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 June 30, 2005

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

For the transition period from                                          to                                         

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(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.)

14100 East 35th Place, Aurora, Colorado (Address or principal executive offices)		80011 (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 accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934).

Yes þ No o

     The number of shares outstanding of the Registrant’s common shares as of August 5, 2005 was 187,073,524.

 

 

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INDEX

		Page
		Number(s)
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets — June 30, 2005 and December 31, 2004			3
Consolidated Condensed Statements of Earnings and Comprehensive Income — Three Months and Six Months Ended June 30, 2005 and 2004			4-5
Consolidated Condensed Statements of Cash Flows — Six Months Ended June 30, 2005 and 2004			6
Notes to Consolidated Condensed Financial Statements			7-30
Report of Independent Registered Public Accounting Firm			31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32-52
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			52
PART II. Other Information
Item 1. Legal Proceedings			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. Submission of Matters to Vote of Securities Holders			53
Item 5. Other Information			53
Item 6. Exhibits			54
Computation of Ratio of Earnings to Fixed Charges
Computation of Ratio of Earnings to Combined Fixed Charges
KPMG LLP Awareness Letter
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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

		June 30,				December 31,
		2005				2004
		(Unaudited)
ASSETS
Real estate		$	6,768,421			$	6,333,731
Less accumulated depreciation			1,061,870				989,221
			5,706,551				5,344,510
Investments in and advances to unconsolidated investees			894,821				908,513
Cash and cash equivalents			157,061				236,529
Accounts and notes receivable			59,099				92,015
Other assets			431,432				401,564
Discontinued operations — assets held for sale			95,152				114,668
Total assets		$	7,344,116			$	7,097,799
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Lines of credit		$	1,297,156			$	912,326
Short-term borrowings			47,700				47,676
Senior notes			1,871,472				1,962,316
Secured debt and assessment bonds			444,861				491,643
Accounts payable and accrued expenses			183,967				192,332
Construction costs payable			82,239				63,509
Other liabilities			197,816				196,240
Discontinued operations — assets held for sale			60,552				62,991
Total liabilities			4,185,763				3,929,033
Minority interest			65,690				66,273
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 June 30, 2005 and December 31, 2004			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 June 30, 2005 and December 31, 2004			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 June 30, 2005 and December 31, 2004			125,000				125,000
Common Shares; $0.01 par value; 186,835,320 shares issued and outstanding at June 30, 2005 and 185,788,783 shares issued and outstanding at December 31, 2004			1,868				1,858
Additional paid-in capital			3,286,107				3,249,576
Accumulated other comprehensive income			153,735				194,445
Distributions in excess of net earnings			(699,047	)			(693,386	)
Total shareholders’ equity			3,092,663				3,102,493
Total liabilities and shareholders’ equity		$	7,344,116			$	7,097,799

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

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues:
Rental income		$	136,079			$	136,716			$	272,776			$	273,812
Property management and other property fund fees			16,478				11,852				33,005				23,119
Development management fees and other CDFS income			3,195				527				3,326				2,049
Total revenues			155,752				149,095				309,107				298,980
Expenses:
Rental expenses			37,237				35,124				76,387				71,358
General and administrative			23,612				20,137				47,773				39,703
Depreciation and amortization			43,221				41,976				86,474				84,438
Relocation expenses			1,052				691				3,803				691
Other expenses			1,369				1,476				3,282				2,472
Total expenses			106,491				99,404				217,719				198,662
Gains on certain dispositions of CDFS business assets, net:
Net proceeds from dispositions			317,995				474,159				600,586				630,040
Costs of assets disposed of			245,047				420,671				472,297				549,394
Total gains, net			72,948				53,488				128,289				80,646
Operating income			122,209				103,179				219,677				180,964
Income from unconsolidated property funds			11,004				9,416				22,775				18,953
Income (loss) from unconsolidated CDFS joint ventures			(268	)			—				189				—
Income (loss) from other unconsolidated investees, net			137				(683	)			178				(383	)
Interest expense			(34,877	)			(37,691	)			(71,485	)			(77,314	)
Interest and other income			1,803				470				3,177				1,208
Earnings before minority interest			100,008				74,691				174,511				123,428
Minority interest share in earnings			(1,261	)			(1,241	)			(2,602	)			(2,467	)
Earnings before certain net gains and net foreign currency exchange gains			98,747				73,450				171,909				120,961
Gains recognized on dispositions of certain non-CDFS business assets			—				6,072				—				6,072
Gain on partial disposition of investment in property fund			—				3,328				—				3,328
Foreign currency exchange gains, net			3,695				7,912				3,581				11,225
Earnings before income taxes			102,442				90,762				175,490				141,586
Income tax expense:
Current			3,577				3,784				4,750				5,997
Deferred			1,982				6,846				2,821				9,585
Total income tax expense			5,559				10,630				7,571				15,582
Earnings from continuing operations			96,883				80,132				167,919				126,004

(Continued)

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

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Discontinued operations:
Income (loss) attributable to assets held for sale			(13,780	)			3,453				(25,150	)			6,848
Assets disposed of:
Operating income (loss) attributable to assets disposed of			—				313				(6	)			594
Gains (losses) recognized on dispositions, net:
Non-CDFS business assets			—				(2,298	)			2,207				(2,844	)
CDFS business assets			420				4,049				(19	)			9,464
Total gains, net			420				1,751				2,188				6,620
Total discontinued operations			(13,360	)			5,517				(22,968	)			14,062
Net earnings			83,523				85,649				144,951				140,066
Less preferred share dividends			6,354				6,354				12,708				13,038
Less excess of redemption values over carrying values of Preferred Shares redeemed			—				—				—				4,236
Net earnings attributable to Common Shares			77,169				79,295				132,243				122,792
Other comprehensive income items:
Foreign currency translation adjustments			(17,746	)			(17,859	)			(32,943	)			24,915
Unrealized losses on derivative contracts, net			(8,167	)			(3,361	)			(7,767	)			(3,771	)
Comprehensive income		$	51,256			$	58,075			$	91,533			$	143,936
Weighted average Common Shares outstanding — Basic			186,715				181,399				186,436				181,066
Weighted average Common Shares outstanding — Diluted			196,761				190,022				196,484				190,018
Net earnings (loss) per share attributable to Common Shares -Basic:
Continuing operations		$	0.48			$	0.41			$	0.83			$	0.60
Discontinued operations			(0.07	)			0.03				(0.12	)			0.08
Net earnings per share attributable to Common Shares — Basic		$	0.41			$	0.44			$	0.71			$	0.68
Net earnings (loss) per share attributable to Common Shares — Diluted:
Continuing operations		$	0.47			$	0.39			$	0.81			$	0.59
Discontinued operations			(0.07	)			0.03				(0.12	)			0.07
Net earnings per share attributable to Common Shares — Diluted		$	0.40			$	0.42			$	0.69			$	0.66
Distributions per Common Share		$	0.370			$	0.365			$	0.74			$	0.73

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

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

		Six Months Ended
		June 30,
		2005				2004
Operating activities:
Net earnings		$	144,951			$	140,066
Minority interest share in earnings			2,602				2,467
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(3,425	)			(4,975	)
Cost of share-based compensation awards			9,552				8,804
Depreciation and amortization			87,304				85,099
Cumulative translation losses and impairment charge on assets held for sale			26,864				—
Net equity in earnings from all unconsolidated investees			(23,142	)			(18,570	)
Distributions from and changes in operating receivables of unconsolidated investees			56,870				58,190
Amortization of deferred loan costs			2,367				2,813
Gains recognized on dispositions of non-CDFS business assets, net			(2,207	)			(3,228	)
Gain on partial disposition of investment in property fund			—				(3,328	)
Adjustments to foreign currency exchange amounts recognized			(2,722	)			(11,526	)
Deferred income tax expense			2,821				9,585
Increase in accounts and notes receivable and other assets			(55,859	)			(13,453	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities			(11,457	)			40,476
Net cash provided by operating activities			234,519				292,420
Investing activities:
Real estate investments			(1,104,424	)			(777,295	)
Tenant improvements and lease commissions on previously leased space			(23,912	)			(22,836	)
Recurring capital expenditures			(9,333	)			(11,184	)
Proceeds from dispositions of real estate assets			576,044				690,704
Proceeds from partial disposition of investment in property fund			—				13,209
Proceeds from repayment of notes receivable			59,991				—
Net amounts invested in/advanced to unconsolidated investees			(18,055	)			(10,418	)
Adjustments to cash balances resulting from reporting changes			—				3,284
Net cash used in investing activities			(519,689	)			(114,536	)
Financing activities:
Net proceeds from sales and issuances of Common Shares under various Common Share plans			25,081				28,081
Redemption of Preferred Shares			—				(125,000	)
Distributions paid on Common Shares			(137,905	)			(132,200	)
Distributions paid to minority interest holders			(4,266	)			(3,537	)
Dividends paid on Preferred Shares			(12,708	)			(13,038	)
Debt and equity issuance costs paid			—				(3,169	)
Proceeds from issuance of Senior Notes			—				420,573
Principal payments on Senior Notes			(53,125	)			(278,125	)
Net proceeds from lines of credit and short-term borrowings			441,329				13,582
Regularly scheduled principal payments on secured debt and assessment bonds			(4,092	)			(2,941	)
Principal payments on secured debt and assessment bonds at maturity and prepayments			(47,883	)			(18,612	)
Proceeds from settlement of derivative financial instruments			236				—
Purchases of derivative contracts			(965	)			(412	)
Net cash provided by (used in) financing activities			205,702				(114,798	)
Net increase (decrease) in cash and cash equivalents			(79,468	)			63,086
Cash and cash equivalents, beginning of period			236,529				331,503
Cash and cash equivalents, end of period		$	157,061			$	394,589

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 Condensed Financial Statements.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. General:

     Business

     ProLogis (collectively with its consolidated subsidiaries and partnerships “ProLogis”) is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly or through unconsolidated investees) industrial distribution properties in North America, Europe and Asia. ProLogis has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

     ProLogis’ business consists of two reportable business segments: property operations and the corporate distribution facilities services business (“CDFS business”). The property operations segment represents the long-term ownership, management and leasing of industrial distribution properties. The CDFS business segment primarily encompasses ProLogis’ development of industrial distribution properties that are either contributed to an unconsolidated property fund in which ProLogis has an ownership interest and acts as manager, or sold to third parties. Additionally, ProLogis acquires industrial distribution properties that are rehabilitated and/or repositioned in the CDFS business segment prior to being contributed to a property fund. See Note 12.

     Basis of Presentation

     ProLogis’ Consolidated Condensed Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). ProLogis and its subsidiaries are included in the accompanying Consolidated Condensed Financial Statements and are presented in ProLogis’ functional currency, the U.S. dollar. All entities that ProLogis controls, either through ownership of a majority voting interest or otherwise, or variable interest entities in which ProLogis is the primary beneficiary, are consolidated. All material intercompany transactions with consolidated entities have been eliminated.

     The Consolidated Condensed Financial Statements of ProLogis as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 are unaudited and, pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in financial statements have been omitted. Management of ProLogis believes that the disclosures presented in these financial statements are adequate. However, these interim Consolidated Condensed Financial Statements should be read in conjunction with ProLogis’ December 31, 2004 audited Consolidated Financial Statements, as restated and filed with the SEC on Form 8-K on July 13, 2005, primarily to reflect the operations of certain properties, that were initially classified as discontinued operations in the first quarter of 2005, as discontinued operations.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates and assumptions are based on current expectations, actual results could differ from those estimates and assumptions.

     Certain amounts included in ProLogis’ Consolidated Condensed Financial Statements for the prior period have been reclassified to conform to the 2005 financial statement presentation.

     Recent Accounting Pronouncements

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment” which requires ProLogis and other public 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. The cost of these awards will be recognized over the period during which an employee is required to provide service in exchange for the award, generally the vesting period. In addition, a public company will measure the cost of employee services received in exchange for an award of liability instruments at its initial fair value, which will subsequently be remeasured at each reporting period. Changes in fair value during the service period will be recognized as compensation expense over that period. SFAS No. 123R is effective for ProLogis beginning in the first quarter of 2006, however, early adoption is allowed.

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     ProLogis does not believe the adoption of SFAS No. 123R, which it expects to adopt effective January 1, 2006, will have a significant impact on its financial position and its results of operations. See Note 11 for SFAS No. 123 proforma disclosures.

     The Emerging Issues Task Force (“EITF”) reached a consensus in June 2005 regarding EITF Issue 04-5, “Investors Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and 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 FASB ratified the consensus which is effective June 29, 2005 for all new or modified partnerships and January 1, 2006 for all existing partnerships for the applicable provisions. ProLogis is currently evaluating the impact the adoption of EITF Issue 04-5 will have on its financial position and its results of operations.

2. Merger with Catellus Development Corporation:

     In June 2005, ProLogis entered into a definitive merger agreement with Catellus Development Corporation (“Catellus”) under which a subsidiary of ProLogis will acquire all of the outstanding common stock of Catellus for a total consideration of approximately $5.6 billion, including assumed liabilities and transaction costs. Under the terms of the agreement, Catellus stockholders have the right to elect to receive either $33.81 per share in cash, without interest, or 0.822 of a ProLogis common share of beneficial interest, par value $0.01 per share (“Common Shares”) for every share of Catellus common stock that the stockholder owns. Catellus stockholder elections will be prorated and reallocated to fix the cash portion of the merger consideration at $1.255 billion. Therefore, approximately 65% of the Catellus shares will be exchanged for ProLogis Common Shares and approximately 35% of the Catellus shares will be exchanged for cash. ProLogis expects to issue approximately 56.1 million Common Shares in the merger. The cash portion of the merger consideration will be paid, depending on market conditions, with the proceeds from a combination of issuance of additional unsecured senior notes, borrowings under existing and/or new lines of credit, short-term bridge financing, and sales of assets. The merger with Catellus is subject to Catellus and ProLogis shareholder approval, as well as regulatory approvals and satisfaction of other customary closing conditions. A special meeting of the shareholders has been scheduled for September 14, 2005 and the transaction is expected to be completed during September. In anticipation of the closing of the merger with Catellus and the related financing, ProLogis entered into several interest rate swap agreements with a total notional amount of $350 million, see Note 14.

3. Keystone Transaction:

     On May 3, 2004, ProLogis and affiliates of four investment funds managed by Eaton Vance Management (the “Fund Affiliates”) established five property funds (the “Acquiring Property Funds” and also referred to by ProLogis as ProLogis North American Properties Funds VI, VII, VIII, IX and X-see Note 6). ProLogis has a 20% ownership interest in each of the Acquiring Property Funds with the remainder owned by the Fund Affiliates. Also on May 3, 2004, ProLogis and the Acquiring Property Funds entered into an agreement to acquire the outstanding equity of Keystone Property Trust (“Keystone”), a publicly traded REIT, and the operating units of Keystone Operating Partnership, L.P., a subsidiary of Keystone. Keystone owned and leased industrial distribution properties located in New Jersey, Pennsylvania, Indiana, Florida, South Carolina and Ohio. The acquisition of Keystone by ProLogis and the Acquiring Property Funds was approved by Keystone’s shareholders on July 30, 2004 and was closed on August 4, 2004.

4. Relocation:

     ProLogis has relocated its information technology and corporate accounting functions from El Paso, Texas to Denver, Colorado and is moving its Denver corporate headquarters. The relocation from El Paso was completed in the first quarter of 2005. The relocation to the new corporate headquarters, which is located in Denver and is currently under development, is expected to be completed in the first quarter of 2006.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     Relocation costs include (i) employee termination costs; (ii) costs associated with the hiring and training of new personnel and other costs including travel and temporary facility costs; (iii) and accelerated depreciation associated with non-real estate assets whose useful life has been shortened due to the relocations. The costs incurred are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Employee termination costs		$	81			$	381			$	717			$	381
Hiring, training, facility and other costs			670				45				2,332				45
Accelerated depreciation			301				265				754				265
		$	1,052			$	691			$	3,803			$	691

     Through June 30, 2005, ProLogis has incurred aggregate relocation costs of $10.6 million.

5. Real Estate:

Real Estate Assets

     Real estate assets directly owned by ProLogis primarily consist of income producing industrial distribution properties, industrial distribution properties under development and land held for future development of industrial distribution properties. ProLogis’ real estate assets, presented at cost, include the following as of the dates indicated (in thousands):

		June 30,				December 31,
		2005				2004
Operating properties(1):
Improved land		$	915,036			$	816,943
Buildings and improvements			4,373,008				4,230,471
			5,288,044				5,047,414
Properties under development (including cost of land)(2)(3)			748,342				575,703
Land held for development(4)			562,573				596,001
Other investments(5)			169,462				114,613
Total real estate assets			6,768,421				6,333,731
Less accumulated depreciation			1,061,870				989,221
Net real estate assets		$	5,706,551			$	5,344,510

(1)		At June 30, 2005 and December 31, 2004, ProLogis had 1,242 and 1,228 operating properties, respectively. These properties consisted of 136.2 million square feet at June 30, 2005 and 133.6 million square feet at December 31, 2004.
(2)		Properties under development consisted of 82 properties aggregating 24.2 million square feet at June 30, 2005 and 58 properties aggregating 15.1 million square feet at December 31, 2004.
(3)		In addition to the construction costs payable balance of $82.2 million, ProLogis had aggregate unfunded commitments on its contracts for properties under development of $1.1 billion at June 30, 2005.
(4)		Land held for future development consisted of 3,088 acres at June 30, 2005 and 2,991 acres at December 31, 2004.
(5)		Other investments primarily include: (i) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties ($46.1 million at June 30, 2005 and zero at December 31, 2004); (ii) earnest money deposits associated with potential acquisitions; (iii) costs incurred during the pre-acquisition due diligence process; (iv) costs incurred during the pre-construction phase related to future development projects; and (v) costs related to ProLogis’ corporate office buildings.

     ProLogis directly owns real estate assets in North America (the United States, Mexico and Canada), Europe (France, the United Kingdom, Poland, the Netherlands, Italy, Germany, Spain, the Czech Republic, Sweden,

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

Hungary and Belgium) and Asia (Japan, China and Singapore). No individual market in any country, as defined by ProLogis and presented in Item 2 of ProLogis’ 2004 Annual Report on Form 10-K/A #1, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

     In conjunction with its development activities, ProLogis capitalized interest of $15.1 million and $9.3 million for the three months ended June 30, 2005 and 2004, respectively, and $27.6 million and $16.7 million for the six months ended June 30, 2005 and 2004, respectively.

     Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At June 30, 2005, minimum lease payments, excluding expense recoveries from customers, on leases with lease periods greater than one year for space in ProLogis’ directly owned properties for the remainder of 2005 and the other years in the five-year period ending December 31, 2009 and thereafter are as follows (in thousands):

Remainder of 2005		$	217,501
2006			372,689
2007			294,544
2008			225,339
2009			156,887
2010 and thereafter			377,037
		$	1,643,997

     For ProLogis’ direct owned properties, the largest customer and the 25 largest customers accounted for 1.3% and 15.6%, respectively, of ProLogis’ annualized collected base rents as of June 30, 2005.

6. Unconsolidated Investees:

     Summary of Investments and Income

     Since 1997, ProLogis has invested in various entities in which its ownership interest is less than 100% and in which it does not have control as defined under GAAP. Accordingly, these investments are presented under the equity method in ProLogis’ Consolidated Condensed Financial Statements. Certain of these investments were originally structured such that ProLogis’ ownership interest would allow ProLogis to continue to comply with the requirements of the Code to qualify as a REIT. However, with respect to ProLogis’ investments in property funds, having an ownership interest of 50% or less is part of ProLogis’ business strategy.

     ProLogis’ investments in and advances to entities that are accounted for under the equity method are summarized by type of investee as follows as of the dates indicated (in thousands):

		June 30,				December 31,
		2005				2004
Property funds		$	800,039			$	839,675
CDFS joint ventures			67,511				40,487
Other investees			27,271				28,351
Totals		$	894,821			$	908,513

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     ProLogis recognizes income or losses from its investments in unconsolidated investees consisting of its proportionate share of the earnings or losses of these investees and interest income on advances made to these investees, if any. Further, ProLogis earns fees for providing services to the property funds. The amounts recognized by ProLogis from its investments in unconsolidated investees are summarized as follows for the periods indicated (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Equity in earnings (losses) (including interest income):
Property funds		$	11,004			$	9,416			$	22,775			$	18,953
CDFS joint ventures			(268	)			—				189				—
Other investees			137				(683	)			178				(383	)
Totals		$	10,873			$	8,733			$	23,142			$	18,570
Fees earned:
Property funds		$	16,478			$	11,852			$	33,005			$	23,119

     Property Funds

     Contributions of developed properties to a property fund allow ProLogis to realize, for financial reporting purposes, a portion of the profits from its development activities while at the same time allowing ProLogis to maintain a long-term ownership interest in its developed properties. This business strategy also provides liquidity to fund ProLogis’ future development activities and generates fee income to ProLogis. ProLogis has investments in 15 property funds with ownership interests in these property funds ranging from 11.4% to 50% at June 30, 2005. The property funds own operating properties that have generally been contributed to them by ProLogis, although certain property funds have also acquired properties from third parties, and in the case of ProLogis North American Property Funds VI through X, the funds also acquired assets in the Keystone Transaction. ProLogis receives additional ownership interests in the property funds as part of the proceeds of contributions of properties to the property funds. ProLogis recognizes its proportionate share of the earnings or losses of each property fund. ProLogis earns fees for acting as the manager of each of the property funds and manager of the fund properties, and may earn additional fees by providing other services to certain of the property funds including, but not limited to, acquisition, development, financing and leasing activities performed on their behalf.

     ProLogis’ investments in the 15 property funds, presented under the equity method, were as follows as of the dates indicated (in thousands):

		June 30,				December 31,
		2005				2004
ProLogis California(1)		$	117,145			$	117,579
ProLogis North American Properties Fund I(2)			34,852				35,707
ProLogis North American Properties Fund II(3)			5,456				5,864
ProLogis North American Properties Fund III(4)			4,768				4,908
ProLogis North American Properties Fund IV(5)			2,872				3,022
ProLogis North American Properties Fund V(6)			92,197				65,878
ProLogis North American Properties Fund VI(7)			43,177				45,721
ProLogis North American Properties Fund VII(7)			32,546				34,861
ProLogis North American Properties Fund VIII(7)			16,463				18,032
ProLogis North American Properties Fund IX(7)			14,403				16,409
ProLogis North American Properties Fund X(7)			16,208				17,876
ProLogis North American Properties Fund XI(8)			32,614				35,886
ProLogis North American Properties Fund XII(9)			39,394				41,401
ProLogis European Properties Fund(10)			266,344				321,548
ProLogis Japan Properties Fund(11)			81,600				74,983
Totals		$	800,039			$	839,675

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

     ProLogis’ investments in the 15 property funds at June 30, 2005 consisted of the following components (in millions):

						ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis
						N.A				N. A.				N.A				N.A.				N.A.				N. A.				N.A.
		ProLogis				Properties				Properties				Properties				Properties				Properties				Properties				Properties
		California(1)				Fund I(2)				Fund II(3)				Fund III(4)				Fund IV(5)				Fund V(6)				Funds VI(7)				Fund VII(7)
Equity interest		$	199.8			$	54.3			$	14.4			$	12.1			$	8.4			$	80.2			$	104.9			$	76.7
Distributions			(117.3	)			(25.9	)			(6.8	)			(4.2	)			(4.2	)			(30.5	)			(62.3	)			(44.5	)
ProLogis’ share of the earnings of the property fund, excluding fees earned by ProLogis			59.9				11.9				3.2				1.3				2.1				13.9				0.6				0.1
Subtotals			142.4				40.3				10.8				9.2				6.3				63.6				43.2				32.3
Adjustments to carrying value(12)			(27.8	)			(8.2	)			(6.7	)			(5.5	)			(4.2	)			(23.8	)			(0.9	)			(0.5	)
Other, net(13)			2.2				2.5				1.2				0.9				0.7				4.7				0.8				0.7
Subtotals			116.8				34.6				5.3				4.6				2.8				44.5				43.1				32.5
Other receivables			0.3				0.3				0.2				0.2				0.1				47.7				0.1				—
Totals		$	117.1			$	34.9			$	5.5			$	4.8			$	2.9			$	92.2			$	43.2			$	32.5

		ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis
		N.A				N. A.				N.A				N.A.				N.A.				European				Japan				All Property
		Properties				Properties				Properties				Properties				Properties				Properties				Properties				Funds
		Fund VIII(7)				Fund IX(7)				Fund X(7)				Fund XI(8)				Fund XII(9)				Fund(10)				Fund(11)				Combined
Equity interest		$	39.3			$	40.7			$	44.8			$	36.3			$	39.2			$	358.8			$	60.1			$	1,170.0
Distributions			(23.3	)			(26.0	)			(28.3	)			(5.2	)			(1.1	)			(96.4	)			(5.1	)			(481.1	)
ProLogis’ share of the earnings of the property fund, excluding fees earned by ProLogis			0.5				—				0.3				0.7				1.0				34.5				8.4				138.4
Subtotals			16.5				14.7				16.8				31.8				39.1				296.9				63.4				827.3
Adjustments to carrying value(12)			(0.5	)			(0.2	)			(0.5	)			—				—				(94.0	)			(32.0	)			(204.8	)
Other, net(13)			0.3				(0.1	)			(0.1	)			—				—				57.2				1.2				72.2
Subtotals			16.3				14.4				16.2				31.8				39.1				260.1				32.6				694.7
Other receivables			0.1				—				—				0.8				0.3				6.2				49.0				105.3
Totals		$	16.4			$	14.4			$	16.2			$	32.6			$	39.4			$	266.3			$	81.6			$	800.0

     The aggregate amount recognized by ProLogis related to the property funds, including ProLogis’ proportionate share of net earnings or losses, interest income on advances, if any, and fees earned for services were as follows for the periods indicated (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
ProLogis California(1)		$	4,229			$	4,231			$	7,894			$	8,283
ProLogis North American Properties Fund I(2)			1,097				1,364				2,237				2,559
ProLogis North American Properties Fund II(3)			716				729				1,466				1,533
ProLogis North American Properties Fund III(4)			572				731				1,047				1,398
ProLogis North American Properties Fund IV(5)			463				472				905				943
ProLogis North American Properties Fund V(6)			4,066				3,337				8,029				5,896
ProLogis North American Properties Fund VI(7)			763				2				1,404				2
ProLogis North American Properties Fund VII(7)			432				1				741				1
ProLogis North American Properties Fund VIII(7)			282				1				621				1
ProLogis North American Properties Fund IX(7)			201				1				416				1
ProLogis North American Properties Fund X(7)			153				1				551				1
ProLogis North American Properties Fund XI(8)			673				—				1,266				—
ProLogis North American Properties Fund XII(9)			552				—				1,124				—
ProLogis European Properties Fund(10)			10,488				8,854				22,602				18,306
ProLogis Japan Properties Fund(11)			2,795				1,544				5,477				3,148
Totals		$	27,482			$	21,268			$	55,780			$	42,072

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

(1)		ProLogis California I LLC (“ProLogis California”):

	•		Began operations on August 26, 1999;
	•		Members are ProLogis (50%) and New York State Common Retirement Fund (50%);
	•		Owned 81 properties aggregating 14.2 million square feet at June 30, 2005;
	•		All but three of the properties owned were contributed by ProLogis or were developed by ProLogis on behalf of the property fund;
	•		ProLogis California has the right of first offer with respect to properties that ProLogis develops, excluding properties developed under build to suit lease agreements, in certain counties included in ProLogis’ Los Angeles/Orange County market;
	•		Properties are located in the Los Angeles Basin market; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.9 million for both the three months ended June 30, 2005 and 2004 and $1.9 million and $1.8 million for the six months ended June 30, 2005 and 2004, respectively.

(2)

ProLogis North American Properties Fund I LLC (“ProLogis North American Properties Fund I”):

	•		Began operations on June 30, 2000;
	•		Members are ProLogis (41.3%) and State Teachers’ Retirement System of Ohio (58.7%);
	•		Owned 36 properties aggregating 9.4 million square feet at June 30, 2005;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 17 markets in the United States; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million for both the three months ended June 30, 2005 and 2004 and $1.2 million for both the six months ended June 30, 2005 and 2004.

(3)

ProLogis First U.S. Properties LP (“ProLogis North American Properties Fund II”):

	•		Began operations on June 30, 2000;
	•		Partners are ProLogis (20%) and an affiliate of Arcapita Bank B.S.C.(c) (“Arcapita”) (80%);
	•		Owned 27 properties aggregating 4.5 million square feet at June 30, 2005;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 13 markets in the United States; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.5 million and $0.6 million for the three months ended June 30, 2005 and 2004, respectively, and $1.1 million and $1.2 million for the six months ended June 30, 2005 and 2004, respectively.

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

(4)

ProLogis Second U.S. Properties LP (“ProLogis North American Properties Fund III”):

	•		Began operations on June 15, 2001;
	•		Partners are ProLogis (20%) and an affiliate of Arcapita (80%);
	•		Owned 34 properties aggregating 4.4 million square feet at June 30, 2005;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 15 markets in the United States; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.5 million and $0.6 million for the three months ended June 30, 2005 and 2004, respectively, and $1.0 million and $1.1 million for the six months ended June 30, 2005 and 2004, respectively.

(5)

ProLogis Third U.S. Properties LP (“ProLogis North American Properties Fund IV”):

	•		Began operations on September 21, 2001;
	•		Partners are ProLogis (20%) and an affiliate of Arcapita (80%);
	•		Owned 17 properties aggregating 3.5 million square feet at June 30, 2005;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 10 markets in the United States; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.3 million for both the three months ended June 30, 2005 and 2004 and $0.6 million for both the six months ended June 30, 2005 and 2004.

(6)

ProLogis North American Properties Fund V:

	•		Began operations on March 28, 2002;
	•		Ownership interests of the ProLogis-Macquarie Fund at June 30, 2005 are held directly or indirectly by ProLogis, Macquarie ProLogis Trust (“MPR”), a publicly traded listed property trust in Australia and Macquarie Bank Limited (“Macquarie Bank”);
	•		MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 88.0% at June 30, 2005 through its 98.7% weighted ownership interest in two entities that collectively owned 89.2% of the ProLogis-Macquarie Fund. MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 86.0% at June 30, 2004;
	•		ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 11.4% at June 30, 2005 and 2004, based on its 10.8% direct ownership interest in the ProLogis-Macquarie Fund and its 0.6% weighted ownership interest in two entities that collectively own 89.2% of the ProLogis-Macquarie Fund.
	•		Macquarie Bank’s effective ownership interest in the ProLogis-Macquarie Fund was 0.6% at June 30, 2005 based on its 0.6% weighted ownership interest in two entities that collectively own 89.2% of the ProLogis-Macquarie Fund. Macquarie Bank’s effective ownership interest was 2.6% at June 30, 2004;
	•		ProLogis and a United States subsidiary of Macquarie Bank each have a 50% ownership interest in a company that was formed to act as manager of the ProLogis-Macquarie Fund;

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

	•		ProLogis refers to the combined entities in which it has ownership interests (ProLogis-Macquarie Fund and the management company) as one property fund named ProLogis North American Properties Fund V. ProLogis’ combined ownership interest in this property fund has ranged from 11.4% to 16.9% since the property fund’s inception;
	•		ProLogis reduced its ownership interest in the ProLogis-Macquarie Fund in June 2004 by exchanging a portion of its investment into units of MPR as allowed under certain formation agreements. Upon receipt of the units of MPR, ProLogis sold them in the public market. The sale generated net proceeds of $13.2 million. ProLogis recognized a net gain on the disposition of the investment of $3.3 million;
	•		Owned 135 properties aggregating 33.2 million square feet at June 30, 2005 (including 16 properties aggregating 4.9 million square feet that have been contributed by ProLogis during 2005);
	•		All but seven of the properties owned were contributed by ProLogis;
	•		Properties are located in 24 markets in the United States and four markets in Mexico;
	•		At June 30, 2005, ProLogis had guaranteed $148.8 million of borrowings of ProLogis North American Properties Fund V. ProLogis provided this guarantee on short-term borrowings of the property fund associated with the acquisition of properties from ProLogis. The borrowings that are guaranteed mature in August and September 2005. On May 5, 2005, ProLogis North American Properties Fund V entered into an interest rate lock agreement for a secured loan of $154.0 million. ProLogis expects that the proceeds of this secured debt financing, which will not be guaranteed by ProLogis and is expected to close in the third quarter of 2005, will be used to repay these borrowings.
	•		ProLogis North American Properties Fund V has the right of first offer to all of ProLogis’ stabilized development properties that ProLogis desires to sell in North America (excluding properties that are covered under the agreement with ProLogis California) through the end of 2005. Properties subject to the right of first offer must meet certain specified criteria, including leasing criteria. ProLogis cannot predict the extent to which ProLogis North American Properties Fund V will have funds available to continue to acquire properties from ProLogis during 2005. Should ProLogis North American Properties Fund V choose not to acquire, or not have sufficient capital available to acquire, a property that meets the specified criteria, its rights under the agreement will terminate; and
	•		Fees recognized by ProLogis were (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Property, asset management, leasing and other fees		$	2.1			$	1.4			$	3.9			$	2.8
Acquisition fees			0.1				0.8				0.3				0.8
Debt placement fees			—				—				0.2				—
Totals		$	2.2			$	2.2			$	4.4			$	3.6

(7)

These property funds, originally formed on May 3, 2004 to acquire properties as part of the Keystone Transaction described in Note 3, each began operations on June 30, 2004 when ProLogis contributed properties to each property fund. The remainder of the properties were acquired as part of the Keystone Transaction. The ownership interests in each property fund are held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%). ProLogis earns fees for providing property management, asset management, leasing, financing and certain other services to the property funds. Other information about these property funds as of and for the three and six months ended June 30, 2005 is as follows:

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

														Fees Earned By ProLogis
														(In Millions) (f)
										Number of				Three				Six
										United				Months Ended June				Months Ended June
		Number of				Square Feet				States				30,				30,
		Properties				(In Millions)				Markets				2005				2005
ProLogis North America Properties Fund VI(a)			22				8.6				8			$	0.8			$	1.5
ProLogis North America Properties Fund VII(b)			29				6.1				9				0.5				1.0
ProLogis North America Properties Fund VIII(c)			24				3.1				10				0.3				0.6
ProLogis North America Properties Fund IX(d)			20				3.4				8				0.3				0.6
ProLogis North America Properties Fund X(e)			29				4.2				11				0.4				0.7
Totals			124				25.4							$	2.3			$	4.4

	(a)		Includes five properties aggregating 1.1 million square feet contributed by ProLogis.
	(b)		Includes four properties aggregating 0.6 million square feet contributed by ProLogis.
	(c)		Includes four properties aggregating 0.4 million square feet contributed by ProLogis.
	(d)		Includes three properties aggregating 0.3 million square feet contributed by ProLogis.
	(e)		Includes five properties aggregating 0.6 million square feet contributed by ProLogis.
	(f)		No fees were earned by ProLogis during the three or six months ended June 30, 2004.

(8)

ProLogis North American Properties Fund XI:

	•		Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction;
	•		Partners are ProLogis (20%) and AFL-CIO Building Investment Trust (80%);
	•		Owned 14 properties aggregating 4.3 million square feet at June 30, 2005;
	•		Properties are located in three markets in the United States; and
	•		Property management fees recognized by ProLogis were $0.6 million and $1.0 million for the three and six months ended June 30, 2005, respectively.

(9)

ProLogis North American Properties Fund XII:

	•		Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction;
	•		Partners are ProLogis (20%) and CalEast Industrial Investors, LLC (80%);
	•		Owned 12 properties aggregating 3.4 million square feet at June 30, 2005;
	•		Properties are located in two New Jersey markets;
	•		Property management fees recognized by ProLogis were $0.2 million and $0.5 million for the three and six months ended June 30, 2005, respectively; and
	•		In July 2005, ProLogis entered into an agreement with CalEast Industrial Investors, LLC (“CalEast”), whereby a subsidiary of ProLogis will buy CalEast’s 80% ownership interest in ProLogis North American Properties Fund XII for approximately $235.0 million, including the assumption of existing debt of the fund. ProLogis expects the acquisition to be completed by the end of the third quarter.

(10)

ProLogis European Properties Fund:

•

Began operations on September 23, 1999;

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

	•		ProLogis and 21 third parties, primarily institutional investors, own units in the property fund. ProLogis European Properties Fund has equity commitments from nine investors through subscription agreements aggregating €636.6 million (the currency equivalent of approximately $775.2 million at June 30, 2005) of which €305.8 million (the currency equivalent of approximately $372.4 million at June 30, 2005) was unfunded at June 30, 2005. The subscription agreements expire on August 29, 2006;
	•		At June 30, 2005, ProLogis was committed to make additional equity contributions to ProLogis European Properties Fund of €135.4 million (the currency equivalent of approximately $164.9 million as of June 30, 2005) through September 15, 2009;
	•		Owned 235 properties aggregating 48.9 million square feet at June 30, 2005 (including five properties aggregating 0.9 million square feet that have been contributed by ProLogis during 2005);
	•		Acquired a 0.2 million square foot property from a third party during the second quarter of 2005;
	•		Properties have been contributed by ProLogis (187 properties, 37.3 million square feet) and acquired from third parties (48 properties, 11.6 million square feet);
	•		Properties are located in 26 markets in 11 countries in Europe;
	•		ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in specified markets in Europe through September 2019 to ProLogis European Properties Fund, subject to the property meeting certain leasing and other criteria;
	•		ProLogis’ ownership interest was 20.6% and 22.5% at June 30, 2005 and 2004, respectively; and
	•		Property management, asset management and other fees recognized by ProLogis were $7.3 million and $6.0 million for the three months ended June 30, 2005 and 2004, respectively, and $14.7 million and $12.3 million for the six months ended June 30, 2005 and 2004, respectively.

(11)

PLD/RECO Japan TMK Property Trust (“ProLogis Japan Properties Fund”):

	•		Began operations on September 24, 2002;
	•		Partners are ProLogis (20%) and a real estate investment subsidiary of the Government of Singapore Investment Corporation (“GIC”) (80%);
	•		The total capital commitment by the real estate investment subsidiary of GIC to the property fund is $300.0 million, of which $59.4 million was unfunded at June 30, 2005;
	•		Owned 16 properties aggregating 6.0 million square feet at June 30, 2005 (including two properties aggregating 2.0 million square feet that were contributed by ProLogis during 2005);
	•		Acquired a 0.1 million square foot property from a third party during the second quarter of 2005;
	•		Nine of the 16 properties owned by the property fund were contributed by ProLogis;
	•		Properties are located in three markets in Japan;
	•		ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in Japan through June 2006 to ProLogis Japan Properties Fund, subject to the property meeting certain leasing and other criteria; and

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

•

Property management and asset management fees recognized by ProLogis were $1.1 million and $0.6 million for the three months ended June 30, 2005 and 2004, respectively, and $2.1 million and $1.2 million for the six months ended June 30, 2005 and 2004, respectively.

(12)		Under GAAP, a portion of the proceeds resulting from ProLogis’ contribution of a property to a property fund is deferred due to ProLogis’ continuing ownership in the property fund that acquires the property. The amount of the proceeds that ProLogis defers in computing the gain on the contribution is recorded as a reduction to ProLogis’ investment in the property fund that acquires the property. The proceeds that have not been recognized are recognized as ProLogis adjusts its proportionate share of the earnings or loss of the property fund, recognized under the equity method, to reflect lower depreciation expense within the property fund. The lower depreciation expense is the result of ProLogis’ reduced investment in the property fund and, accordingly, its lower basis in the contributed property. The proceeds not already recognized through these adjustments to earnings are recognized in results of operations by ProLogis if the property fund disposes of a property to a third party that was originally contributed to the property fund by ProLogis, in addition to ProLogis’ proportionate share of the net gain or loss recognized by the property fund. ProLogis also recognizes gains associated with the previously deferred proceeds in amounts proportionate to reductions in its ownership interest in the property fund after the contribution is made. If a loss results when a property is contributed to a property fund, the entire loss is recognized.
(13)		Includes costs associated with ProLogis’ investment in the property fund, ProLogis’ proportionate share of the accumulated other comprehensive income or loss recognized by ProLogis European Properties Fund (cumulative translation adjustments and hedge accounting adjustments) and ProLogis Japan Properties Fund (cumulative translation adjustments) and settlement amounts either paid or received associated with the interest rate swap agreements and a related indemnification agreement between ProLogis and ProLogis North American Properties Funds VI through X.

     ProLogis, from time to time, enters into Special Limited Contribution Agreements (“SLCA”) in connection with certain of its contributions of properties to certain of its property funds. Under the SLCAs, ProLogis is obligated to make an additional capital contribution to the respective property fund under certain circumstances, the occurrence of which ProLogis believes to be remote. Specifically, ProLogis would be required to make an additional capital contribution to the property fund if the property fund’s third-party lender, whose loans to the property fund are generally secured by the property fund’s assets and are non-recourse, does not receive a specified minimum level of debt repayment. However, the proceeds received by the third-party lender from the exhaustion of all of the assets of the property fund combined with the debt repayments received directly from the property fund will reduce ProLogis’ obligations under the SLCA on a dollar-for-dollar basis. ProLogis’ potential obligations under the respective SLCAs, as a percentage of the undepreciated book value of the assets in the property funds, range from 2% to 28%. Accordingly, the value of the assets of the respective property funds would have to decline by between 98% and 72% from the book value before ProLogis would be required to make an additional capital contribution. ProLogis believes that the likelihood of declines in the values of the assets that support the third-party loans of the magnitude necessary to require an additional capital contribution is remote, especially in light of the geographically diversified portfolios of properties owned by the property funds. Accordingly, these potential obligations have not been recognized as a liability by ProLogis at June 30, 2005 and ProLogis has assessed a nominal value to the obligation undertaken through the SLCAs. The potential obligations under the SLCAs aggregate $402.1 million at June 30, 2005 and the combined book value of the assets in the property funds, before depreciation, that are subject to the provisions of the SLCAs was approximately $6.5 billion at June 30, 2005.

     In August 2003, ProLogis entered into an indemnification agreement with ProLogis European Properties Fund whereby ProLogis indemnifies ProLogis European Properties Fund for certain future capital gains tax liabilities that could be incurred by ProLogis European Properties Fund associated with contributions of properties to ProLogis European Properties Fund after March 31, 2003. ProLogis’ contributions to ProLogis European Properties Fund are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis European Properties Fund at contribution. ProLogis has

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

indemnified ProLogis European Properties Fund to the extent that ProLogis European Properties Fund: (i) incurs capital gains tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) is required to grant a discount to the buyer of shares under a share transfer transaction as a result of ProLogis European Properties Fund transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. Further, if an initial public offering of units in ProLogis European Properties Fund is undertaken, ProLogis has indemnified the unit holders of ProLogis European Properties Fund in the event the unit holders are required to accept a discount to the value of their units because the capital gain tax liability is being transferred to the holders of units in the new public entity. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property to 100% of the actual capital gains tax liability that is deferred and transferred by ProLogis to ProLogis European Properties Fund at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $15.2 million associated with the contributions of 51 properties to ProLogis European Properties Fund during the period from April 1, 2003 through June 30, 2005.

     In June 2004, ProLogis entered into an indemnification agreement with ProLogis North American Properties Fund V whereby ProLogis indemnifies ProLogis North American Properties Fund V for certain future capital gains tax liabilities that could be incurred by ProLogis North American Properties Fund V associated with the contribution of assets located in Mexico. ProLogis’ contributions of properties located in Mexico to ProLogis North American Properties Fund V are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability in Mexico associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis North American Properties Fund V at contribution. ProLogis has indemnified ProLogis North American Properties Fund V to the extent that ProLogis North American Properties Fund V incurs capital gains tax in Mexico as a result of a sale of the real estate asset or an interest in the real estate asset. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property located in Mexico to the lesser of (i) the actual capital gains tax paid in Mexico upon the sale of the real estate assets or (ii) 100% of the capital gains tax liability in Mexico that is deferred and transferred by ProLogis to ProLogis North American Properties Fund V at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $4.6 million associated with the contributions of 22 properties located in Mexico to ProLogis North American Properties Fund V during the period from March 28, 2002 through June 30, 2005.

     Summarized financial information of the property funds as of and for the six months ended June 30, 2005 is presented below (in millions). The information presented is for the entire entity, not ProLogis’ proportionate share of the entity.

						ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis
						N.A.				N.A.				N.A.				N.A.				N.A.				N.A.				N.A.
		ProLogis				Properties				Properties				Properties				Properties				Properties				Properties				Properties
		California				Fund I				Fund II				Fund III				Fund IV				Fund V				Fund VI				Fund VII
Total assets		$	625.0			$	343.0			$	222.8			$	199.5			$	136.8			$	1,432.8			$	528.7			$	394.8
Third party debt		$	332.2			$	242.3			$	165.0			$	150.3			$	103.2			$	709.6			$	307.0			$	229.3
Amounts due to ProLogis		$	0.3			$	0.3			$	0.2			$	0.2			$	0.1			$	47.7			$	0.1			$	—
Total liabilities		$	340.2			$	248.1			$	169.0			$	153.2			$	105.0			$	869.0			$	315.5			$	234.5
Minority interest		$	—			$	—			$	—			$	—			$	—			$	52.8			$	—			$	—
Equity		$	284.8			$	94.9			$	53.8			$	46.3			$	31.8			$	511.0			$	213.2			$	160.3
Revenues		$	41.2			$	21.4			$	13.5			$	11.0			$	8.4			$	74.7			$	18.9			$	13.5
Net earnings (loss) (1)		$	11.5			$	2.3			$	1.2			$	(0.2	)		$	1.1			$	27.7			$	(0.3	)		$	(1.3	)
ProLogis’ ownership at June 30, 2005(2)			50.0	%			41.3	%			20.0	%			20.0	%			20.0	%			11.4	%			20.0	%			20.0	%

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis				ProLogis
		N.A.				N.A.				N.A.				N.A.				N.A.				European				Japan				All Property
		Properties				Properties				Properties				Properties				Properties				Properties				Properties				Funds
		Fund VIII				Fund IX				Fund X				Fund XI				Fund XII				Fund				Fund				Combined
Total assets		$	200.1			$	199.2			$	224.2			$	232.6			$	276.2			$	3,760.9			$	1,011.4			$	9,788.0
Third party debt		$	112.0			$	123.0			$	135.0			$	66.9			$	78.3			$	1,797.6			$	477.2			$	5,028.9
Amounts due to ProLogis		$	0.1			$	—			$	—			$	0.8			$	0.3			$	6.2			$	49.0			$	105.3
Total liabilities		$	115.7			$	125.5			$	139.0			$	69.6			$	83.0			$	2,218.6			$	700.7			$	5,886.6
Minority interest		$	0.9			$	—			$	—			$	—			$	—			$	3.5			$	—			$	57.2
Equity		$	83.5			$	73.7			$	85.2			$	163.0			$	193.2			$	1,538.8			$	310.7			$	3,844.2
Revenues		$	8.2			$	7.7			$	9.9			$	9.3			$	11.1			$	182.9			$	30.1			$	461.8
Net earnings (loss) (1)		$	0.3			$	(0.9	)		$	(0.6	)		$	1.4			$	2.8			$	32.0			$	14.3			$	91.3
ProLogis’ ownership at June 30, 2005(2)			20.0	%			20.0	%			20.0	%			20.0	%			20.0	%			20.6	%			20.0	%			22.1	%