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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 01-12846

PROLOGIS

(303) 375-9292
(Registrant’s telephone number, including area code)

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

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

Yes [X] No [   ]

     Indicate by check mark whether the registrant is accelerated file (as defined in Rule 12b-2 of the Securities Act of 1934).

Yes [X] No [   ]

     The number of shares outstanding of the Registrant’s common shares as of November 10, 2003 was 179,921,826.

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PROLOGIS

INDEX

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PROLOGIS

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

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

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

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

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

See Note 9 for information on non-cash investing and financing activities.

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)

1. General

Business

     ProLogis, collectively with its consolidated subsidiaries and partnerships, is a publicly held real estate investment trust (“REIT”) that owns (directly or through unconsolidated investees), operates and develops industrial distribution properties in North America (the United States and Mexico), Europe (11 countries) and Asia (Japan). In April 2003, ProLogis announced that it had established a representative office in China but ProLogis owned no real estate assets in China as of September 30, 2003. The ProLogis Operating System®, comprised of the Market Services Group, the Global Services Group, the Global Development Group and the ProLogis Solutions Group, utilizes ProLogis’ international network of properties to meet its customers’ distribution space needs globally. ProLogis’ business consists of two reportable business segments: property operations and the corporate distribution facilities services business (“CDFS business”). See Note 8.

Principles of Financial Presentation

     The consolidated condensed financial statements of ProLogis as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 are unaudited and, pursuant to the rules of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in financial statements have been omitted. Management of ProLogis believes that the disclosures presented are adequate; however, these interim consolidated condensed financial statements should be read in conjunction with ProLogis’ December 31, 2002 audited consolidated financial statements contained in ProLogis’ 2002 Annual Report on Form 10-K.

     In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of ProLogis’ consolidated financial position and results of operations for the interim periods. The consolidated results of operations for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the entire year. Additionally, certain of the 2002 amounts have been reclassified to conform to the 2003 financial statement presentation.

     ProLogis began presenting its investment in ProLogis UK Holdings S.A., formerly Kingspark Holding S.A., (collectively with its subsidiaries “Kingspark S.A.”), a Luxembourg company that engages in CDFS business activities in the United Kingdom, and its investment in Kingspark LLC, a holding company that held the voting ownership interests of Kingspark S.A., on a consolidated basis on July 1, 2002. ProLogis began presenting its investment in ProLogis Logistics Services Incorporated (“ProLogis Logistics”), which owns CS Integrated LLC (“CSI”), on a consolidated basis on October 24, 2002. CSI previously operated as a temperature-controlled distribution company in the United States. All of these investments were previously presented under the equity method. The changes in the reporting methods applicable to these entities occurred at the time ProLogis acquired (directly or indirectly) 100% of the ownership interests (voting and non-voting) of Kingspark S.A. and ProLogis Logistics. Generally accepted accounting principles in the United States (“GAAP”) do not require that previously reported financial information be restated when the reporting method is changed to consolidation from the equity method under these circumstances. ProLogis’ consolidated shareholders’ equity and its consolidated net earnings are the same under the two reporting methods. The accompanying consolidated condensed financial statements present ProLogis’ investments in Kingspark S.A. and Kingspark LLC under the equity method through June 30, 2002 and ProLogis’ investment in ProLogis Logistics under the equity method through October 23, 2002. From these dates forward, these investments are presented on a consolidated basis. See Note 3.

     In January 2003, Interpretation No. 46, “Consolidation of Variable Interest Entities,” was issued. ProLogis is required to adopt the requirements of Interpretation No. 46 for the interim or annual period that ends after December 15, 2003. Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and requires that ProLogis present the variable interest entities in which it has a majority variable interest on a consolidated basis in its financial statements. ProLogis is continuing to assess the provisions of Interpretation No. 46 and the impact to ProLogis of its adoption. Interpretation No. 46 will require that ProLogis consolidate its investments in TCL Holding S.A., formerly Frigoscandia Holding S.A., (“Frigoscandia S.A.”) and CSI/Frigo LLC, a company that holds the voting ownership interest in Frigoscandia S.A., as of December 31, 2003.

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Through September 30, 2003, ProLogis has presented its investments in Frigoscandia S.A. and CSI/Frigo LLC under the equity method. ProLogis’ combined effective ownership interest in Frigoscandia S.A. and CSI/Frigo LLC was 99.75% at September 30, 2003. ProLogis expects that it will continue to present its investments in all of its other unconsolidated investees under the equity method after Interpretation No. 46 is adopted. See Note 3 for information on ProLogis’ investments in these entities and for summarized financial information of Frigoscandia S.A. as of and for the nine months ended September 30, 2003.

     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. Actual results could differ from those estimates.

Foreign Operations

     The U.S. dollar is the functional currency for ProLogis’ consolidated subsidiaries and unconsolidated investees operating in the United States and Mexico and for certain of ProLogis’ consolidated subsidiaries that operate as holding companies for foreign investments. The functional currency for ProLogis’ consolidated subsidiaries and unconsolidated investees operating outside North America is the local currency of the country in which the entity is located (euro for members of the European Union that have adopted the euro, krona for Sweden, pound sterling for the United Kingdom, forint for Hungary, koruna for the Czech Republic, zloty for Poland and yen for Japan).

     ProLogis’ consolidated subsidiaries whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars prior to the consolidation of these financial statements with those of ProLogis. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date. Income statement accounts are translated using the average exchange rate for the period. Income statement accounts that represent significant nonrecurring transactions are translated at the rate in effect as of the date of the transaction. Gains and losses resulting from this translation are included in accumulated other comprehensive income as a separate component of shareholders’ equity. ProLogis translates its share of the earnings or losses of its unconsolidated investees whose functional currency is not the U.S. dollar at the average exchange rate for the period.

     ProLogis and its consolidated subsidiaries and unconsolidated investees may have transactions denominated in currencies other than their functional currency. In these instances, nonmonetary assets and liabilities are reflected at the historical exchange rate, monetary assets and liabilities are remeasured at the exchange rate in effect as of the end of the period and income statement accounts are remeasured at the average exchange rate for the period. Gains and losses from such remeasurements are generally included in results of operations. Certain intercompany debt balances are remeasured with the resulting adjustment recognized as a cumulative translation adjustment in accumulated other comprehensive income in shareholders’ equity. This treatment is applicable to intercompany debt that is deemed to be a permanent source of capital to the subsidiary or investee.

     Gains or losses are also recorded in the income statement when a transaction with a third party, denominated in a currency other than the entity’s functional currency, is settled and the functional currency cash flows realized are more or less than expected based upon the exchange rate in effect when the transaction was initiated.

     The components of the net foreign currency exchange gains and expense/losses recognized in ProLogis’ results of operations were as follows for the periods indicated (in thousands of U.S. dollars):

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(1)		At the time certain debt balances are settled, remeasurement gains or losses that have been recognized in results of operations as unrealized are reversed and the cumulative foreign currency exchange gain or loss realized with respect to the settled balance is recognized in results of operations as a realized gain or loss.
(2)		ProLogis enters into foreign currency put option contracts related to its operations in Europe and Japan. These put option contracts do not qualify for hedge accounting treatment. Accordingly, the cost of the contract is capitalized at the contract’s inception and the contract is marked-to-market by ProLogis as of the end of each subsequent accounting period. Upon expiration of the contract, the mark-to-market adjustment is reversed, the total cost of the contract is expensed and the proceeds received, if any, are recognized as a gain.

Other Recently Issued Accounting Standards

     In November 2002, Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others as an interpretation of SFAS Nos. 5, 57 and 107 and a rescission of Interpretation No. 34,” was issued. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. Further, Interpretation No. 45 provides that an entity that issues a guarantee must recognize an initial liability for the fair value, or market value, of the potential obligation undertaken in issuing the guarantee.

     The disclosure requirements of Interpretation No. 45 were effective for ProLogis’ December 31, 2002 consolidated financial statements and the initial recognition and measurement provisions of Interpretation No. 45 are applicable to guarantees issued or modified after December 31, 2002. ProLogis made the applicable disclosures in its consolidated financial statements that were included in its 2002 Annual Report on Form 10-K. The application of the recognition and measurement provisions of Interpretation No. 45 have not had a material impact on ProLogis’ financial position, results of operations or cash flows in 2003. See Note 3.

     In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued. SFAS No. 148 provides alternative methods of transition to the fair value based method of accounting for share-based compensation and is effective for financial statements issued for fiscal years ending after December 15, 2002. ProLogis does not account for share-based compensation under the fair value based method provided in SFAS No. 123. Rather, as allowed under SFAS No. 123, ProLogis continues to account for its various share-based compensation plans using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB No. 25, if the exercise price of the share options issued equals or exceeds the market price of the underlying share on the date the option is granted, no compensation expense is recognized. Under the fair value method provided in SFAS No. 123, the fair value of the share options issued would be recognized as compensation expense. The exercise prices of the share options that ProLogis issues to its employees and members of its Board of Trustees (the “Board”) are equal to the average of the high and low market prices on the day the options are issued. Therefore, no compensation expense is recognized. ProLogis does recognize compensation expense when the terms of the share options are changed after the share options have been granted or when other instruments awarded require the use of variable accounting as provided under SFAS No. 123.

     Had compensation expense been recognized by ProLogis for the three and nine months ended September 30, 2003 and 2002 using an option valuation model as provided in SFAS No. 123, ProLogis’ net earnings (loss) attributable to Common Shares and net

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earnings (loss) attributable to Common Shares per share for these periods would change as follows (in thousands of U.S. dollars, except per share amounts):

     Because share options vest over several years and additional grants are likely to be made in future years, the pro forma compensation expense presented may not be representative of compensation cost to be expected in future years.

     ProLogis adopted the following accounting standards in 2003. Adoption of these standards has not had a material impact on ProLogis’ financial position, results of operations or cash flows:

	•		SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was adopted by ProLogis as of January 1, 2003. SFAS No. 145 significantly limits the treatment of losses associated with early extinguishment of debt as an extraordinary item and contains provisions that impact certain sale-leaseback transactions.
	•		SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was adopted by ProLogis as of January 1, 2003. SFAS No. 146 requires that certain expenses associated with restructuring charges be accrued as liabilities in the period in which the liability is incurred.
	•		SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. SFAS No. 150 establishes standards for how the issuer of financial instruments classifies and measures instruments that contain characteristics of both liabilities and equity. SFAS No. 150 requires certain freestanding financial instruments that embody obligations to be classified as liabilities. Further, certain mandatory redeemable financial instruments are required to be measured at fair value with subsequent changes in fair value recognized in earnings. ProLogis adopted SFAS No. 150 as of July 1, 2003.

2. Real Estate

Investments in Real Estate

     Real estate assets directly owned by ProLogis 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 investments, presented at cost, include the following as of the dates indicated (in thousands of U.S. dollars):

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(1)		At September 30, 2003 and December 31, 2002, ProLogis directly owned 1,232 and 1,230 operating properties, respectively, consisting of 129,551,000 and 127,956,000 square feet, respectively.
(2)		Properties under development consisted of 26 buildings aggregating 8,725,000 square feet at September 30, 2003 and 37 buildings aggregating 9,648,000 square feet at December 31, 2002.
(3)		In addition to the September 30, 2003 construction costs payable balance of $16.4 million, ProLogis had aggregate unfunded commitments on contracts for properties under construction of $321.3 million at September 30, 2003.
(4)		Land held for future development consisted of 2,589 acres at September 30, 2003 and 2,466 acres at December 31, 2002.
(5)		Other investments include: (i) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties ($20.1 million at September 30, 2003 and $6.9 million at December 31, 2002); (ii) earnest money deposits associated with potential acquisitions; (iii) costs incurred during the pre-acquisition due diligence process; and (iv) costs incurred during the pre-construction phase related to future development projects.

     ProLogis’ directly owned real estate assets are located in North America (the United States and Mexico), ten countries in Europe and in Japan. No individual market in any country, as defined by ProLogis and presented in Item 2 of its 2002 Annual Report on Form 10-K, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

     ProLogis disposed of 0.5 million and 0.4 million square feet of operating properties to third parties during the nine months ended September 30, 2003 and 2002, respectively, that are subject to the discontinued operations provisions of SFAS No. 144, “Accounting for the Disposal or Impairments of Long-Lived Assets.” These operating properties were acquired or developed for long-term investment in the property operations segment (see Note 8). ProLogis is not reporting these property dispositions as discontinued operations for these periods as the effect of such presentation in ProLogis’ Consolidated Condensed Statements of Earnings (Loss) and Comprehensive Income (Loss) is not material.

Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At September 30, 2003, minimum lease payments on leases with lease periods greater than one year for space in ProLogis’ directly owned properties during the remainder of 2003, during the other years in the five-year period ending December 31, 2007 and thereafter are as follows (in thousands of U.S. dollars):

     For ProLogis’ directly owned properties, the largest customer and the 25 largest customers accounted for 1.63% and 15.51%,

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respectively, of ProLogis’ total annualized base rental income at September 30, 2003.

3. 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 Internal Revenue Code of 1986, as amended (“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. This business strategy allows ProLogis to realize a portion of the profits from its development activities, raise private equity capital or issue private debt instruments, generate fee income, generate liquidity to fund its future development activities, all the while allowing ProLogis to maintain an ownership interest in its developed properties.

     ProLogis’ investments in entities that are presented under the equity method are summarized as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis recognizes income or losses from its investments in its unconsolidated investees consisting of its proportionate share of the earnings or losses of these entities recognized under the equity method, interest income on advances it has made to these entities, if any, and fees earned for services provided to these entities, if any. The amounts recognized by ProLogis from its investments in unconsolidated investees are summarized as follows for the periods indicated (in thousands of U.S. dollars):

Property Funds

     Since 1999, ProLogis has formed eight property funds. ProLogis’ ownership interests in these property funds at September 30, 2003 ranged from 14% to 50%. The property funds own operating properties that, in most cases, have been contributed to the property funds by ProLogis. ProLogis generally receives ownership interests in the property funds as part of the proceeds received from these contributions. ProLogis recognizes its proportionate share of the earnings or losses of each property fund under the equity method. ProLogis earns fees for acting as the manager of each of the property funds and may earn additional fees by providing other services to certain of the property funds including, but not limited to, development and leasing activities performed on their behalf.

     ProLogis’ investments in the eight property funds, presented under the equity method, were as follows as of the dates indicated (in thousands of U.S. dollars):

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     ProLogis’ total investment in the eight property funds as of September 30, 2003 consisted of the following components (in millions of U.S. dollars):