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, 2007

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

For the transition period from                     to                     

PROLOGIS

(Exact name of registrant as specified in its charter)

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

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

Yes þ No o

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

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

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

Yes o No þ

     The number of shares outstanding of the Registrant’s common shares as of August 2, 2007 was 256,966,568.

 

 

PROLOGIS

INDEX

		Page
		Number(s)
PART I. Financial Information			3
Item 1. Financial Statements:			3
Consolidated Statements of Earnings and Comprehensive Income – Three and Six months ended June 30, 2007 and 2006			3
Consolidated Balance Sheets – June 30, 2007 and December 31, 2006			5
Consolidated Statements of Cash Flows – Six months ended June 30, 2007 and 2006			6
Notes to Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			45
PART II. Other Information			45
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 5. Other Information			46
Item 6. Exhibits			46
Advisory Agreement
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 Chief Executive Officer Pursuant to Section 906
Certification of Chief Financial Officer Pursuant to Section 906

PART 1.

Item 1. Financial Statements

PROLOGIS

CONSOLIDATED STATEMENTS OF

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Rental income		$	272,529			$	215,876			$	530,606			$	440,644
CDFS disposition proceeds			686,715				433,854				1,356,653				738,864
Property management and other fees and incentives			23,937				20,329				45,584				58,897
Development management and other income			6,176				11,258				13,615				15,426
Total revenues			989,357				681,317				1,946,458				1,253,831
Expenses:
Rental expenses			73,705				53,202				139,311				112,236
Cost of CDFS dispositions			476,684				348,552				915,675				586,838
General and administrative			50,503				39,138				100,645				75,298
Depreciation and amortization			74,522				67,943				152,733				138,269
Other expenses			15,068				3,421				17,934				5,947
Total expenses			690,482				512,256				1,326,298				918,588
Operating income			298,875				169,061				620,160				335,243
Other income (expense):
Earnings from unconsolidated property funds			15,804				10,969				34,768				67,414
Earnings from CDFS joint ventures and other unconsolidated investees			1,773				33,904				2,317				37,421
Interest expense			(90,640	)			(68,663	)			(179,291	)			(139,516	)
Interest income on notes receivable			2,891				4,286				6,157				9,322
Interest and other income, net			6,844				709				14,752				5,283
Total other income (expense)			(63,328	)			(18,795	)			(121,297	)			(20,076	)
Earnings before minority interest			235,547				150,266				498,863				315,167
Minority interest			(723	)			(851	)			(896	)			(1,976	)
Earnings before certain net gains			234,824				149,415				497,967				313,191
Gains recognized on dispositions of certain non-CDFS business assets			124,085				—				124,085				13,709
Foreign currency exchange gains, net			22,706				8,569				9,154				7,247
Earnings before income taxes			381,615				157,984				631,206				334,147
Income taxes:
Current income tax expense			26,645				27,892				44,745				41,089
Deferred income tax (benefit) expense			(9,503	)			5,413				(6,182	)			5,582
Total income taxes			17,142				33,305				38,563				46,671
Earnings from continuing operations			364,473				124,679				592,643				287,476

(Continued)

PROLOGIS

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

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Discontinued operations:
Income attributable to disposed properties and assets held for sale			631				5,878				1,601				11,147
Gains recognized on dispositions:
Non-CDFS business assets			27,161				34,223				32,125				50,651
CDFS business assets			14,196				9,971				22,537				14,990
Total discontinued operations			41,988				50,072				56,263				76,788
Net earnings			406,461				174,751				648,906				364,264
Less preferred share dividends			6,357				6,354				12,711				12,708
Net earnings attributable to common shares			400,104				168,397				636,195				351,556
Other comprehensive income items:
Foreign currency translation gains			5,041				38,128				4,666				33,655
Unrealized gains on derivative contracts, net			2,188				2,787				753				2,367
Comprehensive income		$	407,333			$	209,312			$	641,614			$	387,578
Weighted average common shares outstanding — Basic			257,086				244,998				255,677				244,642
Weighted average common shares outstanding — Diluted			267,880				255,196				266,723				255,093
Net earnings per share attributable to common shares — Basic:
Continuing operations		$	1.40			$	0.49			$	2.27			$	1.13
Discontinued operations			0.16				0.20				0.22				0.31
Net earnings per share attributable to common shares — Basic		$	1.56			$	0.69			$	2.49			$	1.44
Net earnings per share attributable to common shares — Diluted:
Continuing operations		$	1.34			$	0.46			$	2.18			$	1.09
Discontinued operations			0.16				0.20				0.21				0.30
Net earnings per share attributable to common shares — Diluted		$	1.50			$	0.66			$	2.39			$	1.39
Distributions per common share		$	0.46			$	0.40			$	0.92			$	0.80

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

PROLOGIS

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

		June 30,
		2007				December 31,
		(Unaudited)				2006
ASSETS
Real estate		$	15,147,686			$	13,953,999
Less accumulated depreciation			1,291,012				1,280,206
			13,856,674				12,673,793
Investments in and advances to unconsolidated investees			1,523,599				1,299,697
Cash and cash equivalents			942,204				475,791
Accounts and notes receivable			363,933				439,791
Other assets			1,373,903				957,295
Discontinued operations — assets held for sale			44,114				57,158
Total assets		$	18,104,427			$	15,903,525
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt		$	9,563,153			$	8,386,886
Accounts payable and accrued expenses			620,900				518,651
Other liabilities			685,799				546,129
Discontinued operations — assets held for sale			844				1,012
Total liabilities			10,870,696				9,452,678
Minority interest			70,359				52,268
Shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50.00 per share; $0.01 par value; 2,000 shares issued and outstanding at June 30, 2007 and December 31, 2006			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000 shares issued and outstanding at June 30, 2007 and December 31, 2006			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25.00 per share; $0.01 par value; 5,000 shares issued and outstanding at June 30, 2007 and December 31, 2006			125,000				125,000
Common Shares; $0.01 par value; 256,880 shares issued and outstanding at June 30, 2007 and 250,912 shares issued and outstanding at December 31, 2006			2,569				2,509
Additional paid-in capital			6,368,396				6,000,119
Accumulated other comprehensive income			222,341				216,922
Retained earnings (distributions in excess of net earnings)			220,066				(170,971	)
Total shareholders’ equity			7,163,372				6,398,579
Total liabilities and shareholders’ equity		$	18,104,427			$	15,903,525

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

PROLOGIS

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

		Six months ended
		June 30,
		2007				2006
Operating activities:
Net earnings		$	648,906			$	364,264
Minority interest share in earnings			896				1,976
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents			(23,484	)			(16,088	)
Cost of share-based compensation awards			14,142				12,076
Depreciation and amortization			154,941				145,303
Amortization of deferred loan costs and net premium on debt			(396	)			(3,748	)
Gains recognized on dispositions of non-CDFS business assets			(156,210	)			(64,360	)
Impairment charges			12,600				3,560
Equity in earnings from unconsolidated investees			(37,085	)			(104,835	)
Distributions from and changes in operating receivables of unconsolidated investees			32,437				53,130
Unrealized foreign currency exchange (gains) losses			(17,176	)			904
Deferred income tax (benefit) expense			(6,182	)			5,582
Increase in accounts receivable and other assets			(130,827	)			(114,508	)
Increase in accounts payable and accrued expenses and other liabilities			119,989				70,188
Net cash provided by operating activities			612,551				353,444
Investing activities:
Real estate investments			(2,297,438	)			(1,867,957	)
Purchase of ownership interests in property funds			—				(259,248	)
Cash paid in the Parkridge acquisition, net of cash acquired			(707,374	)			—
Tenant improvements and lease commissions on previously leased space			(30,827	)			(35,947	)
Recurring capital expenditures			(16,210	)			(11,469	)
Proceeds from dispositions of real estate assets			1,964,286				1,164,820
Proceeds from repayment of notes receivable, net			40,322				59,847
Investments in unconsolidated investees			(62,205	)			(117,575	)
Return of investment from unconsolidated investees			49,201				28,153
Net cash used in investing activities			(1,060,245	)			(1,039,376	)
Financing activities:
Proceeds from sales and issuances of common shares under various common share plans			17,380				26,094
Distributions paid on common shares			(235,883	)			(195,679	)
Minority interest distributions			(4,748	)			(8,357	)
Dividends paid on preferred shares			(12,711	)			(12,708	)
Debt and equity issuance costs paid			(8,187	)			(5,405	)
Net (payments on) proceeds from lines of credit			(277,501	)			218,233
Proceeds from issuance of senior notes, secured and unsecured debt			606,569				851,236
Proceeds from issuance of convertible senior notes			1,228,125				—
Payments on senior notes, secured debt and assessment bonds			(395,636	)			(81,729	)
Net cash provided by financing activities			917,408				791,685
Effect of exchange rate changes on cash			(3,301	)			4,488
Net increase in cash and cash equivalents			466,413				110,241
Cash and cash equivalents, beginning of period			475,791				203,800
Cash and cash equivalents, end of period		$	942,204			$	314,041

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

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

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

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

     The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2007 and our results of operations for the three and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our December 31, 2006 Consolidated Financial Statements, as filed with the SEC in our Annual Report on Form 10-K.

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

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

     Recent Accounting Pronouncements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements but does not require any new fair value

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

measurements. SFAS 157 is effective for our fiscal year beginning January 1, 2008. We are currently assessing what impact, if any, the adoption of SFAS 157 will have on our financial position and results of operations.

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

     Proposed Accounting Pronouncements. The FASB has authorized a FASB Staff Position (the “proposed FSP”) that would require, if issued, separate accounting for the debt and equity components of convertible instruments. The proposed FSP would require that the value assigned to the debt component would be the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The debt would subsequently be accreted to its par value over its expected life with a rate of interest being reflected in earnings that reflects the market rate at issuance. The proposed FSP, if issued in the form expected, would be applied retrospectively to both new and existing convertible instruments, including the Convertible Notes that we issued in March 2007, and would result in approximately $28.0 million to $33.0 million of additional interest expense per annum.

2. Mergers and Acquisitions:

     In February 2007, we purchased the industrial business and made a 25% investment in the retail business of Parkridge Holdings Limited (“Parkridge”), a European developer. The total purchase price was $1.3 billion, which was financed with $741.2 million in cash, the issuance of 4.8 million common shares (valued for accounting purposes at $71.01 per share for a total of $339.5 million) and the assumption of $194.9 million in debt and other liabilities. The assumption of debt includes $113.0 million of loans made to certain affiliates of Parkridge in November 2006, which were included in accounts and notes receivable in our Consolidated Balance Sheet at December 31, 2006. The cash portion of the acquisition was funded with borrowings under our global senior credit facility (“Global Line”) and a new $600.0 million senior unsecured facility (see Note 10 for more information on the new credit facility).

     The acquisition included 6.3 million square feet of operating distribution properties, including 0.7 million square feet of developments under construction, and 1,139 acres of land, primarily in Central Europe and the United Kingdom. We allocated the purchase price based on estimated fair values and recorded approximately $739.3 million of real estate assets, $156.3 million of investments in CDFS joint ventures and other unconsolidated investees, $58.1 million of cash and other tangible assets and $321.9 million of goodwill and other intangible assets. The allocation of the purchase price was based upon preliminary estimates and assumptions and, accordingly, these allocations are subject to revision when final information is available. Revisions to the fair value allocations, which may be significant, will be recorded as adjustments to the purchase price allocation in subsequent periods and should not have a significant impact on our overall financial position or results of operations. The Parkridge acquisition would not have had a material impact on our consolidated results of operations for the six months ended June 30, 2007 and 2006, and as such, we have not presented any pro forma financial information.

     We may be required to make additional payments to the selling shareholders over the next several years (primarily through the issuance of our common shares) of up to £52.3 million (the currency equivalent of $104.2 million at June 30, 2007) upon the successful completion of pending land entitlements or achievement of certain incremental development profit targets.

3. Unconsolidated Investees:

Summary of Investments

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

		June 30,				December 31,
		2007				2006
Property funds		$	1,063,671			$	981,840
CDFS joint ventures and other unconsolidated investees			459,928				317,857
Totals		$	1,523,599			$	1,299,697

   Property Funds

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

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Earnings from unconsolidated property funds:
North America		$	5,689			$	5,375			$	11,641			$	47,857
Europe			6,398				2,450				14,468				13,649
Asia			3,717				3,144				8,659				5,908
Total earnings from unconsolidated property funds		$	15,804			$	10,969			$	34,768			$	67,414
Property management and other fees and incentives:
North America		$	9,879			$	8,380			$	19,771			$	37,009
Europe			11,262				9,549				20,892				16,948
Asia			2,796				2,400				4,921				4,940
Total property management and other fees and incentives		$	23,937			$	20,329			$	45,584			$	58,897

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

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

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

		Ownership Percentage								Investment in and Advances to
		June 30,				December 31,				June 30,				December 31,
Property Fund		2007				2006				2007				2006
ProLogis California			50.0	%			50.0	%		$	110,233			$	112,915
ProLogis North American Properties Fund I			41.3	%			41.3	%			29,509				30,902
ProLogis North American Properties Fund V (1)			11.3	%			11.3	%			58,892				53,331
ProLogis North American Properties Fund VI			20.0	%			20.0	%			38,158				39,149
ProLogis North American Properties Fund VII			20.0	%			20.0	%			31,494				31,816
ProLogis North American Properties Fund VIII			20.0	%			20.0	%			15,487				15,397
ProLogis North American Properties Fund IX			20.0	%			20.0	%			14,157				14,076
ProLogis North American Properties Fund X			20.0	%			20.0	%			15,705				15,399
ProLogis North American Properties Fund XI			20.0	%			20.0	%			31,112				31,871
ProLogis North American Industrial Fund (2)			20.6	%			20.0	%			79,901				72,053
ProLogis European Properties (“PEPR”) (3)			24.8	%			24.0	%			451,509				430,761
ProLogis Japan Properties Fund I			20.0	%			20.0	%			75,060				87,705
ProLogis Japan Properties Fund II (4)			20.0	%			20.0	%			112,454				46,465
Totals										$	1,063,671			$	981,840

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

		2007
		North
		America				Europe				Asia				Total
For the three months ended June 30, 2007:
Revenues		$	141.3			$	129.8			$	39.2			$	310.3
Net earnings		$	15.7			$	23.1			$	14.4			$	53.2
For the six months ended June 30, 2007:
Revenues		$	279.4			$	240.2			$	73.3			$	592.9
Net earnings		$	33.5			$	53.8			$	36.1			$	123.4
As of June 30, 2007:
Total assets		$	6,225.1			$	5,112.2			$	2,694.1			$	14,031.4
Amounts due to us		$	15.3			$	12.5			$	78.3			$	106.1
Third party debt (1)		$	3,570.4			$	2,876.7			$	1,178.1			$	7,625.2
Total liabilities		$	3,817.2			$	3,186.1			$	1,441.1			$	8,444.4
Minority interest		$	18.2			$	8.7			$	—			$	26.9
Equity		$	2,389.7			$	1,917.4			$	1,253.0			$	5,560.1
Our weighted average ownership (2)			22.8	%			24.8	%			20.0	%			23.0	%
Our investment balance (3)		$	424.7			$	451.5			$	187.5			$	1,063.7
Deferred proceeds, net of amortization (4)		$	174.7			$	139.5			$	128.0			$	442.2

		2006
		North
		America				Europe				Asia				Total
For the three months ended June 30, 2006:
Revenues		$	123.8			$	99.7			$	29.0			$	252.5
Net earnings		$	17.4			$	9.1			$	13.2			$	39.7
For the six months ended June 30, 2006:
Revenues		$	234.8			$	197.3			$	53.9			$	486.0
Net earnings (5)		$	221.6			$	59.8			$	24.8			$	306.2
As of December 31, 2006:
Total assets		$	5,462.7			$	4,856.0			$	1,958.3			$	12,277.0
Amounts due to us		$	6.7			$	14.0			$	75.2			$	95.9
Third party debt (1)		$	3,113.8			$	2,615.6			$	904.2			$	6,633.6
Total liabilities		$	3,357.1			$	2,968.0			$	1,054.2			$	7,379.3
Minority interest		$	5.5			$	6.6			$	—			$	12.1
Equity		$	2,100.1			$	1,881.4			$	904.1			$	4,885.6
Our weighted average ownership (2)			23.1	%			24.0	%			20.0	%			23.0	%
Our investment balance (3)		$	416.8			$	430.8			$	134.2			$	981.8
Deferred proceeds, net of amortization (4)		$	112.8			$	123.7			$	66.2			$	302.7

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

   CDFS joint ventures and other unconsolidated investees

     At June 30, 2007, we had investments in entities that perform some of our CDFS business activities (the “CDFS joint ventures”) and investments in other unconsolidated investees. The CDFS joint ventures include entities that develop and own distribution properties and also include entities that develop land, multi-use, retail and residential projects. The other unconsolidated investees primarily include entities that own a hotel property and office properties.

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

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
North America (1)		$	2,218			$	32,146			$	4,068			$	35,453
Europe			503				1,279				581				1,106
Asia			(948	)			479				(2,332	)			862
Total earnings from CDFS joint ventures and other unconsolidated investees		$	1,773			$	33,904			$	2,317			$	37,421

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

		June 30,				December 31,
		2007				2006
CDFS joint ventures:
North America		$	57,342			$	75,197
Europe (1)			150,457				8,499
Asia			147,618				119,614
Total CDFS joint ventures			355,417				203,310
Other unconsolidated investees			104,511				114,547
Total		$	459,928			$	317,857

4. Long-Term Compensation:

     We account for share based compensation in accordance with SFAS No. 123R, “Share Based Payment”, which we adopted January 1, 2006, utilizing the modified retrospective transition method. During the six months ended

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

June 30, 2007 and 2006, we recognized $14.1 million and $12.1 million of compensation expense, respectively. This includes expense related to awards granted to our outside trustees and is net of $5.2 million and $3.2 million in 2007 and 2006, respectively, that was capitalized due to our development and leasing activities. The share based compensation expense recognized in 2007 also includes $4.2 million of expense related to accelerated vesting of share options and awards of employees who terminated employment with us in March 2007.

     Our long-term incentive plans provide for grants of share options, stock appreciation rights, full value awards and cash incentive awards to employees and other persons, including outside trustees. As of June 30, 2007, we have the following awards outstanding:

   Share Options

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

   Full Value Awards

   Restricted Share Units

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

   Contingent Performance Shares and Performance Share Awards

     Certain employees are granted contingent performance shares (“CPSs”) and performance share awards (“PSAs”). The CPSs are earned based on our ranking in a defined subset of companies in the National Association of Real Estate Investment Trust’s (“NAREIT’s”) published index. These CPSs generally vest over a three-year period and the recipient must continue to be employed by us until the end of the vesting period. The amount of CPSs to be issued will be based on our ranking at the end of the three-year performance period, and may range from zero to twice the targeted award, which, at June 30, 2007, was a maximum of 559,000 shares. For purposes of calculating compensation expense, we consider the CPSs to have a market condition and therefore, we have estimated the grant date fair value of the CPSs using a pricing valuation model. We recognize the value of the CPSs granted as compensation expense utilizing the grant date fair value and the target shares over the vesting period.

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

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

   Summary of Activity

     The activity for the six months ended June 30, 2007, with respect to our share options, is as follows.

		Options Outstanding
		Number of				Weighted Average
		Options				Exercise Price				Options Exercisable
Balance at December 31, 2006			8,464,053			$	32.50
Granted			4,656			$	64.82
Exercised			(645,435	)		$	25.02
Forfeited			(65,263	)		$	46.08
Balance at June 30, 2007			7,758,011			$	33.02				4,945,758

     The activity for the six months ended June 30, 2007, with respect to our full value awards, is as follows:

						Weighted
						Average				Number of
		Number of				Original				Shares
		Shares				Value				Vested
Balance at December 31, 2006			2,264,876
Granted			51,373
Exercised			(383,232	)
Forfeited			(12,459	)
Balance at June 30, 2007			1,920,558			$	45.63				488,386

5. Income Taxes:

     We and one of our consolidated subsidiaries have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, (the “Code”), and are not generally required to pay federal income taxes if we make distributions in excess of taxable income and meet the REIT requirements of the Code. We have elected taxable REIT subsidiary (“TRS”) status for certain of our consolidated subsidiaries, which operate primarily in the CDFS business segment. This enables us to provide services and enter into certain other types of transactions that would otherwise be considered impermissible for REITs. We recognize current income tax expense for the federal and state income taxes incurred by our TRSs and we are taxed in certain states in which we operate. In addition, many of the foreign countries where we have operations do not recognize REITs or do not accord REIT status under their respective tax laws to our entities that operate in their jurisdiction. Accordingly, we recognize income taxes for these jurisdictions, as appropriate. We also include interest and penalties, if any, associated with our unrecognized tax benefit liabilities in current income tax expense. During the six months ended June 30, 2007 and 2006, cash paid for income taxes was $13.8 million and $17.8 million, respectively.

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

     For federal income tax purposes, certain acquisitions have been treated as tax-free transactions resulting in a carry-over basis for tax purposes. For financial reporting purposes and in accordance with purchase accounting, we record all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our TRSs, we recognize the deferred income tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair value of the tangible assets at the date of acquisition. As taxable income is generated in these subsidiaries, we recognize a deferred income tax benefit in earnings as a result of the reversal of the deferred income tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. Any increases or decreases that result from a change in circumstances in the deferred income tax liability recorded in connection with these acquisitions will be reflected as an adjustment to goodwill. During the six months ended June 30, 2007, we reduced deferred tax liabilities and goodwill by $16.3 million.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

     As discussed in Note 1, we adopted the provisions of FIN 48 on January 1, 2007 and, as a result, we recognized a $9.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to our January 1, 2007 balance of retained earnings. The term “unrecognized tax benefits” in FIN 48 refers to the differences between a tax position taken or expected to be taken in a tax return and the benefit measured and recognized in the financial statements. The unrecognized tax benefit liability of $183.9 million and $163.4 million, which included accrued interest of approximately $59.8 million and $45.2 million, at June 30, 2007 and December 31, 2006, respectively, principally includes estimated federal and state income tax liabilities associated with acquired companies. Any increases or decreases in the liabilities for unrecognized tax benefits associated with the potential income taxes related to an acquired company will be reflected as an adjustment to goodwill recorded as part of the transaction.

6. Discontinued Operations:

     Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. The results of operations of the component of the property or a business are reported as discontinued operations for all periods presented. A property is classified as held for sale when certain criteria are met. At such time, the respective assets and liabilities are presented separately on our balance sheet and depreciation and amortization is no longer recognized. Assets held for sale are reported at the lower of their carrying amount or their estimated fair value less the costs to sell the assets.

     The operations of the 55 properties disposed of to third parties during 2007, as well as land subject to a ground lease, and the aggregate net gains recognized upon their disposition are presented as discontinued operations in our Consolidated Statements of Earnings and Comprehensive Income for all periods presented (also see the table below). In addition, the operations of 89 properties disposed of to third parties during the year ended December 31, 2006 (15 of which were CDFS business assets) are presented as discontinued operations for the three and six months ended June 30, 2006. At June 30, 2007 and December 31, 2006, we had 14 and 8 properties, respectively, that were classified as held for sale and accordingly, the respective assets and liabilities are presented separately in our Consolidated Balance Sheets. The operations of the properties held for sale at June 30, 2007 are included in discontinued operations for all periods presented in our Consolidated Statements of Earnings and Comprehensive Income. Interest expense included in discontinued operations represents interest directly attributable to these properties.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Rental income		$	2,222			$	16,553			$	6,446			$	38,805
Rental expenses			(868	)			(7,904	)			(2,637	)			(19,750	)
Depreciation and amortization			(723	)			(2,531	)			(2,208	)			(7,034	)
Interest expense			—				(240	)			—				(874	)
Income attributable to disposed properties and assets held for sale		$	631			$	5,878			$	1,601			$	11,147

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

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Non-CDFS business assets:
Number of properties			44				7				51				36
Net proceeds from dispositions		$	117,506			$	206,000			$	166,200			$	343,733
Net gains from dispositions		$	27,161			$	34,223			$	32,125			$	50,651
CDFS business assets:
Number of properties			4				3				4				5
Net proceeds from dispositions		$	105,810			$	57,700			$	173,298			$	105,451
Net gains from dispositions		$	14,196			$	9,971			$	22,537			$	14,990

7. Distributions and Dividends:

   Common Share Distributions

     Cash distributions of $0.46 per common share for each of the first and second quarters of 2007 were paid on February 28, 2007 and May 31, 2007, respectively, to holders of common shares of record on February 14, 2007 and May 16, 2007, respectively. Quarterly common share distributions paid in 2007 are based on the annual distribution level for 2007 of $1.84 per common share (as compared to $1.60 per common share in 2006) set by our Board of Trustees (“Board”) in December 2006. The payment of common share distributions is subject to the discretion of the Board and is dependent upon our financial condition and operating results, and may be adjusted at the discretion of the Board during the year.

   Preferred Share Dividends

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8. Earnings Per Common Share:

     We determine basic earnings per share based on the weighted average number of common shares outstanding during the period. We determine diluted earnings per share based on the weighted average number of common shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments. The following table sets forth the computation of our basic and diluted earnings per share (in thousands, except per share amounts):

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Net earnings attributable to common shares		$	400,104			$	168,397			$	636,195			$	351,556
Minority interest (1)			1,474				851				2,462				1,976
Adjusted net earnings attributable to common shares		$	401,578			$	169,248			$	638,657			$	353,532
Weighted average common shares outstanding — Basic			257,086				244,998				255,677				244,642
Incremental weighted average effect of conversion of limited partnership units			5,108				5,154				5,124				5,258
Incremental weighted average effect of share options and awards (2)			5,686				5,044				5,922				5,193
Weighted average common shares outstanding — Diluted			267,880				255,196				266,723				255,093
Net earnings per share attributable to common shares — Basic		$	1.56			$	0.69			$	2.49			$	1.44
Net earnings per share attributable to common shares — Diluted		$	1.50			$	0.66			$	2.39			$	1.39

9. Real Estate:

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

		June 30,				December 31,
		2007				2006
Distribution operating properties (1):
Improved land		$	2,235,533			$	2,227,953
Buildings and improvements			8,708,376				8,195,296
Retail operating properties (2):
Improved land			77,446				77,808
Buildings and improvements			245,194				227,380
Land subject to ground leases and other			449,738				472,412
Properties under development, including cost of land (3)			1,087,133				964,842
Land held for development (4)			2,013,029				1,397,081
Other investments (5)			331,237				391,227
Total real estate assets			15,147,686				13,953,999
Less accumulated depreciation			1,291,012				1,280,206
Net real estate assets		$	13,856,674			$	12,673,793

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

     During the six months ended June 30, 2007, we acquired 18 distribution properties aggregating 3.3 million square feet with a combined purchase price of $204.9 million, excluding the properties acquired in the Parkridge acquisition discussed in Note 2. During the six months ended June 30, 2006, we acquired 39 distribution properties aggregating 7.6 million square feet with a combined purchase price of $416.1 million.

     During the six months ended June 30, 2007 and 2006, we recognized gains of $124.1 million and $13.7 million, respectively, on the disposition of certain non-CDFS properties. We contributed 66 properties and 12 properties in 2007 and 2006, respectively, from our property operations segment to certain unconsolidated property funds. Due to our continuing involvement through our ownership in the property funds, these dispositions are not included in discontinued operations and the gains recognized represent the portion attributable to the third party ownership in the property funds that acquired the properties.

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

     For our direct-owned properties, the largest customer and the 25 largest customers accounted for 3.7% and 21.7%, respectively, of our annualized collected base rents at June 30, 2007.

10. Debt:

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

		June 30, 2007								December 31, 2006
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Global line and other lines of credit			3.53	%		$	2,173,242				3.56	%		$	2,462,796
Senior notes and other unsecured debt			5.74	%			4,719,033				5.51	%			4,445,092
Secured debt			6.52	%			1,409,373				6.66	%			1,445,021
Convertible senior notes			2.25	%			1,228,537				—				—
Assessment bonds			3.72	%			32,968				3.85	%			33,977
Totals			4.90	%		$	9,563,153				5.13	%		$	8,386,886

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     Our Global Line commitment fluctuates in U.S. dollars based on the underlying currencies and was $3.5 billion at June 30, 2007. The funds may be drawn under the Global Line in U.S. dollar, euro, Japanese yen, British pound sterling, Chinese renminbi, South Korean won and Canadian dollar. The weighted average interest rate represents the weighted average interest rates using local currency rates on borrowings outstanding at the end of the period. In addition, we also have other credit facilities with total commitments of $69.8 million at June 30, 2007. At June 30, 2007, we had $37.3 million outstanding on these other credit facilities, with a weighted average interest rate of 6.55%.

     In February 2007 in connection with the Parkridge acquisition, as discussed in Note 2, we entered into a new $600.0 million multi-currency senior credit facility. This facility fluctuates in U.S. dollars based on the underlying currencies and the funds may be drawn in U.S. dollar, euro, Japanese yen and British pound sterling. The outstanding balance is included in senior notes and other unsecured debt above. This debt bears interest at a variable rate based upon the London Interbank Offered Rate (“ LIBOR”) plus a margin and matures in October 2009. This debt can be repaid at our option prior to maturity. The facility provides us the ability to re-borrow, within a specified period of time, any amounts repaid on the facility.

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

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

     We intend to settle the principal balance of the Convertible Notes in cash and, therefore, we have not included the effect of the conversion of these notes in our computation of diluted earnings per share. Based on the conversion rate, 16.3 million shares would be required to settle the principal amount in shares. Such potentially dilutive shares, and the corresponding adjustment to interest expense, are not included in our computation of diluted earnings per share. The amount in excess of the principal balance of the notes (the “Conversion Spread”) will be settled in cash or, at our option, ProLogis common shares. When the Conversion Spread becomes dilutive to our earnings per share, (i.e. when our share price exceeds $76.58) we will include the shares in our computation of diluted earnings per share. The conversion option associated with the notes, when analyzed as a free standing instrument, meets the criteria under the Emerging Issues Task Force No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Common Stock”, and therefore, we have accounted for the debt as a single instrument and not bifurcated the derivative instrument. See Note 1 for information on a proposed accounting pronouncement that, if issued in its current form, would impact our accounting for the Convertible Notes.

11.

Shareholders’ Equity:

     During the six months ended June 30, 2007, we sold and/or issued common shares under various common share plans, including share-based compensation plans, as follows (in thousands):

		Shares				Proceeds
1999 dividend reinvestment and share purchase plan			33			$	2,074
Long-term incentive plans			1,026			$	15,306

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

12. Business Segments:

     We have three reportable business segments:

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

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Upon contribution or sale, the resulting gain is included in the income of the CDFS business segment. The assets of the fund management segment include our investments in and advances to the unconsolidated property funds.

     We present the operations and net gains associated with properties sold to third parties generally as discontinued operations. In addition, as of June 30, 2007, we had 14 properties classified as assets held for sale, whose operations are included in discontinued operations. Accordingly, these amounts are excluded from the segment presentation. See Note 6.

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

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Property operations (1):
North America		$	220,285			$	193,128			$	429,686			$	399,437
Europe			29,230				5,623				52,939				13,938
Asia			12,054				8,282				27,539				10,872
Total property operations segment			261,569				207,033				510,164				424,247
Fund management (2):
North America			15,568				13,755				31,412				84,866
Europe			17,660				11,999				35,360				30,597
Asia			6,513				5,544				13,580				10,848
Total fund management segment			39,741				31,298				80,352				126,311
CDFS business (3):
North America			313,748				193,572				440,453				297,192
Europe			7,576				285,997				281,023				438,024
Asia			373,096				516				653,197				62,140
Total CDFS business segment			694,420				480,085				1,374,673				797,356
Total segment revenues			995,730				718,416				1,965,189				1,347,914
Other – North America			10,960				8,843				20,442				16,397
Reconciling item (4)			(17,333	)			(45,942	)			(39,173	)			(110,480	)
Total revenues		$	989,357			$	681,317			$	1,946,458			$	1,253,831
Net operating income:
Property operations (5):
North America		$	146,722			$	145,613			$	301,657			$	299,010
Europe			22,632				3,512				40,897				9,233
Asia			9,454				7,539				22,480				9,706
Total property operations segment			178,808				156,664				365,034				317,949
Fund management (2):
North America			15,568				13,755				31,412				84,866
Europe			17,660				11,999				35,360				30,597
Asia			6,513				5,544				13,580				10,848
Total fund management segment			39,741				31,298				80,352				126,311
CDFS business (6):
North America			101,969				63,342				138,042				98,153
Europe			2,155				64,395				78,770				96,508
Asia			111,258				490				237,082				10,140
Total CDFS business segment			215,382				128,227				453,894				204,801
Total segment net operating income			433,931				316,189				899,280				649,061
Other – North America			7,416				6,010				13,661				10,459
Reconciling items:
Earnings from other unconsolidated investees			3,135				3,217				4,069				3,677
General and administrative expenses			(50,503	)			(39,138	)			(100,645	)			(75,298	)
Depreciation and amortization expense			(74,522	)			(67,943	)			(152,733	)			(138,269	)
Other expenses			(114	)			(115	)			(230	)			(230	)
Interest expense			(90,640	)			(68,663	)			(179,291	)			(139,516	)
Interest and other income, net			6,844				709				14,752				5,283
Total reconciling items			(205,800	)			(171,933	)			(414,078	)			(344,353	)
Total earnings before minority interest		$	235,547			$	150,266			$	498,863			$	315,167