the modified prospective application. Prior to that date, we recognized the costs of our share-based compensation plans under SFAS No. 123 “Accounting and Disclosure of Stock Based Compensation” that allowed us to continue to account for these plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The impact of adoption of SFAS 123R is the inclusion of compensation expense within our statements of earnings, which were previously disclosed as pro forma amounts within the notes to our financial statements. See Note 4.

2.  Mergers and Acquisitions:

     On September 15, 2005, Catellus Development Corporation, a publicly traded REIT, (“Catellus”) merged with and into Palmtree Acquisition Corporation, one of our subsidiaries, pursuant to an Agreement and Plan of Merger dated as of June 6, 2005 (the “Merger Agreement”), as amended (the “Catellus Merger”). At the time of the Catellus Merger, Catellus owned or held an ownership interest in 41.8 million square feet of industrial, office and retail properties of which approximately 92% was industrial space.

     In connection with the Catellus Merger, we incurred merger integration costs, such as employee transition costs and severance costs for certain of our employees whose responsibilities became redundant after the Catellus Merger. We expect to incur integration costs through the first half of 2006, although the majority of these costs have already been incurred.

     Under the terms of the Merger Agreement, Catellus stockholders had the opportunity to elect to receive cash or our common shares for their Catellus stock. As a result of the Catellus Merger, we issued approximately 55.9 million of our common shares to former Catellus stockholders. We financed the cash portion of the Catellus Merger primarily through borrowings of $1.5 billion on a short-term bridge facility (the “Bridge Facility”). As of March 31, 2006, the Bridge Facility had been repaid with proceeds from the issuance of senior notes, $900 million issued in November 2005 and $850 million issued in March 2006, borrowings under our revolving credit facilities and the disposition of certain real estate properties. See Note 9 for details of our March 2006 debt issuance.

     The allocation of the purchase price of $5.3 billion was based upon estimates and assumptions. We engaged a third party business valuation expert to assist primarily with the fair value assessment of real estate. The current allocations are substantially complete; however, there are certain items that may be subject to revision if additional information becomes available. We do not expect future revisions to have a significant impact on our financial position or results of operations.

     The following unaudited pro forma financial information for the three months ended March 31, 2005, gives effect to the Catellus Merger as if it had occurred on January 1, 2005. The pro forma results (in millions, except per share amounts) are based on historical data and are not intended to be indicative of the results of future operations.

		Three Months Ended
		March 31, 2005
Total revenues		$	543.1
Operating income		$	114.7
Net earnings attributable to common shares		$	53.2
Weighted average common shares outstanding – basic			241.8
Weighted average common shares outstanding – diluted			251.8
Net earnings per share attributable to common shares – basic		$	0.22
Net earnings per share attributable to common shares – diluted		$	0.22

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

3.  Unconsolidated Investees:

Summary of Investments and Income

     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,
		2006				2005
Property funds		$	826,206			$	755,320
CDFS joint ventures and other investees			362,891				294,423
Totals		$	1,189,097			$	1,049,743

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

		Three Months
		Ended March 31,
		2006				2005
Earnings (losses) from unconsolidated investees (including interest income):
Property funds:
North America		$	42,482			$	5,408
Europe			11,199				4,721
Asia			2,764				1,642
Total property funds			56,445				11,771
CDFS joint ventures and other investees:
North America			3,306				113
Europe			(172	)			41
Asia			383				344
Total CDFS joint ventures and other investees			3,517				498
Total equity in earnings		$	59,962			$	12,269
Property management and other fees and incentives:
North America		$	28,629			$	8,094
Europe			7,399				7,393
Asia			2,540				1,040
Total property management and other fees and incentives		$	38,568			$	16,527

Property Funds

     Contributions of developed properties to a property fund allow us to realize, for financial reporting purposes, 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 generates 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 may receive additional ownership interests in the property funds as part of the proceeds generated by the contributions of properties to the property funds. We recognize our proportionate share of the earnings or losses of each property fund. We earn fees for acting as the manager of each of the property funds and the fund properties, and we may earn additional fees by providing other services including, but not limited to, acquisition, development and leasing activities. We may also earn incentive performance participation based on the investors’ returns.

     On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (collectively “Funds II-IV”) from our fund partner. On March 1, 2006, we contributed substantially all of these assets and associated liabilities to the ProLogis North American Industrial Fund (the “North American Industrial Fund”), which was formed in February 2006 (see below). In connection with these transactions, we recognized the

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

following amounts in the respective financial statement line items for the three months ended March 31, 2006, after deferral of $17.9 million due to our 20% ownership interest in the North American Industrial Fund (in thousands):

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

     Information about our property funds is as follows:

										Investment in
		Ownership percentage								and advances to
		March 31,				December 31,				March 31,				December 31,
Property Fund		2006				2005				2006				2005
ProLogis California (1)			50.0	%			50.0	%		$	114,549			$	115,743
ProLogis North American Properties Fund I (1)			41.3	%			41.3	%			33,159				33,241
ProLogis North American Properties Fund II-IV (2)			—				20.0	%			—				12,410
ProLogis North American Properties Fund V (3)			11.2	%			11.3	%			56,190				53,104
ProLogis North American Properties Fund VI (1)			20.0	%			20.0	%			41,070				42,227
ProLogis North American Properties Fund VII (1)			20.0	%			20.0	%			32,275				32,543
ProLogis North American Properties Fund VIII (1)			20.0	%			20.0	%			15,463				15,602
ProLogis North American Properties Fund IX (1)			20.0	%			20.0	%			14,191				14,274
ProLogis North American Properties Fund X (1)			20.0	%			20.0	%			15,950				15,968
ProLogis North American Properties Fund XI (1)			20.0	%			20.0	%			32,188				33,094
ProLogis North American Industrial Fund (4)			20.0	%			—				69,139				—
ProLogis European Properties Fund (5)			21.2	%			21.0	%			287,456				283,435
ProLogis Japan Properties Fund I (1)			20.0	%			20.0	%			94,447				103,679
ProLogis Japan Properties Fund II (1)(6)			20.0	%			—				20,129				—
Totals										$	826,206			$	755,320

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):

		2006
		North America				Europe				Asia				Total
For the three months ended March 31, 2006:
Revenues		$	111.0			$	97.7			$	24.9			$	233.6
Net earnings (1)		$	204.2			$	50.7			$	11.6			$	266.5
As of March 31, 2006:
Total assets		$	5,129.3			$	4,233.5			$	1,553.4			$	10,916.2
Amounts due to ProLogis		$	13.7			$	7.2			$	62.6			$	83.5
Third party debt (2)		$	2,774.7			$	2,082.9			$	634.0			$	5,491.6
Total liabilities		$	3,051.2			$	2,490.6			$	832.8			$	6,374.6
Equity		$	2,077.3			$	1,737.8			$	720.6			$	4,535.7
Our weighted average ownership (3)			23.2	%			21.2	%			20.0	%			22.0	%
Our investment balance (4)		$	424.1			$	287.5			$	114.6			$	826.2
Deferred proceeds, net of amortization		$	81.8			$	119.2			$	46.2			$	247.2

		2005
		North America				Europe				Asia				Total
For the three months ended March 31, 2005:
Revenues		$	126.1			$	91.4			$	14.5			$	232.0
Net earnings		$	26.9			$	19.4			$	7.1			$	53.4
As of December 31, 2005:
Total assets		$	4,786.6			$	4,052.0			$	1,230.1			$	10,068.7
Amounts due to ProLogis		$	9.0			$	15.7			$	71.3			$	96.0
Third party debt (2)		$	2,690.7			$	1,991.2			$	535.1			$	5,217.0
Total liabilities		$	2,921.0			$	2,409.6			$	639.8			$	5,970.4
Equity		$	1,864.1			$	1,637.9			$	590.3			$	4,092.3
Our weighted average ownership (3)			23.5	%			21.0	%			20.0	%			22.1	%
Our investment balance (4)		$	368.2			$	283.4			$	103.7			$	755.3
Deferred proceeds, net of amortization		$	77.7			$	105.5			$	44.1			$	227.3

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

CDFS joint ventures and other investees

     At March 31, 2006, 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 industrial operating properties and also include entities that perform land, multi-use and residential development activity. The other operating joint ventures include entities that own a hotel property and office properties. Our investments in and advances to these entities were as follows (in thousands):

		March 31,				December 31,
		2006				2005
CDFS joint ventures:
United States		$	119,850			$	113,008
Europe			13,042				12,238
China			62,322				57,165
Total CDFS joint ventures		$	195,214			$	182,411
Other investees:
Operating joint ventures		$	85,331			$	84,731
Other (1)			82,346				27,281
Total other investees			167,677			$	112,012
Total		$	362,891			$	294,423

4.  Long-Term Compensation:

Share Options

     We have granted various share options to our employees and trustees with graded vesting at various rates over periods from one to 10 years, 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 generally vest over a four-year period.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     Share options outstanding at March 31, 2006 were as follows:

										Weighted
										Average
										Remaining
		Number of						Expiration		Life
		Options				Exercise Price(1)		Date		(in years)
Outside Trustees Plan			121,250			$19.75 - $43.80		2009-2015			6.4
Share options:
1997 grants			157,464			$21.22		2007			1.4
1998 grants			678,895			$20.94 - $21.09		2008			2.6
1999 grants			666,038			$17.19 - $18.62		2009			3.5
2000 grants			660,242			$21.75 - $24.25		2010			4.5
2001 grants			603,575			$20.67 - $22.02		2011			5.5
2002 grants			1,091,164			$22.98 - $24.75		2007, 2012			6.2
2003 grants			1,351,345			$24.90 - $31.26		2013			7.5
2004 grants			1,792,863			$29.41 - $41.50		2014			8.5
2005 grants			1,110,093			$40.86 - $45.46		2015			9.7
2006 grants			7,518			$54.51		2016			10.0
Total			8,240,447

     The weighted average fair value of the share options granted during the three months ended March 31, 2006 was $9.61 per option. There were no options granted during the corresponding period in 2005. We calculated the fair value of the options granted in 2006 using a Black-Scholes model with the following assumptions: i) risk free interest rate of 4.69%; ii) dividend yield of 3.59%; iii) volatility of 20.25%; and iv) weighted-average option life of 5.8 years.

Restricted Share Units

     Restricted share units (“RSUs”), in the form of common shares, are granted at a rate of one common share per RSU from time to time to our employees and our trustees. The RSUs are valued on the grant date based upon the market price of a common share on that date. We recognize the value of the RSUs granted as compensation expense over the applicable vesting period which generally is four or five years. The RSUs do not carry voting rights during the vesting period, but do generally earn DEUs that vest according to the underlying RSU.

Performance Shares

     Certain employees are granted performance share awards (“PSAs”). The grants are based on performance criteria, established in advance, for each employee eligible for the grant. If, based on the performance criteria, a PSA is earned, the recipient must continue to be employed by us until the end of the vesting period before any portion of the grant is vested. The PSAs carry no voting rights during this vesting period, but do earn DEUs that are vested at the end of the vesting period, which is generally two or three years. The PSAs are valued on the grant date, based upon the market price of a common share on that date. We recognize the value of the PSAs granted as compensation expense over the vesting period.

     Included in the PSAs outstanding at March 31, 2006 were certain PSAs that will be 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 PSAs will vest over a three-year period. The amount of PSAs to be issued will be based on our ranking at the end of the three-year period, and may range from zero to 255,000 shares. For purposes of calculating compensation expense, we consider the PSAs to have a market condition and therefore we estimate the amount of PSAs to be earned.

Dividend Equivalent Units

     DEUs in the form of common shares are earned at a rate of one common share per DEU for certain share options granted through 2001, RSUs and PSAs. The DEUs are valued on the grant date, generally December 31st, based on the market price of a common share on that date. Prior to the adoption of SFAS 123R, we recognized the value of the DEUs issued as compensation expense over the vesting period of the underlying share award. With the adoption of SFAS

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

123R, we now treat the DEUs as dividends, which are charged to retained earnings and factored into the computation of the fair value of the underlying share award at grant date.

 Summary of Activity

     The activity for the three months ended March 31, 2006, with respect to our share options is presented below.

		Options Outstanding								Options Exercisable
						Weighted								Weighted				Weighted
						Average								Average				Average
		Number of				Exercise				Number of				Exercise				Life
		Options				Price				Options				Price				(in years)
Balance at December 31, 2005			8,873,820			$	29.19
Granted			7,518			$	54.51
Exercised			(579,203	)		$	25.57
Forfeited			(61,688	)		$	35.02
Balance at March 31, 2006			8,240,447			$	29.42				4,427,383			$	24.09				6.6

     Activity with respect to our RSUs and PSAs is as follows:

						Weighted
						Average				Number of
		Number of				Original				Shares
		Shares				Value				Vested
Balance at December 31, 2005			1,792,335
Granted			3,567
Exercised			(277,625	)
Forfeited			(6,933	)
Balance at March 31, 2006			1,511,344			$	37.36				367,899

     During the three months ended March 31, 2006, we recognized $5.2 million of compensation expense, net of $0.7 million that was capitalized due to our development activities, under the provisions of SFAS 123R. During the three months ended March 31, 2005, under the provisions of APB 25, we recognized $4.8 million of compensation expense, net of $0.9 million that was capitalized due to our development activities. With the adoption of SFAS 123R, we now recognize the compensation cost associated with stock options that was previously disclosed in our footnotes and we no longer recognize compensation cost associated with dividend equivalent units, which are now treated 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. Had we not adopted SFAS 123R, our net earnings attributable to common shares would have been approximately $182.5 million and our net earnings per share attributable to common shares would not have changed.

     Had we adopted SFAS 123R on January 1, 2005, our net earnings attributable to common shares would have changed as follows:

					Three Months Ended
					March 31, 2005
Net earnings attributable to common shares:
As reported					$	55,074
Pro forma					$	55,765
Net earnings per share attributable to common shares:
As reported — Basic					$	0.30
As reported — Diluted					$	0.29
Pro forma — Basic					$	0.30
Pro forma — Diluted					$	0.29

     Total compensation cost related to unvested share options, RSUs and PSAs was $52.4 million as of March 31, 2006 and will be recognized over a weighted average period of 1.8 years, prior to adjustments for capitalized amounts due to our development activities and forfeited awards.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

5.  Discontinued Operations:

     Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The results of operations of the component of the property or a business are also 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 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.

     Properties disposed of to third parties are considered discontinued operations unless such properties were developed under a pre-sale agreement. Properties contributed to property funds in which we maintain an ownership interest and act as manager are not considered discontinued operations due to our continuing involvement with the properties. Discontinued operations recognized directly by our unconsolidated investees, if any, are not reflected separately from our investment balance or separately from the net earnings or losses of those equity investees.

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

		Three Months Ended March 31,
		2006				2005
Rental income		$	14.0			$	5.7
Rental expenses			(6.7	)			(1.8	)
Depreciation and amortization			(2.3	)			(1.8	)
Interest expense			(0.6	)			(0.1	)
Income attributable to disposed properties and assets held for sale		$	4.4			$	2.0

     Assets Disposed Of

     The following information relates to properties disposed of to third parties that are recorded as discontinued operations (in millions, except number of properties):

		Three Months Ended March 31,
		2006				2005
Non-CDFS business assets:
Number of properties			29				4
Net proceeds from dispositions		$	137.7			$	6.9
Net gains from dispositions		$	16.4			$	2.2
CDFS business assets:
Number of properties			2				1
Net proceeds from dispositions		$	47.8			$	2.9
Net gains (losses) from dispositions		$	5.0			$	(0.4	)

     Our temperature-controlled distribution assets in France were sold in July 2005. In connection with the sale, we received total proceeds of €30.8 million including a note receivable of €23.9 million that was paid in full in January 2006. We recognized impairment charges of $13.1 million in the first quarter of 2005, to reflect our investment in this business at its estimated fair value less costs to sell. These charges are included in Losses related to temperature-controlled distribution assets in our Consolidated Statements of Earnings.

     Assets Held For Sale

     As of March 31, 2006, we had 19 office properties and one hotel property that were classified as held for sale and accordingly, the operations of these properties were included in discontinued operations and the respective assets and liabilities are presented separately in our Consolidated Balance Sheets.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

6.  Distributions and Dividends:

     Common Share Distributions

     Cash distributions of $0.40 per common share for the first quarter of 2006 were paid on February 28, 2006 to holders of common shares on February 15, 2006. Quarterly common share distributions paid in 2006 are based on the annual distribution level for 2006 of $1.60 per common share (as compared to $1.48 per common share in 2005) set by the Board of Trustees (“Board”) in December 2005. 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). On March 31, 2006, 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.

7.  Earnings Per Common Share:

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

		Three Months Ended March 31,
		2006				2005
Net earnings attributable to common shares		$	183,159			$	55,074
Minority interest share in earnings			1,125				1,341
Adjusted net earnings attributable to common shares		$	184,284			$	56,415
Weighted average common shares outstanding — Basic			244,282				186,154
Incremental weighted average effect of conversion of limited partnership units			5,363				5,543
Incremental weighted average effect of potentially dilutive instruments (1)			5,501				4,483
Weighted average common shares outstanding — Diluted			255,146				196,180
Net earnings per share attributable to common shares — Basic		$	0.75			$	0.30
Net earnings per share attributable to common shares — Diluted		$	0.72			$	0.29

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

8.  Real Estate:

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

		March 31,				December 31,
		2006				2005
Industrial operating properties (1):
Improved land		$	1,878,867			$	1,774,923
Buildings and improvements			7,140,425				6,955,983
Retail operating properties (2):
Improved land			67,357				66,848
Buildings and improvements			215,540				221,405
Land subject to ground leases and other (3)			452,399				792,668
Properties under development, including cost of land (4)			1,041,465				884,345
Land held for development (5)			1,022,971				1,045,042
Other investments (6)			183,969				133,916
Total real estate assets			12,002,993				11,875,130
Less accumulated depreciation			1,149,705				1,118,547
Net real estate assets		$	10,853,288			$	10,756,583

     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, Spain, Sweden, and the United Kingdom) and Asia (China, Japan, Korea and Singapore).

     For our direct-owned properties, the largest customer and the 25 largest customers accounted for 2.3% and 18.5%, respectively, of our annualized collected base rents at March 31, 2006.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

9.  Debt:

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

		March 31, 2006								December 31, 2005
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Unsecured lines of credit and short-term borrowings			2.43	%		$	1,835,643				3.28	%		$	2,240,054
Senior notes			6.02	%			3,589,137				6.16	%			2,759,675
Secured debt			6.50	%			1,595,431				6.50	%			1,643,586
Assessment bonds			3.89	%			34,417				3.87	%			34,565
Totals			5.18	%		$	7,054,628				5.27	%		$	6,677,880

     On March 27, 2006, we issued $450.0 million of 5.5% senior notes due April 1, 2012 and $400.0 million of 5.75% senior notes due April 1, 2016. We received net proceeds of $838.7 million, after all offering costs, of which $390.0 million was used to repay the balance under the Bridge Facility with the remainder to repay borrowings under our global senior credit facility (“Global Line”).

     Our Global Line is a $2.6 billion global senior credit facility from which funds may be drawn in U.S. dollar, euro, Japanese yen, British pound sterling, Chinese renminbi, South Korean won and Canadian dollar. The commitments for $40 million of borrowings in Chinese renminbi have been received but the facilities are not yet available pending the completion of certain conditions that are expected to be resolved this year. The weighted average interest rate represents the weighted average base interest rates using local currency rates on borrowings outstanding at the end of the period.

10.  Shareholders’ Equity:

     During the three months ended March 31, 2006, 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			19			$	967
Continuous Equity Offering Plan (1)			135			$	7,018
Long-term Incentive Plan and Share Option Plan for Outside Trustees			845			$	14,579

(1)		Proceeds were received in April 2006.

11.  Business Segments:

     We have three reportable business segments:

	•		Property operations — representing the direct long-term ownership, management and leasing of industrial distribution and retail properties, both directly and indirectly owned. 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. Our operations in the property operations business segment are in North America (Mexico and the United States), Europe (properties are located in the Czech Republic, France, Germany, Hungary, Italy, Poland and the United Kingdom and are generally pending contribution to a property fund or sale to a third party) and Asia (properties are located in China, Japan and Singapore and are generally pending contribution to a property fund or sale to a third party).
	•		Fund management — representing the long-term investment management of unconsolidated property funds and the properties they own, generate a high level of returns to us and our fund partners. Along with the income recognized under the equity method from our investments in the property funds, we include fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

			funds, if any. We utilize our leasing and property management expertise in our property operations segment for managing the properties owned by property funds in this segment, and we report the costs as part of rental expenses in the property operations segment. Each investment in a property fund is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Our operations in the fund management segment are in North America (Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Spain, Sweden, and the United Kingdom), and Asia (Japan).
	•		CDFS business — primarily encompasses our development of properties that generally are either contributed to an unconsolidated property fund, in which we have an ownership interest and act as manager, or sold to third parties. Additionally, we acquire properties with the intent to rehabilitate and/or reposition the property in the CDFS business segment prior to being contributed to a property fund. We engage in commercial mixed-use development activities generally with the intention of selling the land or completed projects to third parties. We also have investments in several unconsolidated entities that perform development activities and we include our proportionate share of their earnings or losses in this segment. Additionally, we include fees earned for development activities on behalf of customers or third parties, interest income earned on notes receivable related to asset sales and gains or losses on the disposition of land parcels when our development plans no longer include the parcels. 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, Spain, and the United Kingdom) and in Asia (China, Japan and 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. Each operating property and activity is located in the United States and is considered to be an individual operating segment.

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

     We present the operations and net gains and losses associated with properties sold to third parties generally as discontinued operations. In addition, as of March 31, 2006, we had 19 office properties and one hotel property classified as assets held for sale, with the operations included in discontinued operations. Accordingly, these amounts are excluded from the segment presentation. See Note 5.

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		Three Months Ended March 31,
		2006				2005
Revenues:
Property operations (1):
North America		$	207,373			$	127,876
Europe			11,662				1,182
Asia			2,590				2,145
Total property operations segment			221,625				131,203
Fund management (2):
North America			71,111				13,502
Europe			18,598				12,114
Asia			5,304				2,682
Total fund management segment			95,013				28,298
CDFS business (3):
North America			100,913				131,605
Europe			152,060				86,170
Asia			61,241				64,947
Total CDFS business segment			314,214				282,722
Total segment revenue			630,852				442,223
Other – North America			11,408				-
Reconciling item (4)			(61,481	)			(11,771	)
Total revenues		$	580,779			$	430,452
Net operating income (loss):
Property operations (5):
North America		$	153,860			$	92,188
Europe			6,882				(188	)
Asia			2,167				1,682
Total property operations segment			162,909				93,682
Fund management (2):
North America			71,111				13,502
Europe			18,598				12,114
Asia			5,304				2,682
Total fund management segment			95,013				28,298
CDFS business (6)(7):
North America			34,810				28,169
Europe			32,113				13,729
Asia			9,650				12,424
Total CDFS business segment			76,573				54,322
Total segment net operating income			334,495				176,302
Other – North America			5,953				-
Reconciling items:
Income from other unconsolidated investees			461				41
General and administrative expenses			(33,788	)			(23,934	)
Depreciation and amortization expense			(72,554	)			(41,470	)
Merger integration and relocation expenses			(2,372	)			(2,751	)
Other expenses			(115	)			(306	)
Interest expense			(70,853	)			(36,493	)
Interest and other income			4,574				1,147
Total reconciling items			(174,647	)			(103,766	)
Total earnings before minority interest		$	165,801			$	72,536

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		March 31,				December 31,
		2006				2005
Assets:
Property operations (8):
North America		$	7,667,237			$	7,530,062
Europe			667,402				673,342
Asia			260,147				106,069
Total property operations segment			8,594,786				8,309,473
Fund management (9):
North America			424,174				368,206
Europe			287,456				283,435
Asia			114,576				103,679
Total fund management segment			826,206				755,320
CDFS business:
North America			1,161,145				1,142,319
Europe			1,089,390				1,062,338
Asia			655,140				535,190
Total CDFS business segment			2,905,675				2,739,847
Total segment assets			12,326,667				11,804,640
Other – North America			481,080				901,281
Reconciling items:
Investments in and advances to other unconsolidated investees			167,677				27,281
Cash and cash equivalents			254,095				191,716
Accounts and notes receivable			24,574				38,864
Other assets			152,290				150,314
Discontinued operations – assets held for sale			258,236				—
Total reconciling items			856,872				408,175
Total assets		$	13,664,619			$	13,114,096

12.  Supplemental Cash Flow Information:

     Non-cash investing and financing activities for the three months ended March 31, 2006 and 2005 are as follows:

	•		In connection with the purchase of the 80% ownership interests from our fund partner in Funds II-IV, we assumed $418.0 million of secured debt. See Note 3.
	•		As partial consideration for properties we contributed to the North American Industrial Fund, we received ownership interests of $62.1 million, representing a 20% ownership interest, and the property fund assumed $677.2 million of secured debt and short-term borrowings. See Note 3.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

	•		We received $35.4 million and $15.1 million of equity interests in property funds from the contribution of properties to these property funds during the three months ended March 31, 2006 and 2005, respectively.
	•		As partial consideration for certain property contributions, we received $1.9 million and $32.6 million in the form of notes receivable from ProLogis North American Properties Fund V in 2006 and 2005, respectively. The outstanding balance of the notes at March 31, 2006 was $1.9 million.

     The amount of interest paid in cash, net of amounts capitalized, for the three months ended March 31, 2006 and 2005 was $57.6 million and $46.5 million, respectively.

13.  Derivative Financial Instruments:

     We use derivative financial instruments as hedges 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.

     At March 31, 2006, the only outstanding derivative contracts were foreign currency put option contracts. The activity relating to these contracts for the three months ended March 31, 2006 was as follows (in millions):

New contracts		$	92.9
Settled contracts			(13.9	)
Notional amounts at March 31, 2006		$	79.0

     The foreign currency put option contracts are paid in full at execution and are related to our operations in Europe and Japan. The put option contracts provide us with the option to exchange euro, pound sterling and yen for U.S. dollars at a fixed exchange rate such that, if the euro, pound sterling or yen were to depreciate against the U.S. dollar to predetermined levels as set by the contracts, we could exercise our options and mitigate our foreign currency exchange losses. The notional amounts of the put option contracts represent the U.S. dollar equivalent of €18.9 million, £12.2 million and ¥4.9 billion at March 31, 2006.

     These contracts generally do not qualify for hedge accounting treatment and are marked-to-market through results of operations at the end of each period. Upon expiration of the contract, the mark-to-market adjustment is reversed, the total cost of the contract is expensed and any proceeds are recognized as a gain. We recognized net losses/expenses of $113,000 and net gains of $277,000 for the three months ended March 31, 2006 and 2005, respectively, on various put option contracts. These amounts include mark-to-market losses of $22,000 and mark-to-market gains of $304,000 for the three months ended March 31, 2006 and 2005, respectively.

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, 2006 and the related consolidated statements of earnings and comprehensive income and consolidated statements of cash flows for the three-month periods ended March 31, 2006 and 2005. These consolidated financial statements are the responsibility of ProLogis’ management.

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

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

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ProLogis and subsidiaries as of December 31, 2005, 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 March 14, 2006, 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, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Los Angeles, California
May 8, 2006

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 2005 Annual Report on Form 10-K.

     Certain statements contained in this discussion or elsewhere in this report may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future – including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of developed properties, general conditions in the geographic areas where we operate and the availability of capital in existing or new property funds – are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchanges rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, (v) maintenance of real estate investment trust (“REIT”) status, (vi) availability of financing and capital, (vii) changes in demand for developed properties, and (viii) those additional factors discussed in “Item 1A. Risk Factors” of our 2005 Annual Report on Form 10-K. Unless the context otherwise requires, the terms “we”, “us” and “our” refer to ProLogis and our consolidated subsidiaries.

     Management’s Overview

     We are a self-administered and self-managed REIT that operates a global network of real estate properties, primarily industrial distribution properties. The primary business drivers across the globe continue to be the need for greater distribution network efficiency and the growing shift to third-party logistics providers. Our focus on our customers’ expanding needs has enabled us to become a leading global provider of distribution space in three continents.

     Our business is organized into three reportable business segments: (i) property operations, (ii) fund management and (iii) corporate distribution facilities services and other real estate development business (“CDFS business”). The property operations segment represents the direct long-term ownership and the management and leasing of industrial distribution and retail properties, both directly and indirectly owned. The fund management segment represents the long-term investment management of unconsolidated property funds and the properties they own, to generate a high level of returns to us and our fund partners. The CDFS business segment primarily encompasses our development or acquisition of properties that are rehabilitated or repositioned, which are generally contributed to an unconsolidated property fund in which we have an ownership interest and act as manager or sold to third parties.

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

     Property Operations Segment

•

We earn rent from our customers under long-term operating leases, including reimbursements of certain operating costs, in our industrial distribution and retail properties that we own directly in North America, Europe and Asia. We expect to grow our revenue through increases in occupancy rates and rental rates in both our industrial distribution and retail properties. Our strategy is to achieve these increases primarily through continued focus on our customers’ global needs for distribution space in the three continents in which we operate and use of the ProLogis Operating System®, an

organizational structure and service delivery system that we built around our customers and the selective acquisition of industrial distribution properties.

     Fund Management Segment

•

We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds operating in North America, Europe and Asia. Along with the income recognized under the equity method, we include fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property funds, if any. We also earn certain other fees for services provided to the property funds, such as acquisition, financing and development fees. We expect growth in income recognized to come from newly created property funds, as discussed below, growth in existing property funds, as well as increased fees and incentives. 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 our leasing and property management efforts by our property operations segment.

     CDFS Business Segment

•

We recognize income primarily from the contributions of developed, rehabilitated and repositioned properties to the property funds and from dispositions to third parties. In addition, we earn fees from our customers or other third parties for development activities that we provide on their behalf, recognize interest income on notes receivable related to asset dispositions, recognize net gains from the disposition of land parcels that no longer fit into our development plans and recognize our proportionate share of the income generated by development joint ventures in which we have an investment. We expect increases in this segment to come primarily from the continued development of high-quality industrial distribution properties in our key markets in North America, Europe and Asia, resulting in the contribution to property funds or sale to third parties. In addition, we expect to increase our land and other commercial development activities for development fees and sales to third parties.

     In September 2005, we completed a merger whereby Catellus Development Corporation was merged into one of our subsidiaries (the “Catellus Merger”). The total purchase price of $5.3 billion was financed through the issuance of 55.9 million ProLogis common shares, the assumption of $1.7 billion of liabilities and cash of $1.3 billion. We financed the cash portion through borrowings on a short-term bridge facility that has been fully repaid as of March 31, 2006.

  Summary of the three months ended March 31, 2006

     The fundamentals of our business were strong in the first three months of 2006. We increased our total operating portfolio of industrial distribution and retail properties owned or managed, including direct-owned properties, and properties owned by the property funds and CDFS joint ventures, to 359.7 million square feet at March 31, 2006 from 349.7 million square feet at December 31, 2005. We increased our same store net operating income (as defined below) by 3.7% in the first quarter of 2006 over the same period in 2005. Our same store average occupancy increased by 4.0% for the first quarter of 2006 as compared to the first quarter of 2005. Same store rent growth was a negative 1.1% in the first quarter of 2006, compared with a negative 2.1% in the first quarter of 2005. The stabilized leased percentage (as defined below) was 95.2% at March 31, 2006, compared with 94.5% at December 31, 2005.

     Net operating income of the CDFS business segment increased 41.0% in the three months ended March 31, 2006 as compared to the same period in 2005, primarily due to increased development fees and interest income due in part to activities acquired in the Catellus Merger, as well as the recognition of previously deferred proceeds from contributions. During the quarter, we started the development of projects with a total expected cost at completion of $887.4 million and completed development projects at a total cost of $461.6 million. This compares with the first quarter of 2005 when we started development projects with a total expected cost at completion of $732.2 million and completed development projects at a total cost of $178.6 million. The increased development activity was spurred by increased demand for industrial distribution properties in North America, Europe and Asia. We believe

the strong development activity, along with the access to capital through the property funds and positive leasing activity, will continue to support increased contribution activity.

     Key Transactions during the three months ended March 31, 2006

	•		We formed the ProLogis North American Industrial Fund (the “North American Industrial Fund”), which will primarily own recently developed industrial properties in the United States and Canada.
	•		During the quarter, we generated net proceeds of $305.0 million from contributions and sales of CDFS assets, excluding discontinued operations. This includes our first contribution of assets to the ProLogis Japan Properties Fund II, which was formed in late 2005 and in which we have a 20% ownership interest.
	•		On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (“Funds II-IV”) from our fund partner. In March 2006, we contributed substantially all of the assets and associated liabilities we obtained in this acquisition to the North American Industrial Fund. In connection with this transaction, we recognized: (i) our proportionate share of the gain on termination of Funds II-IV of $37.1 million; (ii) an incentive return fee of $22.0 million due to certain return levels achieved by our fund partner, and (iii) $12.5 million of disposition proceeds that had previously been deferred. These amounts are net of an aggregate $17.9 million, which was deferred due to our 20% ownership in the North American Industrial Fund.
	•		During the quarter, we disposed of 31 CDFS and non-CDFS properties to third parties, which are included in discontinued operations and generated net proceeds of $185.5 million and resulted in the recognition of $21.4 million of gains.
	•		On March 27, 2006 we issued $850.0 million of senior notes and used the proceeds to repay borrowings under the short-term bridge facility that was used to fund the Catellus Merger and borrowings under our global credit facility (“Global Line”).

  Results of Operations

     Net earnings attributable to common shares was $183.2 million and $55.1 million for the three months ended March 31, 2006 and 2005, respectively. Basic and diluted net earnings attributable to common shares was $0.75 and $0.72 per share, respectively, for the three months ended March 31, 2006 and $0.30 and $0.29 per share, respectively, for the three months ended March 31, 2005. The increase in net earnings in 2006 over 2005 is primarily due to the Catellus Merger, the termination of Funds II-IV, improved property operating performance, and gains on dispositions of assets to third parties.

  Portfolio Information

     In the discussion that follows, we present the results of operations by reportable business segment. The following table summarizes our total operating portfolio of industrial and retail properties, excluding properties under development, and including properties owned by us, the properties funds and CDFS joint ventures (square feet in thousands):

		March 31, 2006								December 31, 2005								March 31,2005
		Number of								Number of								Number of
Reportable Business Segment		Properties				Square Feet				Properties				Square Feet				Properties				Square Feet
Property operations			1,436				188,520				1,461				186,663				1,220				131,679
Fund management			780				166,869				752				159,769				722				153,308
CDFS business			26				4,314				23				3,283				17				2,411
Totals			2,242				359,703				2,236				349,715				1,959				287,398