UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 May 5, 2004 was 181,359,530.

PROLOGIS

INDEX

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PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS

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

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME

(Continued)

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

4

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME (CONTINUED)

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

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

See Note 11 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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PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. General:

          Business

          ProLogis (collectively with its consolidated subsidiaries and partnerships “ProLogis”) 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). ProLogis has initiated operations in China, but ProLogis owned no real estate assets in China at March 31, 2004. 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 distribution properties. The CDFS business segment primarily encompasses the development of 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 will acquire distribution properties in the CDFS business segment that are generally rehabilitated and/or repositioned prior to being contributed to a property fund. See Note 10.

          Principles of Financial Presentation

          ProLogis’ Consolidated Condensed Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The accounts of ProLogis, its wholly owned subsidiaries and its majority owned and controlled subsidiaries and partnerships are consolidated in the accompanying financial statements and are presented in ProLogis’ functional currency, the U.S. dollar. ProLogis consolidates all entities in which it owns a majority voting interest and those variable interest entities, as defined, in which it is the primary beneficiary. All material intercompany transactions, including transactions with unconsolidated investees, have been eliminated.

          The Consolidated Condensed Financial Statements of ProLogis as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 are unaudited and, pursuant to the rules of the United States 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 are adequate; however, these interim Consolidated Condensed Financial Statements should be read in conjunction with ProLogis’ December 31, 2003 audited Consolidated Financial Statements contained in ProLogis’ 2003 Annual Report on Form 10-K.

          Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued in January 2003 and revised in December 2003. The revised Interpretation No. 46 (“FIN 46R”) was adopted by ProLogis as of January 1, 2004. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and requires that variable interest entities in which ProLogis is the primary beneficiary be presented on a consolidated basis in its financial statements. As a result of adopting FIN 46R, ProLogis began consolidating its investments in TCL Holding S.A. (“TCL Holding”), formerly Frigoscandia Holding S.A., and CSI/Frigo LLC, a company that holds the voting ownership interest in TCL Holding, as of January 1, 2004. Through December 31, 2003, ProLogis presented its investments in TCL Holding and CSI/Frigo LLC under the equity method. ProLogis’ combined effective ownership in these entities was 99.75% at December 31, 2003. None of ProLogis’ other unconsolidated investees are variable interest entities as defined in FIN 46R. Therefore, ProLogis will continue to present its investments in these entities under the equity method. See Note 3.

          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

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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.

          Certain amounts included in ProLogis’ Consolidated Condensed Financial Statements for the prior period have been reclassified to conform to the 2004 financial statement presentation.

     Proposed Acquisition Transaction

          On May 3, 2004, ProLogis and certain private REIT subsidiaries of established investment funds (the “Fund Partners”) established five property funds (the “Acquiring Property Funds”). Also on that date, ProLogis and the Acquiring Property Funds entered into an agreement to acquire the outstanding equity and operating units of Keystone Property Trust (“Keystone”) (the “Keystone Transaction”). ProLogis has a 20% ownership interest in the Acquiring Property Funds with the remainder owned by the Fund Partners. As part of the Keystone Transaction, ProLogis, through a wholly owned subsidiary, will directly acquire certain assets of Keystone. Consideration for the common equity of Keystone will be paid in cash at $23.80 per share. ProLogis anticipates that a portion of the consideration that it pays will be in the form of limited partnership units that are convertible into ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”). Keystone, a publicly traded REIT, owns and leases industrial distribution properties located in New Jersey, Pennsylvania, Indiana, Florida, South Carolina and Ohio. The Keystone Acquisition is subject to the approval of Keystone’s shareholders.

          Collectively, the Acquiring Property Funds would acquire $1.37 billion of assets from Keystone, including 22.9 million square feet of operating properties. ProLogis’ direct acquisition includes operating properties aggregating 2.4 million square feet, Keystone’s 20% ownership interests in two unconsolidated entities that own 7.7 million square feet of operating properties, Keystone’s 50% ownership interest in an unconsolidated entity that is developing a 0.8 million square foot property and land positions aggregating 126 acres. The assets to be acquired directly by ProLogis are valued at $290.0 million. The Acquiring Property Funds anticipate that Keystone’s existing direct fixed-rate obligations will be retired after the closing date. The combined value of the Keystone Transaction is estimated to be $1.66 billion, including the assumption of liabilities and transaction expenses.

          In anticipation of the proposed transaction, the Acquiring Property Funds have entered into interest rate swap agreements to hedge a portion of the future interest payments associated with the secured debt that the Acquiring Property Funds anticipate will be obtained as part of the financing of the Keystone Transaction. ProLogis believes that the interest rate swap agreements qualify for hedge accounting treatment. Certain of the interest rate swap agreements are subject to an indemnification agreement between the Acquiring Property Funds and ProLogis. Under the indemnification agreement, ProLogis is obligated to make any settlement payments that may become due and, alternatively, ProLogis is entitled to receive any settlement proceeds that may be paid. This indemnification agreement relates to interest swap agreements with an aggregate notional amount of $185.2 million, the approximate amount of the secured debt to be obtained by the Acquiring Property Funds attributable to ProLogis’ 20% ownership interest.

          Keystone will file a proxy statement with the SEC related to the Keystone Transaction. ProLogis anticipates that the Keystone Transaction will close during the third quarter of 2004.

2. Real Estate:

     Real Estate Assets

          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 assets, presented at cost, include the following as of the dates indicated (in thousands of U.S. dollars):

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          ProLogis’ directly owned real estate assets are located in North America (the United States and Mexico), 11 countries in Europe and in Japan. No individual market in any country, as defined by ProLogis and presented in Item 2 of its 2003 Annual Report on Form 10-K, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

     Operating Lease Agreements

          ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At March 31, 2004, minimum lease payments on leases with lease periods greater than one year for space in ProLogis’ directly owned properties for the remainder of 2004 and the other years in the five-year period ending December 31, 2008 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 1.27% and 15.75%, respectively, of ProLogis’ annualized collected base rents at March 31, 2004.

3. Unconsolidated Investees:

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     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. Generally, these entities are not variable interest entities as defined in FIN 46R (see Note 1). 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. This business strategy allows ProLogis to realize, for financial reporting purposes, a portion of the profits from its development activities, raise private equity capital or issue private debt instruments, generate fee income, provide liquidity to fund its future development activities, while still allowing ProLogis to maintain a long-term ownership interest in its developed properties.

          ProLogis’ investments in entities that were accounted for under the equity method are summarized by type of investee 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 shares of the net earnings or losses of these investees recognized under the equity method 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 of U.S. dollars):

     Property Funds

          Since 1999, ProLogis has formed eight property funds. ProLogis’ ownership interests in these property funds range from 14% to 50%. The property funds own operating properties that have generally been contributed to the property funds by ProLogis. In most cases, ProLogis receives ownership interests in the property funds as part of the proceeds received from these contributions. ProLogis recognizes its proportionate share of the net 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’ investments in the property funds at March 31, 2004 consisted of the following components (in millions of U.S. dollars):

           ProLogis’ proportionate shares of the net earnings or losses of the property funds recognized under the equity method, interest income on advances to the property funds, if any, and fees earned for services provided to the property funds were as follows for the periods indicated (in thousands of U.S. dollars):

	•		Began operations on August 26, 1999;
	•		Members are ProLogis and New York State Common Retirement Fund;
	•		Owned 80 properties aggregating 13.2 million square feet at March 31, 2004;

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	•		Acquired two properties aggregating 257,000 square feet from third parties and disposed of one 111,000 square foot property during the three months ended March 31, 2004;
	•		All but three of the properties owned were contributed by ProLogis or were developed by ProLogis on behalf of the property fund;
	•		Properties are located in the Los Angeles/Orange County market;
	•		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;
	•		ProLogis’ ownership interest has been 50% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.9 million and $0.8 million for the three months ended March 31, 2004 and 2003, respectively.

(2)

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

	•		Began operations on June 30, 2000;
	•		Members are ProLogis and State Teachers’ Retirement Board of Ohio;
	•		Owned 36 properties aggregating 9.4 million square feet at March 31, 2004;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 16 markets in the United States;
	•		ProLogis’ ownership interest has been 41.3% since January 15, 2001 and was 20% from inception of the property fund to that date; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million and $0.5 million for the three months ended March 31, 2004 and 2003, respectively.

(3)

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

	•		Began operations on June 30, 2000;
	•		Partners are ProLogis and an affiliate of First Islamic Investment Bank E.C. (“First Islamic Bank”);
	•		Owned 27 properties aggregating 4.5 million square feet at March 31, 2004;
	•		All properties were contributed by ProLogis;
	•		Properties are located in 13 markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million and $0.5 million for the three months ended March 31, 2004 and 2003, respectively.

(4)

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

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	•		Began operations on June 15, 2001;
	•		Partners are ProLogis and an affiliate of First Islamic Bank;
	•		Owned 34 properties aggregating 4.4 million square feet at March 31, 2004;
	•		All properties were acquired from ProLogis;
	•		Properties are located in 15 markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; 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 March 31, 2004 and 2003, respectively.

(5)

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

	•		Began operations on September 21, 2001;
	•		Partners are ProLogis and an affiliate of First Islamic Bank;
	•		Owned 17 properties aggregating 3.5 million square feet at March 31, 2004;
	•		All properties were acquired from ProLogis;
	•		Properties are located in ten markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.3 million for both the three months ended March 31, 2004 and 2003.

(6)

ProLogis North American Properties Fund V:

	•		Began operations on March 28, 2002;
	•		Ownership interests (direct and indirect) of the ProLogis-Macquarie Fund at March 31, 2004 are held directly or indirectly by ProLogis, Macquarie ProLogis Trust (“MPR”), a listed property trust in Australia, and a company that was formed to act as manager of the ProLogis-Macquarie Fund. ProLogis and a United States subsidiary of Macquarie Bank Limited (“Macquarie Bank”) each have a 50% ownership interest in the manager of the ProLogis-Macquarie Fund;
	•		MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 83.1% at March 31, 2004 through its 93.5% weighted ownership interest in two entities that collectively owned 88.9% of the ProLogis-Macquarie Fund. MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 82.4% at March 31, 2003 through its 93.0% weighted ownership interest in two entities that collectively owned 88.6% of the ProLogis-Macquarie Fund;
	•		ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 14.0% at March 31, 2004 based on its 11.1% direct ownership interest in the ProLogis-Macquarie Fund and its 50% ownership interest in the management company that had a 6.5% ownership interest in two entities that collectively owned 88.9% of the ProLogis-Macquarie Fund. ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 14.5% at March 31, 2003 based on its 11.4% direct ownership interest in the ProLogis-Macquarie Fund and its 50% ownership interest in the management company that had a 7.0% ownership interest in two entities that collectively owned 88.6% of the ProLogis-Macquarie Fund;

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	•		Macquarie Bank’s effective ownership interest in the ProLogis-Macquarie Fund was 2.9% at March 31, 2004 based on its 50% ownership interest in the management company that had a 6.5% ownership interest in two entities that collectively owned 88.9% of the ProLogis-Macquarie Fund. Macquarie Bank’s effective ownership interest at March 31, 2003 was 3.1% based on its 50% ownership interest in the management company that had a 7.0% ownership interest in two entities that collectively owned 88.6% of the ProLogis-Macquarie Fund;
	•		ProLogis refers to the combined entities in which it has direct or indirect 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 14% to 16.9% since the property fund began operations in March 2002;
	•		Owned 97 properties aggregating 21.9 million square feet at March 31, 2004 (including seven properties aggregating 1.1 million square feet that were contributed by ProLogis during the first quarter of 2004);
	•		All properties were acquired from ProLogis;
	•		Properties are located in 24 markets in the United States and three markets in Mexico;
	•		ProLogis was committed to offer to contribute all of the properties that it developed and stabilized during 2003 in North America (excluding properties that are covered under the agreement with ProLogis California) to ProLogis North American Properties Fund V. This commitment expired on December 31, 2003. While ProLogis is no longer committed to contribute, and ProLogis North American Properties Fund V is no longer obligated to acquire properties from ProLogis, ProLogis did contribute seven properties to ProLogis North American Properties Fund V in the first quarter of 2004. ProLogis expects that it will periodically offer to contribute properties to ProLogis North American Properties Fund V in 2004. ProLogis cannot predict the extent to which ProLogis North American Properties Fund V will continue to acquire properties from ProLogis during 2004; and
	•		Property management, leasing and other fees recognized by ProLogis were $1.4 million and $1.8 million for the three months ended March 31, 2004 and 2003, respectively. Fees and other income recognized for the three months ended March 31, 2004 consisted of property management and asset management fees while the amounts recognized for the three months ended March 31, 2003 consisted of $0.8 million of property management and asset management fees, $0.3 million of long-term debt placement fees and $0.7 million of other fees.

(7)

ProLogis European Properties Fund:

	•		Began operations on September 23, 1999;
	•		ProLogis and 21 third party institutional investors own units in the property fund. In August 2003, ProLogis European Properties Fund obtained additional equity commitments from 11 institutional investors (including five new investors) aggregating 636.6 million euro (the currency equivalent of approximately $785.8 million at March 31, 2004) of which 559.8 million euro (the currency equivalent of approximately $691.0 million at March 31, 2004) was unfunded at March 31, 2004. The subscription agreements expire on August 29, 2006;
	•		At March 31, 2004, ProLogis was committed to make additional equity contributions to ProLogis European Properties Fund of 135.4 million euro (the currency equivalent of approximately $167.1 million as of March 31, 2004) through September 15, 2009;
	•		Owned 204 properties aggregating 41.9 million square feet at March 31, 2004 (including seven properties aggregating 1.8 million square feet that were contributed by ProLogis in the first quarter of 2004);

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	•		Properties have been contributed by ProLogis (159 properties, 31.3 million square feet) and acquired from third parties (45 properties, 10.6 million square feet);
	•		Properties are located in 25 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 criteria, including leasing criteria;
	•		ProLogis’ ownership interest was 22.6% and 29.8% at March 31, 2004 and 2003, respectively; and
	•		Property management, asset management and other fees recognized by ProLogis were $6.3 million and $5.2 million for the three months ended March 31, 2004 and 2003, respectively.

(8)

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

	•		Began operations on September 24, 2002;
	•		Partners are ProLogis and a real estate investment subsidiary of the Government of Singapore Investment Corporation (“GIC”);
	•		The total capital commitment by the real estate investment subsidiary of GIC to the property fund is $300.0 million, of which $206.0 million is unfunded at March 31, 2004;
	•		Owned six properties aggregating 2.0 million square feet at March 31, 2004 (including one property aggregating 0.4 million square feet that was acquired from a third party in the first quarter of 2004);
	•		Four of the six properties owned by the property fund were contributed by ProLogis;
	•		All properties are located in Tokyo;
	•		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 criteria, including leasing criteria;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and
	•		Property management and asset management fees recognized by ProLogis were $0.6 million and $0.1 million for the three months ended March 31, 2004 and 2003, respectively.

(9)		Under GAAP, a portion of the proceeds resulting from ProLogis’ contribution of properties to the property funds are deferred due to ProLogis’ continuing ownership in the property fund that acquires the property. The amount of the proceeds that ProLogis is unable to recognize in computing the gain on the contribution is recorded as a reduction to ProLogis’ balance sheet investment in the property fund that acquires the property. The proceeds that have not been recognized are eventually recognized when ProLogis adjusts its proportionate share of the net earnings or losses 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 properties. The proceeds not recognized are eventually recognized in income by ProLogis if the property fund disposes of a property to a third party that was originally contributed to the property fund by ProLogis. 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.
(10)		Includes costs associated with ProLogis’ investment in the property fund and ProLogis’ proportionate share of the accumulated other comprehensive income or loss recognized by ProLogis European Properties Fund

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(cumulative translation adjustments and hedge accounting adjustments) and ProLogis Japan Properties Fund (cumulative translation adjustments).

          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 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% 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 March 31, 2004 and ProLogis has assessed a nominal value to the guarantee undertaken through the SLCAs. The potential obligations under the SLCAs aggregate $402.8 million at March 31, 2004 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 $5.4 billion at March 31, 2004.

          In August 2003, ProLogis entered into an indemnification agreement with ProLogis European Properties Fund whereby ProLogis would indemnify ProLogis European Properties Fund for certain future capital gains tax liabilities that could be incurred by ProLogis European Properties Fund. The indemnification agreement applies to properties that ProLogis contributes 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 agreed to indemnify ProLogis European Properties Fund if ProLogis European Properties Fund: (i) is subject to 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) must grant a discount to the buyer of shares under a share transfer transaction because the embedded capital gain tax liability is being transferred to the buyer of the shares. 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 receive 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 to 100% of the 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 $5.7 million associated with the contributions of 21 properties to ProLogis European Properties Fund during the period from April 1, 2003 to March 31, 2004.

          Summarized financial information of the property funds as of and for the three months ended March 31, 2004 is presented below (in millions of U.S. dollars). The information presented is for the entire entity, not ProLogis’ proportionate share of the entity.

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     CDFS Business Investees

          ProLogis has active investments in three joint ventures (the “CDFS Joint Ventures”) that perform some of ProLogis’ CDFS business activities in the United Kingdom. ProLogis discontinued its participation and significantly reduced its investment in a fourth CDFS Joint Venture in November 2003. ProLogis’ ownership interest in each of the CDFS Joint Ventures is 50%. ProLogis’ combined investment in the CDFS Joint Ventures was $11.9 million and $12.7 million at March 31, 2004 and December 31, 2003, respectively. The CDFS Joint Ventures are presented under the equity method.

          Collectively, the CDFS Joint Ventures owned 57 acres of land at both March 31, 2004 and December 31, 2003, respectively, with the capacity for the future development of 0.3 million square feet of distribution properties. Also, at March 31, 2004 and December 31, 2003, the CDFS Joint Ventures collectively controlled (through contracts, options or letters of intent) 368 acres of land and 398 acres of land, respectively, with the capacity for the future development of 7.1 million and 7.6 million square feet of distribution properties, respectively. The CDFS Joint Ventures own no operating properties.

          The CDFS Joint Ventures in which ProLogis currently actively participates engage primarily in development activities (currently the holding of land positions for future development). The CDFS Joint Venture in which ProLogis ceased its participation and significantly reduced its investment during 2003 owned 11 operating properties at March 31, 2003. Based on its investment in this entity, ProLogis recognized $0.3 million of income under the equity method during the three months ended March 31, 2003.

     Other Investees

          ProLogis has also invested in temperature-controlled distribution companies and in other companies that do not own or operate real estate but that provide ProLogis’ customers with access to logistics expertise and technology. Generally these investments were structured to allow ProLogis to continue to meet the REIT requirements of the Code. ProLogis’ investment in these companies were as follows as of the dates indicated (in thousands of U.S. dollars):

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          ProLogis recognized its proportionate shares of the net earnings or losses of its other unconsolidated investees including interest income, if any, as follows for the periods indicated (in thousands of U.S. dollars):

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4. Discontinued Operations:

          Discontinued operations are defined in Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as 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. SFAS No. 144 further provides that the assets and liabilities of the component of the entity that has been classified as discontinued operations be presented separately in the entity’s balance sheet. The results of operations of the component of the entity that has been classified as discontinued operations are reported as discontinued operations in the entity’s statement of earnings.

          Properties that ProLogis disposed of to third parties are considered to be discontinued operations unless such properties were developed by ProLogis under a pre-sale agreement. However, properties that ProLogis contributes to property funds in which ProLogis maintains an ownership interest and acts as manager are not considered to be discontinued operations due to ProLogis’ continuing involvement with the properties. Discontinued operations recognized directly by ProLogis’ unconsolidated investees, if any, are not required to be reflected separately from ProLogis’ investment balance or separately from the net earnings or losses of those entities of which ProLogis recognizes its proportionate share under the equity method.

          During the period prior to the contribution or sale but after the completion of CDFS business activities (development, rehabilitation or repositioning), ProLogis includes CDFS business assets in its operating portfolio and as a part of the property operations segment. See Note 10. These assets do not meet the criteria to be classified as held for sale or as discontinued operations.

          As of and for the three months ended March 31, 2004, ProLogis reported discontinued operations as follows:

•

Assets held for sale: Represents the operations in France of ProLogis’ temperature-controlled distribution investee, TCL Holding. See Notes 1 and 3.

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•

Assets sold in 2004: During the three months ended March 31, 2004, ProLogis disposed of seven properties to third parties that had not been developed under pre-sale agreements. ProLogis has reported the operations of these properties and the net gains or losses resulting from their dispositions as discontinued operations for the three months ended March 31, 2004. Accordingly, the operations of these properties for the three months ended March 31, 2003 have been reclassified and are presented as discontinued operations in ProLogis’ Consolidated Condensed Statement of Earnings and Comprehensive Income for that period.

     Assets Held For Sale

          The net assets of TCL Holding’s operations in France that are classified as held for sale consisted of the following at March 31, 2004 (in thousands of U.S. dollars):

          TCL Holding’s operations in France that are classified as held for sale generated net income of $3.4 million for the three months ended March 31, 2004. ProLogis began consolidating its investments in TCL Holding as of January 1, 2004 (see Notes 1 and 3). These operations were classified as held for sale in 2003. However, because ProLogis’ investments in TCL Holding were presented under the equity method during 2003, ProLogis was not required to reflect the portion of its investments in TCL Holding related to the French operations or the portion of its earnings recognized under the equity method attributable to the French operations separately as discontinued operations in 2003.

     Assets Sold in 2004

          ProLogis recognized a net gain of $4.9 million from the dispositions of the seven properties that meet the criteria to be presented as discontinued operations in 2004. Three of the seven properties were CDFS business assets. These properties generated an aggregate net gain of $5.4 million from aggregate net disposition proceeds of $68.2 million. The remaining four properties disposed of in the first quarter of 2004 were held in ProLogis’ property operations segment. The dispositions of these properties generated an aggregate net loss of $0.5 million. See Note 10.

          The operating amounts attributable to the seven properties that are presented as discontinued operations (other than the net gain or loss recognized upon disposition) are as follows for the periods indicated (in thousands of U.S. dollars):

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5. Borrowings:

     Euro Denominated Debt Offering

          In April 2004, ProLogis issued 350.0 million euro of notes that are registered on the Luxembourg Stock Exchange (the “Euro Notes”). The Euro Notes will mature in April 2011 and bear interest at a fixed coupon rate of 4.375% per annum (an effective interest rate of 4.414% per annum) to be paid on an annual basis beginning in April 2005. The net proceeds from the issuance of the Euro Notes were 347.8 million euro. A portion of the proceeds were used to repay 76.8 million euro of borrowings under one of ProLogis’ revolving lines of credit. The remaining cash (approximately $329.8 million) was repatriated to the United States.

6. Shareholders’ Equity:

     Common Shares

          ProLogis had 181,222,238 and 180,182,615 Common Shares outstanding at March 31, 2004 and December 31, 2003, respectively.

          ProLogis issues Common Shares under various Common Share Plans:

	•		1999 Dividend Reinvestment and Share Purchase Plan, amended in November 2002 (the “1999 Common Share Plan”): Allows holders of Common Shares to automatically reinvest Common Share distributions and certain holders and persons who are not holders of Common Shares to purchase a limited number of additional Common Shares by making optional cash payments, without payment of any brokerage commission or service charge. Common Shares that are acquired under the 1999 Common Share Plan, either through reinvestment of distributions or through optional cash payments, are acquired at a price ranging from 98% to 100% of the market price of such Common Shares, as determined by ProLogis. ProLogis generated net proceeds of $6.0 million from the issuance of 166,000 Common Shares during the three months ended March 31, 2004 under the 1999 Common Share Plan.
	•		Long-term incentive plan (the “Incentive Plan”) and Share Option Plan for Outside Trustees (the “Outside Trustees Plan”): Certain employees and outside members of the Board of Trustees (the “Board”) participate in these plans which provide compensation, generally in the form of Common Shares. Under the Incentive Plan and the Outside Trustees Plan, ProLogis generated net proceeds from the exercise of share options and other awards of $12.7 million from the issuance of 856,000 Common Shares during the three months ended March 31, 2004. Also in 2004, certain employees who earned awards under the Incentive Plan received cash payments in lieu of Common Shares of $0.3 million.
	•		ProLogis Trust Employee Share Purchase Plan (the “Employee Share Plan”): Employees of ProLogis and its participating entities may purchase Common Shares, through payroll deductions only, at a discounted price of 85% of the market price of the Common Shares, subject to certain restrictions. During the three months ended March 31, 2004, 12,000 Common Shares were purchased, generating net proceeds to ProLogis of $0.3 million.

          In 2004, ProLogis issued 5,000 Common Shares upon exchange of limited partnership units in one of ProLogis’ majority-owned and controlled real estate partnerships.

     Preferred Shares

          At March 31, 2004, ProLogis had three series of preferred shares of beneficial interest (“Preferred Shares”) outstanding (“Series C Preferred Shares”, “Series F Preferred Shares” and “Series G Preferred Shares”). Holders of each series of Preferred Shares outstanding have, subject to certain conditions, limited voting rights and all holders are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. 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

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for the payment of dividends. After the respective redemption dates, each series of Preferred Shares can be redeemed at ProLogis’ option. The cash redemption price (other than the portion consisting of accrued and unpaid dividends) with respect to Series C Preferred Shares is payable solely out of the cumulative sales proceeds of other capital shares of ProLogis, which may include shares of other series of Preferred Shares. With respect to the payment of dividends, each series of Preferred Shares ranks on parity with ProLogis’ other series of Preferred Shares.

          ProLogis’ Preferred Shares outstanding at March 31, 2004 are summarized as follows (amounts in U.S. dollars as applicable):

          ProLogis’ remaining outstanding Series D Preferred Shares (5,000,000 shares) were redeemed on January 12, 2004 at the price of $25.00 per share, plus $0.066 in accrued and unpaid dividends. The total redemption value (including accrued dividends) was $125.3 million. ProLogis recognized a charge of $4.2 million representing the excess of the redemption value over the carrying value of the Series D Preferred Shares redeemed.

7. Distributions and Dividends:

     Common Share Distributions

          In December 2003, the Board announced a projected increase in the annual distribution level for 2004 from $1.44 to $1.46 per Common Share. The payment of Common Share distributions is subject to the discretion of the Board and is dependent upon ProLogis’ financial condition and operating results, and may be adjusted at the discretion of the Board during the year. A distribution of $0.365 per Common Share for the first quarter of 2004 was declared on January 29, 2004. This distribution was paid on February 27, 2004 to holders of Common Shares on February 13, 2004.

     Preferred Share Dividends

          The annual dividends on ProLogis’ Preferred Shares are $4.27 per share (Series C) and $1.6875 per share (Series F and Series G). On March 31, 2004, ProLogis paid a quarterly dividend of $1.0675 per share (Series C) and $0.421875 per share (Series F and Series G).

          Pursuant to the terms of its Preferred Shares, ProLogis is restricted from declaring or paying any distribution with respect to its Common Shares unless and until all cumulative dividends with respect to the Preferred Shares have been paid and sufficient funds have been set aside for dividends that have been declared for the then-current dividend period with respect to the Preferred Shares.

8. Earnings Per Common Share:

          Reconciliations of the denominator used to calculate basic net earnings attributable to Common Shares per share to the denominator used to calculate diluted net earnings attributable to Common Shares per share for the periods indicated are as follows (in thousands of U.S. dollars, except per share amounts):

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9. Long-Term Compensation:

          ProLogis recognizes the costs of its share-based compensation plans under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, that allow ProLogis to continue to account for these 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 granted equals or exceeds the market price of the underlying share on the date of grant, no compensation expense is recognized. SFAS No. 123 requires that the fair value of the share options granted be recognized as compensation expense, regardless of the relationship of the exercise price to the market price. ProLogis grants share options to employees and members of its Board that have an exercise price that is equal to the average of the high and low market prices on the day the options are granted. Therefore, no compensation expense is recognized. ProLogis recognizes compensation expense if the terms of the share options or other instruments awarded are changed in such a manner that the variable accounting rules as provided in APB No. 25 become applicable.

          Had compensation expense been recognized by ProLogis for the three months ended March 31, 2004 and 2003 using an option valuation model as provided in SFAS No. 123, ProLogis’ net earnings attributable to Common Shares and net earnings attributable to Common Shares per share for these periods would have changed as follows (in thousands of U.S. dollars, except per share amounts):

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

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          The pro forma amounts above were calculated using the Black-Scholes model to value the option grants and the following assumptions:

10. Business Segments:

          ProLogis has two reportable business segments:

	•		Property operations — Representing the long-term ownership, management and leasing of industrial distribution properties in the United States, Mexico, Europe and Japan (either directly or through investments in unconsolidated property funds in which ProLogis has an ownership interest and acts as manager). Each operating property and 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.
	•		CDFS business — representing the development, acquisition and rehabilitation and/or acquisition and repositioning of industrial distribution properties in the United States, Mexico, Europe and Japan with the intent to contribute the properties to unconsolidated property funds in which ProLogis has an ownership interest and acts as manager or to sell the developed properties to third parties. Additionally, ProLogis earns fees for development activities on behalf of customers or third parties and realizes profits from the sales of land parcels when their development plans no longer include the development parcels. The separate activities in this segment are considered to be individual operating segments having similar economic characteristics that are combined within the reportable segment based upon geographic location.

          The assets of the CDFS business segment generally include properties under development and land held for development. During the period between the completion of development, rehabilitation or repositioning of a property and the date the property is contributed to a property fund or sold to a third party, the property and its associated rental income and rental expenses are included in the property operations segment because the primary activity associated with the property during that period is leasing. Upon contribution or sale, the resulting gain or loss is part of the net operating income of the CDFS business segment. Certain sales to third parties are presented as discontinued operations. See Note 4.

          For both of ProLogis’ reportable business segments, reconciliations are presented below for: (i) income from external customers to ProLogis’ total revenues; (ii) net operating income from external customers to ProLogis’ net earnings before minority interest; and (iii) assets to ProLogis’ total assets. ProLogis’ chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The components of ProLogis’ earnings before minority interest that are also components of net operating income are allocated to each reportable operating segment. All other items are reflected as reconciling items. The following reconciliations are presented in thousands of U.S. dollars:

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(2)		Although certain properties owned by ProLogis North American Properties Fund V in 2004 and 2003 are located in Mexico (16 properties at March 31, 2004 and 13 properties at March 31, 2003), ProLogis classifies its entire investment in ProLogis North American Properties Fund V, the associated income recognized under the equity method from its investment in this property fund and the fees earned from this property fund as part of the United States revenues, net operating income and assets of the property operations segment.
(3)		Excludes rental income of $139,000 and $110,000 for the three months in 2004 and 2003, respectively, associated with properties sold to third parties in 2004. These amounts are presented as discontinued operations in ProLogis’ Consolidated Condensed Statements of Earnings and Comprehensive Income. See Note 4.
(4)		Amounts include the operations of ProLogis that are reported on a consolidated basis, including the fees earned by ProLogis for providing services to its unconsolidated property funds and ProLogis’ proportionate shares of the net earnings or losses of its unconsolidated property funds recognized under the equity method. See Note 3.
(5)		Excludes rental expenses of $98,000 ($33,000 for the United States and $65,000 for Europe) and $33,000 (all in the United States) for the three months in 2004 and 2003, respectively, associated with properties sold to third parties in 2004. These amounts are presented as discontinued operations in ProLogis’ Consolidated Condensed Statements of Earnings and Comprehensive Income. See Note 4.
(6)		Amounts recognized under the equity method include net foreign currency exchange losses of $0.3 million and $9.4 million for the three months in 2004 and 2003, respectively. See Note 3.
(7)		Net proceeds on dispositions of CDFS business assets were as follows for the three months in 2004 and 2003:

	•		United States: $41.2 million and $202.2 million, respectively;
	•		Mexico: $6.7 million (for 2004 only);
	•		Europe: $103.3 million and $46.0 million, respectively; and
	•		Japan: $4.7 million (for 2004 only).

(8)		Excludes net gains from dispositions of $5.4 million ($2.3 million for the United States and $3.1 million for Europe) for the three months in 2004 associated with properties sold to third parties in 2004. These amounts are presented as discontinued operations in ProLogis’ Consolidated Condensed Statements of Earnings and Comprehensive Income. See Note 4.
(9)		Includes $3.9 million and $24.0 million of net gains (including previously deferred amounts) recognized by ProLogis related to the contributions of properties to ProLogis North American Properties Fund V during the three months in 2004 and 2003, respectively. See Note 3.
(10)		Includes $1.7 million of net gains (including previously deferred amounts) recognized by ProLogis related to the contributions of properties to ProLogis North American Properties Fund V during the three months in 2004. See Note 3.
(11)		Includes $13.8 million and $4.8 million of net gains (including previously deferred amounts) recognized by ProLogis related to the contributions of properties to ProLogis European Properties Fund during the three months in 2004 and 2003, respectively. Also includes ProLogis’ proportionate shares of the net earnings of the CDFS Joint Ventures recognized under the equity method for the three months in 2003. See Note 3.

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(12)		For the three months in 2004, includes a net gain of $4.7 million recognized by ProLogis as a result of earning contingent proceeds associated with a 2003 contribution of a property to ProLogis Japan Properties Fund. See Note 3.
(13)		These unconsolidated investees do not operate in one of ProLogis’ two reportable business segments. See Note 3.
(14)		Includes properties that were developed or acquired in the CDFS business segment that have not yet been contributed or sold as follows:

	•		United States: $489.3 million and $388.2 million at March 31, 2004 and December 31 2003, respectively;
	•		Mexico: $56.6 million and $59.8 million at March 31, 2004 and December 31, 2003, respectively;
	•		Europe: $441.8 million and $480.3 million at March 31, 2004 and December 31, 2003, respectively; and
	•		Japan: $130.9 million at March 31, 2004.

(15)

Amounts include investments presented under the equity method. See Note 3.

11. Supplemental Cash Flow Information:

          The amount of interest paid in cash for the three months ended March 31, 2004 and 2003 was $45.8 million and $40.4 million, respectively.

          Non-cash investing and financing activities for the three months ended March 31, 2004 and 2003 are as follows:

	•		ProLogis received $16.8 million and $12.1 million of equity interests in property funds from the contributions of properties to these property funds during the three months in 2004 and 2003, respectively.
	•		Net foreign currency translation adjustments of $42.8 million and $3.3 million were recognized for the three months in 2004 and 2003, respectively.
	•		During the three months in 2004 and 2003, ProLogis capitalized portions of the total cost of its share-based compensation awards of $1.2 million and $1.0 million, respectively, to the investment basis of its real estate assets.
	•		As partial consideration for certain property contributions, ProLogis received $3.2 million and $69.7 million in the form of notes receivable from ProLogis North American Properties Fund V during the three months in 2004 and 2003, respectively.
	•		ProLogis assumed $14.5 million of secured debt in connection with the acquisition of properties in 2004.
	•		Limited partnership units aggregating $33,000 were converted into Common Shares in 2004.

12. Derivative Financial Instruments:

     ProLogis uses derivative financial instruments as hedges to manage well-defined risk associated with interest and foreign currency exchange rate fluctuations on existing or anticipated obligations and transactions. ProLogis does not use derivative financial instruments for trading purposes.

     The primary risks associated with derivative instruments are market risk and credit risk. Market risk is defined as the potential for loss in the value of the derivative due to adverse changes in market prices (interest rates or foreign currency exchange rates). The use of derivative financial instruments allows ProLogis to manage the risks of

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increases in interest rates and fluctuations in foreign currency exchange rates with respect to the effects these fluctuations would have on ProLogis’ income and cash flows.

          Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation under the contract. ProLogis does not obtain collateral to support financial instruments subject to credit risk but monitors the credit standing of counterparties, primarily global commercial banks. ProLogis does not anticipate non-performance by any of the counterparties to its derivative instruments. However, should a counterparty fail to perform, ProLogis would incur a financial loss to the extent of the positive fair market value of the derivative contracts, if any.

          The following table summarizes the activity in ProLogis’ derivative instruments for the three months ended March 31, 2004 (in millions of U.S. dollars):