~~Table~~SECURITIES ofAND ~~Contents~~EXCHANGE COMMISSION

~~SECURITIES~~Washington, D.C. ~~AND EXCHANGE COMMISSION~~ 20549

~~Washington, D.C. 20549~~ FORM 10-Q

~~FORM~~QUARTERLY ~~10-Q~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~QUARTERLY~~For ~~REPORT~~the fiscal ~~PURSUANT~~quarter TOended ~~SECTION~~June 30, ~~13 OR 15(d) OF THE SECURITIES EXCHANGE~~ 2005

~~ACT~~Commission file OFnumber ~~1934~~ 1-31908

~~For~~CATELLUS ~~the fiscal quarter ended~~DEVELOPMENT ~~September 30, 2004~~ CORPORATION

~~Commission~~(Exact name ~~file~~of ~~number~~Registrant ~~1-31908~~ as specified in its charter)

CATELLUS DEVELOPMENT CORPORATION

Delaware		94-2953477
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~(Exact~~201 ~~name of Registrant as specified in its charter)~~ Mission Street

Delaware		94-2953477
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

San Francisco, California 94105

~~201~~(Address of ~~Mission~~principal ~~Street~~ executive offices and zip code)

~~San~~Registrant’s telephone ~~Francisco~~number, ~~California~~including ~~94105~~area code:

(~~Address of principal executive offices and zip code~~415) 974-4500

Indicate by check mark whether the Registrant’s ~~telephone~~(1) has ~~number~~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), ~~including~~and ~~area~~(2) has ~~code:~~been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (~~415)~~as ~~974~~defined in Rule 12b-~~4500~~2 of the Exchange Act). ý Yes o No

~~Indicate~~As byof ~~check~~August ~~mark whether the Registrant (~~1), ~~has~~2005 ~~filed~~there were ~~all~~103,678,456 ~~reports~~issued ~~required~~and tooutstanding beshares ~~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’s ~~was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days~~Common Stock. ~~Yes x No ¨~~

~~Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange~~CATELLUS ~~Act). x Yes ¨ No~~DEVELOPMENT CORPORATION

As of November 1, 2004, there were 103,039,418 issued and outstanding shares of the Registrant’s Common Stock.

		Page No.
INDEX

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004	4
	Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2005 and 2004	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION		53
Item 1.	Legal Proceedings	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Submission of Matters to a Vote of Security Holders	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
SIGNATURES		55

~~Table of Contents~~2

~~CATELLUS~~PART I. ~~DEVELOPMENT~~FINANCIAL ~~CORPORATION~~ INFORMATION

~~INDEX~~ Item 1. Financial Statements (Unaudited)

			Page No
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003	2
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003	3
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
	Item 4.	Controls and Procedures	47
PART II. OTHER INFORMATION			47
	Item 1.	Legal Proceedings	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults Upon Senior Securities	48
	Item 4.	Submission of Matters to a Vote of Security Holders	49
	Item 5.	Other Information	49
	Item 6.	Exhibits and Reports on Form 8-K	49
SIGNATURES			50

CATELLUS DEVELOPMENT CORPORATION

1CONDENSED CONSOLIDATED BALANCE SHEETS

~~Table of Contents~~(In thousands)

PART I. FINANCIAL INFORMATION

	June 30, 2005			December 31, 2004
	(Unaudited)
Assets
Properties	$	2,381,584		$	2,316,289
Less accumulated depreciation	(487,227		)	(490,409		)
	1,894,357			1,825,880
Other assets and deferred charges, net	206,377			224,932
Notes receivable, less allowance	236,170			329,758
Accounts receivable, less allowance	26,902			35,800
Assets held for sale	55,484			10,336
Restricted cash and investments	12,852			29,569
Cash and cash equivalents	61,265			252,069
Total	$	2,493,407		$	2,708,344

Liabilities and stockholders’ equity
Mortgage and other debt	$	1,208,835		$	1,440,528
Accounts payable and accrued expenses	110,872			201,238
Deferred credits and other liabilities	284,187			286,780
Liabilities associated with assets held for sale	81,891			88
Deferred income taxes	51,231			36,119
Total liabilities	1,737,016			1,964,753
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.01 par value, 105,086 and 104,720 shares issued, and 103,941 and 103,317 shares outstanding at June 30, 2005 and December 31, 2004, respectively	1,051			1,047
Paid-in capital	517,089			509,407
Unearned value of restricted stock and restricted stock unit grants (1,145 and 1,403 shares at June 30, 2005 and December 31, 2004, respectively)	(21,474		)	(23,049		)
Accumulated earnings	259,725			256,186
Total stockholders’ equity	756,391			743,591
Total	$	2,493,407		$	2,708,344

~~Item~~See 1.notes ~~Financial~~to ~~Statements~~Condensed Consolidated ~~(Unaudited)~~Financial Statements.

~~CATELLUS DEVELOPMENT CORPORATION~~ 3

~~CONDENSED~~CATELLUS DEVELOPMENT ~~CONSOLIDATED BALANCE SHEETS~~ CORPORATION

~~(In~~CONDENSED ~~thousands)~~CONSOLIDATED STATEMENTS OF OPERATIONS

	September 30,2004			December 31,2003
	(Unaudited)
Assets
Properties	$	2,635,367		$	2,498,015
Less accumulated depreciation		(486,288	)		(446,872	)
		2,149,079			2,051,143
Other assets and deferred charges, net		270,065			292,312
Notes receivable, less allowance		84,519			119,202
Accounts receivable, less allowance		21,857			19,752
Assets held for sale		6,778			2,352
Restricted cash and investments		12,646			64,617
Cash and cash equivalents		23,855			45,931
Total	$	2,568,799		$	2,595,309
Liabilities and stockholders’ equity
Mortgage and other debt	$	1,353,941		$	1,378,054
Accounts payable and accrued expenses		125,668			157,036
Deferred credits and other liabilities		300,867			291,530
Liabilities associated with assets held for sale		72			2,296
Deferred income taxes		50,461			56,712
Total liabilities		1,831,009			1,885,628
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, 104,339 and 103,822 shares issued, and 103,039 and 102,724 shares outstanding at September 30, 2004 and December 31, 2003, respectively		1,043			1,039
Paid-in capital		500,578			489,143
Unearned value of restricted stock and restricted stock unit grants (1,300 and 1,098 shares at September 30, 2004 and December 31, 2003, respectively)		(19,845	)		(22,720	)
Accumulated earnings		256,014			242,219
Total stockholders’ equity		737,790			709,681
Total	$	2,568,799		$	2,595,309

(In thousands, except per share data)

See notes to condensed consolidated financial statements.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Unaudited)						(Unaudited)
Revenues
Rental revenue	$	74,725		$	72,428		$	148,924		$	144,203
Sales revenue	31,990			7,299			65,134			44,990
Management, development and other fees	3,250			758			10,794			2,457
	109,965			80,485			224,852			191,650
Costs and expenses
Property operating costs	(20,782		)	(18,092		)	(41,057		)	(36,932		)
Cost of sales	(20,141		)	(4,874		)	(43,036		)	(27,964		)
Selling, general and administrative expenses	(13,234		)	(12,611		)	(25,524		)	(25,562		)
Depreciation and amortization	(17,587		)	(18,045		)	(35,505		)	(34,939		)
	(71,744		)	(53,622		)	(145,122		)	(125,397		)
Operating income	38,221			26,863			79,730			66,253
Other income
Equity in earnings of operating joint ventures, net	2,665			2,379			5,498			4,793
Equity in earnings of development joint ventures, net	6,651			3,391			11,737			4,618
Gain on non-strategic asset sales	—			16,380			20			16,441
Interest income	8,883			2,461			17,778			5,238
Other	780			956			869			1,257
	18,979			25,567			35,902			32,347
Other expenses
Interest expense	(15,017		)	(15,314		)	(31,339		)	(29,627		)
REIT transition costs	—			(208		)	—			(420		)
Other	158			(1,819		)	(1,340		)	(2,249		)
	(14,859		)	(17,341		)	(32,679		)	(32,296		)
Income before income taxes and discontinued operations	42,341			35,089			82,953			66,304
Income tax expense	(9,246		)	(982		)	(17,394		)	(1,913		)
Income from continuing operations	33,095			34,107			65,559			64,391
Discontinued operations, net of income tax:
(Loss) gain from disposal of discontinued operations	(17		)	398			716			2,014
(Loss) income from discontinued operations	(6,896		)	829			(6,775		)	1,020
Net (loss) gain from discontinued operations	(6,913		)	1,227			(6,059		)	3,034
Net income	$	26,182		$	35,334		$	59,500		$	67,425
Income per share from continuing operations
Basic	$	0.32		$	0.33		$	0.63		$	0.63
Assuming dilution	$	0.31		$	0.33		$	0.62		$	0.62
(Loss) income per share from discontinued operations
Basic	$	(0.07	)	$	0.01		$	(0.06	)	$	0.03
Assuming dilution	$	(0.06	)	$	0.01		$	(0.06	)	$	0.03
Net income per share
Basic	$	0.25		$	0.34		$	0.57		$	0.66
Assuming dilution	$	0.25		$	0.34		$	0.56		$	0.65
Average number of common shares outstanding-basic	103,912			103,023			103,832			102,933
Average number of common shares outstanding-diluted	105,457			104,078			105,406			104,116
Dividends declared per share	$	0.27		$	0.27		$	0.54		$	0.54

2See notes to Condensed Consolidated Financial Statements.

~~Table of Contents~~4

CATELLUS DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~CASH FLOWS

(In thousands~~, except per share data~~)

	Three Months EndedSeptember 30,							Nine Months EndedSeptember 30,
	Six Months Ended June 30,
	2004				2003			2004			2003
	2005			2004
	(Unaudited)							~~(Unaudited)~~
Revenues
Cash flows from operating activities:
Rental revenue	$	76,548			$	74,079		$	229,373		$	219,907
Net income	$	59,500		$	67,425
Sales revenue		39,487				45,515			84,477			78,425
Adjustments to reconcile net income to net cash provided by operating activities:
Management, development and other fees		394				2,954			2,851			9,901
Depreciation and amortization	35,505			34,939
		116,429				122,548			316,701			308,233
Deferred income tax (benefit) provision	15,112			(5,237		)
Costs and expenses
Deferred gain recognized	(4,524		)	(8,707		)
Property operating costs		(21,775	)			(22,760	)		(63,037	)		(61,568	)
Amortization of deferred loan fees and other costs	2,588			2,624
Cost of sales		(23,144	)			(27,171	)		(51,108	)		(50,424	)
Equity in earnings of joint ventures	(17,235		)	(9,411		)
Selling, general and administrative expenses		(13,619	)			(15,365	)		(39,181	)		(35,423	)
Gain on sales of investment property	(540		)	(2,014		)
Depreciation and amortization		(20,344	)			(17,721	)		(56,980	)		(51,311	)
Operating distributions from joint ventures	3,948			18,540
		(78,882	)			(83,017	)		(210,306	)		(198,726	)
Cost of development property and non-strategic assets sold	41,585			47,056
Operating income		37,547				39,531			106,395			109,507
Capital expenditures for development property	(28,340		)	(33,119		)
Other income
Other, net	3,805			4,729
Equity in (losses) earnings of operating joint ventures, net		(802	)			540			3,991			5,199
Change in notes receivable	93,588			24,459
Equity in earnings of development joint ventures, net		1,204				7,553			5,822			16,834
Change in deferred credits and other liabilities	12,645			18,581
Gain on non-strategic asset sales		—				928			16,441			8,285
Change in other operating assets and liabilities	(11,023		)	(54,587		)
Interest income		2,143				1,745			7,381			5,458
Net cash provided by operating activities	206,614			105,278
Other		1,166				581			2,423			2,530
Cash flows from investing activities:
		3,711				11,347			36,058			38,306
Property acquisitions	(42,627		)	(3,316		)
Other expenses
Capital expenditures for investment property	(78,684		)	(100,110		)
Interest expense		(15,763	)			(15,583	)		(47,821	)		(48,778	)
Tenant improvements	(3,554		)	(3,042		)
REIT transition costs		—				(1,416	)		(420	)		(4,779	)
Reimbursable construction costs	—			2,313
Other		(1,693	)			(411	)		(3,942	)		(607	)
Net proceeds from sale of investment property	2,852			9,649
		(17,456	)			(17,410	)		(52,183	)		(54,164	)
Contributions to joint ventures	(2,130		)	(600		)
Income before income taxes and discontinued operations		23,802				33,468			90,270			93,649
Decrease in restricted cash and investments	16,717			61,135
Income tax expense		(5,905	)			(12,456	)		(7,818	)		(34,842	)
Net cash used in investing activities	(107,426		)	(33,971		)
Income from continuing operations		17,897				21,012			82,452			58,807
Cash flows from financing activities:
Discontinued operations, net of income tax:
Borrowings	—			107,131
Gain (loss) from disposal of discontinued operations		11,617				(201	)		13,631			4,218
Repayment of borrowings	(190,380		)	(132,025		)
Income from discontinued operations		299				138			1,155			589
Dividends	(102,265		)	(55,418		)
Net gain (loss) from discontinued operations		11,916				(63	)		14,786			4,807
Proceeds from issuance of common stock	2,653			3,718
Net income	$	29,813			$	20,949		$	97,238		$	63,614
Net cash used in financing activities	(289,992		)	(76,594		)
Income per share from continuing operations
Net decrease in cash and cash equivalents	(190,804		)	(5,287		)
Basic	$	0.17			$	0.21		$	0.80		$	0.59
Cash and cash equivalents at beginning of period	252,069			45,931
Assuming dilution	$	0.17			$	0.20		$	0.79		$	0.58
Cash and cash equivalents at end of period	$	61,265		$	40,644
Income per share from discontinued operations
Supplemental disclosures of cash flow information:
Basic	$	0.12			$	—		$	0.14		$	0.05
Cash paid during the year for:
Assuming dilution	$	0.12			$	—		$	0.14		$	0.05
Interest (net of amount capitalized)	$	31,545		$	29,789
Net income per share
Income taxes	$	1,632		$	24,796
Basic	$	0.29			$	0.21		$	0.94		$	0.64
Non-cash financing activities:
Assuming dilution	$	0.29			$	0.20		$	0.93		$	0.63
Debt forgiveness-property reconveyance/reduction	$	(2,383	)	$	(8,946	)
Average number of common shares outstanding—basic		103,053				100,879			102,974			99,064
Average number of common shares outstanding—diluted		104,424				102,994			104,272			101,737
Dividends declared per share	$	0.27			$	—		$	0.81		$	—

See notes to ~~condensed~~Condensed Consolidated ~~consolidated~~Financial ~~financial statements~~Statements.

3 5

~~Table~~CATELLUS DEVELOPMENT ~~of Contents~~CORPORATION

~~CATELLUS~~NOTES ~~DEVELOPMENT~~TO ~~CORPORATION~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~ June 30, 2005

(~~In thousands~~Unaudited)

	Nine Months EndedSeptember 30,
	2004			2003
	(Unaudited)
Cash flows from operating activities:
Net income	$	97,238		$	63,614
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		56,980			51,311
Deferred income tax (benefit) provision		(6,251	)		781
Deferred gain recognized		(10,861	)		(3,576	)
Amortization of deferred loan fees and other costs		3,867			3,316
Equity in earnings of joint ventures		(9,813	)		(22,033	)
Gain on sales of investment property		(13,631	)		(7,030	)
Operating distributions from joint ventures		18,979			19,754
Cost of development property and non-strategic assets sold		55,809			49,229
Capital expenditures for development property		(42,896	)		(62,981	)
Other, net		6,314			(1,652	)
Change in deferred credits and other liabilities		26,458			13,548
Change in other operating assets and liabilities		(14,051	)		11,976
Net cash provided by operating activities		168,142			116,257
Cash flows from investing activities:
Property acquisitions		(27,574	)		(94,248	)
Capital expenditures for investment property		(155,642	)		(103,064	)
Tenant improvements		(4,410	)		(5,491	)
Reimbursable construction costs		2,769			(5,128	)
Net proceeds from sale of investment property		40,370			27,800
Distributions from joint ventures		—			8,601
Contributions to joint ventures		(1,445	)		(6,028	)
Decrease (increase) in restricted cash and investments		51,971			(7,308	)
Net cash used in investing activities		(93,961	)		(184,866	)
Cash flows from financing activities:
Borrowings		142,131			70,262
Repayment of borrowings		(159,094	)		(131,980	)
Dividends		(83,151	)		—
Distributions to minority partners		—			(4,551	)
Proceeds from issuance of common stock		3,857			53,925
Net cash used in financing activities		(96,257	)		(12,344	)
Net decrease in cash and cash equivalents		(22,076	)		(80,953	)
Cash and cash equivalents at beginning of period		45,931			274,927
Cash and cash equivalents at end of period	$	23,855		$	193,974
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)	$	44,348		$	46,500
Income taxes	$	42,104		$	57,923
Non-cash financing activities:
Debt forgiveness—property reconveyance/reduction	$	(9,209	)	$	(6,536	)

Note 1. Description of Business

~~See~~Catellus ~~notes~~Development Corporation (together with its subsidiaries, “Catellus” or the “Company”) owns and develops primarily industrial properties located in major markets in California, Illinois, Texas, Colorado, and Georgia, with recent expansion into New Jersey. The Company operated as a fully taxable C-corporation through December 31, 2003. At December 31, 2003, the Company reorganized its operations in order to ~~condensed~~operate as a real estate investment trust (“REIT”) commencing January 1, ~~consolidated~~2004 ~~financial~~(see ~~statements~~Note 11). All references to Catellus or the Company mean the current Catellus or its predecessor, as the context requires.

4On June 6, 2005, the Company and ProLogis announced that their boards had unanimously approved a definitive merger agreement under which ProLogis will acquire all of the outstanding common stock of Catellus for a total consideration of approximately $5.6 billion, including assumed liabilities and transaction costs (see Note 13).

~~Table~~Note of2. ~~Contents~~Interim Financial Data

The accompanying Condensed ~~CATELLUS~~Consolidated ~~DEVELOPMENT~~Financial ~~CORPORATION~~Statements should be read in conjunction with the Company’s 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying financial information includes all normal and recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented.

~~NOTES~~Partnership ~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ accounting

~~September~~At June 30, ~~2004~~2005, the Company holds significant variable interests in three variable interest entities that do not qualify for consolidation under the provisions of FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51”. The Company’s significant variable interests are in the form of equity interests in two of its unconsolidated joint ventures and its participation in a master development agreement:

~~(Unaudited)~~• Bergstrom Partners, L.P. was formed in January 2003 to redevelop and market 624 acres of land at a former missile test site in Travis County, Texas. No further contributions are required.

~~Note~~• SAMS Venture, 1.LLC ~~Description~~was formed in January 2003 to initially develop a new 545,000 square foot office park for the Los Angeles Air Force Base, convey that property to the United States Air Force in exchange for three parcels of ~~Business~~land totaling 56 acres and other consideration, and finally either sell or develop for sale the three parcels. The Company’s exposure will increase should this joint venture require additional contributions from its joint venture partners.

~~Catellus Development Corporation (together with its subsidiaries,~~• A ~~“Catellus” or the “~~Company”) ~~owns~~subsidiary ~~and~~entered ~~develops~~into ~~primarily~~a ~~industrial~~master ~~properties~~development ~~located~~agreement inwith ~~major~~the ~~markets~~City ~~in California~~of Austin, ~~Illinois,~~ Texas ~~and~~in ~~Colorado,~~December 2004 ~~with~~to ~~recent~~redevelop ~~expansion into Georgia~~ and ~~New~~market ~~Jersey.~~the ~~The~~property formerly ~~Company~~known ~~operated~~ as ~~a fully~~the ~~taxable~~Robert ~~C-corporation~~Mueller ~~through~~Municipal ~~December 31, 2003~~Airport. The ~~At December 31, 2003, the~~ Company’s ~~reorganized~~exposure ~~its~~will ~~operations~~increase inshould public ~~order~~financing toand ~~operate~~sales asrevenues abe ~~real~~insufficient ~~estate investment trust (“REIT”) commencing January 1, 2004 (see Note 11). All references~~ to ~~Catellus~~meet ~~or the Company mean the~~ current ~~Catellus~~ or projected ~~its~~financial ~~predecessor, as the context requires~~requirements.

~~Note~~The 2Company’s exposure in the current financial statements as a result of its involvement with these variable interest entities is $17.5 ~~Interim~~million ~~Financial~~as ~~Data~~of June 30, 2005.

The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying financial information includes all normal and recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. Certain prior period financial data have been reclassified to conform to the current period presentation. 6

~~New accounting~~Accounting ~~standards~~for stock-based compensation

InAt ~~December~~June 30, ~~2003~~2005, the Company ~~FASB~~has ~~issued Interpretation~~six Nostock-based employee compensation plans. ~~46-R,~~The ~~“Consolidation~~Company ofaccounts for ~~Variable~~those ~~Interest~~plans ~~Entities~~under –the anrecognition ~~interpretation~~and measurement principles of ~~ARB~~APB Opinion No. 25, 51“Accounting for Stock Issued to Employees” (“~~FIN~~APB ~~46-R~~25”), and related Interpretations. ~~FIN~~All ~~46-R~~options ~~requires~~when granted ~~that~~under ~~any~~those ~~entity~~plans ~~meeting~~had ~~certain~~an ~~rules~~exercise ~~relating~~price equal to athe ~~company’s~~market ~~level~~value of ~~economic~~ ~~risks~~the ~~and~~underlying ~~rewards~~common bestock ~~consolidated~~on asthe adate ~~variable~~of ~~interest entity~~grant. ~~The~~As ~~statement~~a isresult ~~applicable~~of toa ~~all~~stock ~~variable~~option exchange ~~interest~~offer ~~entities~~related ~~created~~to orthe ~~acquired~~REIT ~~after January 31~~conversion, ~~2003, and~~ the ~~first~~Company ~~interim~~is orrequired ~~annual reporting period beginning after December 15,~~to ~~2003,~~recognize ~~for~~compensation ~~variable~~expense ~~interest~~related ~~entities~~to inthe ~~which~~outstanding ~~the~~grants ~~Company~~of ~~holds~~$0.3 million aand ~~variable~~$0.5 ~~interest~~million ~~that~~for ~~was~~the ~~acquired~~three ~~before~~months ~~February~~ended 1June 30, ~~2003.~~2005 ~~The~~and 2004, ~~Company~~respectively, ~~has~~and ~~adopted~~$(0.03) ~~FIN~~million ~~46-R~~and ~~as required~~$1.7 ~~There~~million ~~was~~for nothe ~~significant~~six ~~effect~~months ended onJune 30, ~~the~~2005 ~~financial~~and ~~position~~2004, ~~results~~respectively ~~of operations~~(see orNote ~~cash~~11). ~~flows~~The offollowing ~~the~~table ~~Company~~illustrates ~~as a result of~~ the ~~initial~~effect ~~adoption~~on net ofincome ~~this~~and ~~standard~~earnings ~~with~~per ~~regard~~share toif ~~existing~~the ~~variable~~Company ~~interest~~had ~~entities;~~applied ~~however,~~the ~~future~~fair ~~newly~~value recognition ~~formed~~provisions ~~entities~~of ~~could~~FASB ~~meet~~Statement ~~these~~No. 123, ~~requirements~~“Accounting ~~and~~for ~~will~~Stock-Based beCompensation,” to ~~recorded~~stock-based asemployee ~~appropriate~~compensation.

At September 30, 2004, the Company holds significant variable interests in three variable interest entities that do not qualify for consolidation under the provisions of FIN 46-R. The Company’s significant variable interests are in the form of equity interests in three of its unconsolidated joint ventures:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Net income, as reported	$	26,182		$	35,334		$	59,500		$	67,425
Add: Stock-based employee compensation (credit) expense included in reported net income	257			471			(34		)	1,661
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards	(123		)	(367		)	(261		)	(749		)
Pro forma net income	$	26,316		$	35,438		$	59,205		$	68,337
Earnings per share:
Basic—as reported	$	0.25		$	0.34		$	0.57		$	0.66
Basic—pro forma	$	0.25		$	0.34		$	0.57		$	0.66
Diluted—as reported	$	0.25		$	0.34		$	0.56		$	0.65
Diluted— pro forma	$	0.25		$	0.34		$	0.56		$	0.66

•During ~~Bayport~~2004, ~~Alameda~~the ~~Associates,~~Compensation ~~LLC~~and ~~was~~Benefits ~~formed~~Committee of inthe ~~May~~Company’s Board of Directors established two performance-based executive award plans under the Company’s 2003 Performance Award Plan: the 2004 Transition Incentive Plan (“TIP”) and the 2004 Long-Term Incentive Plan (“LTIP”). Awards under the TIP were granted in 2004 and LTIP were granted in 2004 and 2005. The awards granted are non-voting units of measurement (“Performance Units”) that are deemed to ~~redevelop~~represent ~~land~~one share of the Company’s common stock. Performance Units are entitled to dividend equivalents representing dividends on an equal number of shares of the Company’s common stock. Dividend equivalents are credited to participants’ accounts as additional Performance Units. The initial performance period under the LTIP and the performance period under the TIP are from January 1, 2004 through December 31, 2006. Subsequent awards under the LTIP were granted in ~~Alameda~~2005 with a performance period from January 1, ~~California~~2005 ~~into~~to ~~485~~December 31, ~~residential~~2007. The ~~lots~~earliest ~~for~~date ~~sale~~TIP awards were eligible to begin vesting was December 31, 2004 if at least 50% of defined performance targets were achieved by that date and certain time vesting requirements as to certain participants were met. If Noany defined ~~further~~performance ~~cash~~targets ~~contributions~~are not 100% achieved by December 31, 2006, the remaining unvested performance units will be forfeited. TIP awards are payable ~~required~~in the Company’s common stock. The initial and subsequent LTIP awards vest at December 31, 2006 and 2007, respectively, if the Company’s total stockholder return, relative to the total stockholder returns of a certain group of peer companies, meets certain performance targets. LTIP awards are payable 50% in the Company’s common stock and 50% in cash.

• Bergstrom Partners, L.P. was formed in January 2003 to redevelop and market 624 acres of land at a former missile test site in Travis County, Texas. The Company is required to contribute up to $1.0 million in total contributions should there be insufficient funds to meet its current or projected financial requirements.7

•At ~~SAMS~~June 30, ~~Venture~~2005, 312,278 ~~LLC~~Performance ~~was~~Units, ~~formed~~representing the aggregate number initially awarded under both plans, less vested TIP Performance Units distributed in ~~January~~common stock, ~~2003~~plus additional Performance Units from dividend equivalents on previously existing Performance Units, have been credited to ~~initially~~participants’ accounts, ~~develop~~subject ato ~~new~~the ~~545~~vesting requirements discussed in the preceding paragraph. As required by APB 25,~~000~~ ~~square~~the ~~foot~~Company ~~office~~has ~~park~~recognized ~~for~~$1.2 million and $1.3 million as compensation expense during the ~~Los~~three ~~Angeles~~months ~~Air~~ended ~~Force~~June 30, 2005 ~~Base~~and 2004, ~~convey~~respectively, ~~that~~and ~~property~~$2.1 tomillion and $2.6 million during the ~~United~~six months ~~States~~ended ~~Air~~June 30, ~~Force~~2005 and 2004, respectively, with the corresponding liability recorded in ~~exchange~~“Accounts payable and accrued expenses” in the accompanying Condensed Consolidated Balance Sheet. For purposes of recognizing compensation expense, TIP performance is based on the Company’s current estimate of the timing for ~~three~~achieving ~~parcels~~performance targets, and LTIP performance is measured on the basis of ~~land~~actual ~~totaling~~results 56as ~~acres~~of June 30, 2005. The Company estimates that as of June 30, 2005, 95.7% of the TIP performance targets have been achieved. Actual performance under the LTIP is not determinable until the performance periods for the initial and ~~other~~subsequent awards ~~consideration~~end on December 31, 2006 and ~~finally~~2007, ~~either~~respectively. ~~sell~~Certain orTIP performance ~~develop~~targets were 100% achieved as of December 31, 2004, and therefore were eligible for ~~sale~~100% vesting. However, for purposes of vesting under the ~~three~~TIP, ~~parcels~~since at least 50% but less than 100% of the other defined performance targets were met as of December 31, 2004, the Compensation and Benefits Committee could only certify the achievement of 50% of such targets as of December 31, 2004. ~~The~~In ~~Company’s~~February 2005 ~~exposure~~and ~~will~~May 2005, ~~increase~~the Compensation ~~should~~and ~~this~~Benefits ~~joint~~Committee ~~venture~~certified ~~require~~the ~~additional~~achievement ~~contributions~~of ~~from~~the ~~its~~defined performance ~~joint~~targets ~~venture~~to ~~partners~~an extent which resulted in the performance vesting of 85% of all TIP Performance Units, subject to the time vesting requirements as to certain participants, as discussed in the preceding paragraph.

~~The~~During 2005, the Company’s ~~maximum~~granted ~~exposure~~to incertain officers ~~the~~and ~~current~~employees ~~financial~~an ~~statements~~aggregate asof a169,845 ~~result~~shares of ~~its~~restricted ~~involvement~~stock with a ~~these~~fair ~~variable~~market ~~interest~~value ~~entities~~of is $24.28 million as of ~~September~~the ~~30,~~grant ~~2004~~date. Shares of restricted stock are entitled to dividends.

5During 2005, the Company granted to non-employee directors an aggregate of 14,744 Director Restricted Stock Units with a fair market value of $0.4 million as of the grant date. Director Restricted Stock Units are entitled to dividend equivalents.

~~Table~~The ofCompany ~~Contents~~expenses dividends paid on unvested restricted stock and dividend equivalents paid on restricted stock units, Director Restricted Stock Units, and Director Stock Units. For the three months ended June 30, 2005 and 2004, such dividends and dividend equivalents paid were $0.4 million and $0.3 million, respectively, and $0.9 million and $0.7 million for the six months ended June 30, 2005 and 2004, respectively.

~~CATELLUS~~If ~~DEVELOPMENT~~the ~~CORPORATION~~proposed merger under the definitive merger agreement between the Company and ProLogis (as announced on June 6, 2005) is completed, all outstanding vested and unvested stock options will be canceled as of the effective time of the merger. Each holder of a canceled stock option will receive $33.81 for each share of Catellus common stock subject to the canceled option, less the exercise price and any applicable withholding taxes, payable in the form of 65% ProLogis common shares and 35% cash. In addition, if the merger is completed, the outstanding TIP and LTIP Performance Units, restricted stock units, Director Restricted Stock Units and Director Stock Units will be canceled as of the effective time of the merger. The holder of each such canceled unit will receive $33.81 for each share subject to the canceled unit, less any applicable withholding taxes, payable in the form of 65% ProLogis common shares and 35% cash.

~~NOTES~~New TOaccounting ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~ standards

In December 2004, the FASB issued Statement of Accounting ~~for~~Standards ~~stock~~No. 123R, “Share-~~based~~Based ~~compensation~~Payment” (“SFAS 123R”). SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity investments for goods or services. This statement is effective for fiscal years that begin after June 15, 2005 (as extended by the Securities and Exchange Commission). The Company will adopt SFAS 123R in the time frame required and it is anticipated that the Company will elect the modified prospective application transition method without restatement of prior interim periods. The initial adoption of SFAS 123R will not have a significant effect on the financial position, results of operations, or cash flow of the Company.

AtAcquisition ~~September 30, 2004, the Company has six stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles~~ of ~~APB~~joint ~~Opinion~~venture No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations. All options when granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Subsequently, as a result of a stock option exchange offer related to the REIT conversion, compensation expense of $0.8 million and $2.5 million was recognized for the three months and nine months ended September 30, 2004, respectively (see Note 11). The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. interest

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2004			2003			2004			2003
	(In thousands)						(In thousands)
Net income, as reported	$	29,813		$	20,949		$	97,238		$	63,614
Add: Stock-based employee compensation expense included in reported net income		853			—			2,514			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects in 2003		(259	)		(1,373	)		(1,008	)		(3,993	)
Pro forma net income	$	30,407		$	19,576		$	98,744		$	59,621
Earnings per share:
Basic—as reported	$	0.29		$	0.21		$	0.94		$	0.64
Basic—pro forma	$	0.30		$	0.19		$	0.96		$	0.60
Diluted—as reported	$	0.29		$	0.20		$	0.93		$	0.63
Diluted— pro forma	$	0.29		$	0.19		$	0.95		$	0.59

On June 1, 2005, the Company acquired the remaining 50 percent interest in Pacific Market Investment Company, LLC, an investment previously held as a joint venture. In accordance with FAS 141, Business Combinations, the results of Pacific Market Investment Company, LLC’s operations have been included in the consolidated financial statements since the acquisition date. The aggregate purchase price was $36.7 million and included a $19.7 million loan assumption, and $17.0 million of cash. The value of the hotel was determined based on the current market price for investments of similar age, condition, and location. Pacific Market Investment Company, LLC owns and operates an Embassy Suites Hotel in San Diego, California.

During the first quarter of 2004, the Compensation and Benefits Committee of the Company’s Board of Directors established two performance-based executive award plans under the Company’s 2003 Performance Award Plan: the 2004 Transition Incentive Plan (“TIP”) and the 2004 Long-Term Incentive Plan (“LTIP”). The awards granted are non-voting units of measurement (“Performance Units”) that are deemed to represent one share of the Company’s common stock. Performance Units are entitled to dividend equivalents representing dividends on an equal number of shares of the Company’s common stock. Dividend equivalents are credited to participants’ accounts as additional Performance Units. The initial performance period under the LTIP and the performance period under the TIP are from January 1, 2004 through December 31, 2006. TIP awards vest no sooner than December 31, 2004 if at least 50% of defined performance targets have been achieved and certain time vesting requirements are met and are payable in the Company’s common stock. LTIP awards vest at December 31, 2006 if the Company’s total stockholder return, relative to the total stockholder returns of a certain group of peer companies, meets certain performance targets. Awards under the LTIP are payable 50% in the Company’s common stock and 50% in cash. 8

~~At September 30, 2004, 359,576 Performance Units, representing the aggregate number initially awarded under both plans plus additional Performance Units~~Income from dividend equivalents on the initial awards, have been credited to participants’ accounts, subject to the vesting requirements discussed in the preceding paragraph. As required by APB 25, the Company has recognized $1.5 million and $4.1 million as compensation expense during the three and nine months ended September 30, 2004, respectively, with the corresponding liability recorded in “Deferred Credits and Other Liabilities” in the accompanying condensed consolidated balance sheet. For purposes of recognizing compensation expense, TIP performance is based on the Company’s current estimate of the timing for achieving performance targets, and LTIP performance is measured on the basis of actual results as of September 30, 2004. Taxes

~~During 2004,~~The ~~the~~ Company ~~granted~~was restructured to ~~certain~~operate ~~officers~~as ana ~~aggregate~~REIT ofeffective ~~196~~January 1,~~595~~ ~~shares~~2004. ofIn ~~restricted~~general, ~~stock~~a ~~and~~corporation that ~~restricted~~elects ~~stock~~REIT ~~units~~status ~~with~~and adistributes ~~fair~~at ~~market~~least ~~value~~90% of ~~$4.8~~its ~~million~~taxable asincome ~~of the grant date. In addition, during 2004 the Company granted~~ to ~~non-employee~~ ~~directors~~its anstockholders ~~aggregate~~and ofcomplies ~~17,696 Director Restricted Stock Units~~ with acertain ~~fair~~other ~~market~~requirements ~~value~~(relating primarily ofto ~~$0.4~~the ~~million~~nature as of ~~the~~its ~~grant~~assets ~~date. Restricted stock, restricted stock units~~ and ~~Director~~the ~~Restricted~~sources ~~Stock~~of ~~Units~~its ~~are~~revenues) ~~entitled~~is ~~to dividend equivalents~~not ~~representing~~subject ~~dividends~~to onfederal anincome ~~equal~~taxation ~~number~~to ofthe ~~shares~~extent ofit ~~the~~distributes ~~Company’s~~its ~~common stock~~taxable income. ~~Dividend~~The ~~equivalents~~Company onbegan ~~restricted~~operating ~~stock~~so ~~and~~as ~~restricted~~to ~~stock~~qualify ~~units~~as ~~are payable in cash. For dividends with~~ a ~~record~~REIT ~~date~~beginning ~~prior to~~ January 1, ~~2005~~ 2004, ~~dividend equivalents~~and onpaid ~~Director~~at ~~Restricted~~least ~~Stock~~90% ~~Units~~of ~~get~~REIT ~~credited~~taxable income to ~~directors’~~stockholders ~~accounts~~in ~~as additional Director Restricted Stock Units~~2004. Based ~~For~~on ~~each~~these ~~year~~considerations, ~~beginning~~the ~~January~~Company 1,believes ~~2005,~~that ~~non-employee~~it ~~directors~~ will not be ~~able~~liable for totaxes ~~elect~~(except towith ~~receive~~respect ~~dividend equivalents~~to onthe ~~Director~~items ~~Restricted~~discussed ~~Stock~~below) ~~Units~~and, in ~~cash~~2003, reversed orapproximately as$232 ~~additional~~million ~~Director~~of ~~Restricted~~deferred ~~Stock~~tax ~~Units~~liabilities.

6In 2003, as part of the restructuring activities to enable the Company to operate as a REIT, the Company created subsidiaries that qualify (subject to certain size limitations) as taxable REIT subsidiaries under the REIT rules (“TRS”), which are subject to federal and state income taxes. Accordingly, the Company will still be liable for federal and state taxes with respect to income earned in the TRS. As a result of this future tax liability, certain assets of the TRS carry temporary differences between book and tax amounts that are reflected as net deferred tax liabilities at the TRS and in the Condensed Consolidated Balance Sheet. Also, a majority of the Company’s assets owned as of December 31, 2003, which were transferred into the REIT, had values in excess of tax basis (“built-in-gain”) of approximately $1.7 billion. Under the REIT rules, the Company is liable for the tax on this built-in-gain if it is realized in a taxable transaction (as for example by sale of the asset) before January 1, 2014. The Company believes that it will pay taxes on built-in-gains on the Company’s assets subject to purchase options in the event the Company cannot effectuate a tax-free exchange. As a result of this future tax liability, the temporary differences between book and tax amounts for these assets will continue to be reflected as net deferred tax liabilities in the Condensed Consolidated Balance Sheet. In addition, the Company’s 1999 and later federal and state tax returns are still open with certain returns currently under audit, which may result in additional taxes with respect to these prior years. In 2003, the Company has provided for a current tax liability, currently totaling approximately $126 million, related to certain transactions under audit where it has taken a tax benefit, but the tax impact is uncertain. Lastly, the Company expects that once certain tasks are completed, certain of the Company’s assets not currently in the TRS will later be contributed to the TRS and carry temporary differences between book and tax amounts which will result in current tax liabilities.

~~Table~~To initially qualify as a REIT, among other things, the Company distributed all of ~~Contents~~its accumulated earnings and profits (“E&P”) to the Company’s stockholders in one or more taxable dividends. In order to meet the required distribution of accumulated E&P, the Company made a distribution of $128 million in cash and 10.7 million shares of Catellus common stock valued at $252 million in the fourth quarter of 2003. The amount of the distributions was based, in part, upon the estimated amount of accumulated E&P at year-end 2003. Although the Company believes that the distributions were sufficient to eliminate all of its accumulated E&P, to the extent that adjustments, if any, to prior years’ taxable income results in higher cumulative E&P, the Company will make an additional taxable distribution (in the form of cash and/or securities) at that time.

~~CATELLUS~~Income ~~DEVELOPMENT~~tax ~~CORPORATION~~expense for the six months ended June 30, 2005 was generated at both the REIT level and the TRS. The TRS income before income taxes was $36.7 million with an effective overall rate of 41.22%. The Company has accrued $2.3 million for state taxes at the REIT level to reflect state tax liability resulting from projected taxable income in California in excess of federal taxable income that is not distributed to stockholders and additional taxes with respect to a proposed California adjustment for a mortgage REIT subsidiary. Income tax (expense) benefit for the six months ended June 30, 2004 was generated only at the TRS level. The TRS income before income taxes for the six months ended June 30, 2004 was $4.8 million with an effective overall rate of 40.08%.

~~NOTES~~Income TOtax ~~CONDENSED~~(expense) ~~CONSOLIDATED~~benefit on ~~FINANCIAL~~consolidated ~~STATEMENTS—(Continued)~~income from continuing operations is as follows:

The Company expenses dividends paid on restricted stock and restricted stock units. For the three and nine months ended September 30, 2004, dividends paid were $0.4 million and $1.1 million, respectively.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Current	$	4,088		$	(2,120	)	$	(2,282	)	$	(7,150	)
Deferred	(13,334		)	1,138			(15,112		)	5,237
Total	$	(9,246	)	$	(982	)	$	(17,394	)	$	(1,913	)

~~Income~~Non-strategic ~~Taxes~~asset sales

~~The~~During ~~Company~~the second ~~has~~quarter ~~restructured to operate as a REIT effective January 1,~~ 2004~~. In general~~, ~~a corporation that elects REIT status and distributes at least 90% of its taxable income to its stockholders and complies with certain other requirements (relating primarily to~~ the ~~nature~~Company ofsold ~~its~~substantially ~~assets~~all ~~and the sources~~ of its ~~revenues) is not subject to federal income taxation to the extent it distributes its~~remaining ~~taxable~~dessert ~~income.~~properties ~~The~~for ~~Company is operating so as to qualify as a REIT beginning January 1, 2004, including paying at least 90% of REIT taxable income to stockholders in 2004 and subsequent years~~$16.4 million.

AsNote part of the restructuring operations of the Company to qualify as a REIT, subsidiaries have been created (subject to certain size limitations) that qualify as Taxable REIT Subsidiaries (“TRS”) and will be subject to federal and state income taxes3. ~~Accordingly,~~Restricted ~~the~~Cash ~~Company will still be liable for federal~~ and state taxes with respect to income earned in the TRS. As a result of this future tax liability, certain assets of the TRS carry temporary differences between book and tax amounts that are reflected as net deferred tax liabilities at the TRS and in the consolidated balance sheet. In addition, our 1999 and later federal and state tax returns are still open with certain returns currently under audit, which may result in additional taxes with respect to these prior years. Also, a majority of the Company’s assets owned in the REIT as of December 31, 2003 had values in excess of tax basis (“built-in-gain”) of approximately $1.7 billion. Under the REIT rules, the Company is liable for the tax on this built-in-gain if it is realized in a taxable transaction (as for example by sale of the asset) before January 1, 2014. The Company believes that it will pay taxes on built-in-gains on certain of the Company’s assets in the event the Company cannot effectuate a tax-free exchange. Lastly, the Company expects that once certain tasks are completed, certain of the Company’s assets not currently in the TRS will later be contributed to the TRS and carry temporary differences between book and tax amounts. Investments

InOf ~~order~~the tototal ~~qualify~~restricted ascash and ainvestments ~~REIT,~~of ~~among~~$12.9 ~~other~~million ~~things~~at June 30, ~~the~~2005, ~~Company was~~and ~~required~~$29.6 tomillion ~~distribute~~at ~~its~~December 31, 2004, ~~accumulated~~$0.2 ~~earnings~~million and ~~profits~~$18.9 ~~(“E&P”)~~million, torespectively, ~~the~~represent ~~Company’s~~proceeds ~~stockholders~~from property insales ~~one~~held orin ~~more~~separate ~~taxable~~cash ~~dividends~~accounts ~~prior~~at totrust ~~the~~companies ~~end~~in ~~of the first full taxable year for which the REIT election is effective. In~~ order to preserve ~~meet~~ the ~~required~~Company’s ~~distribution~~option ofto ~~accumulated~~reinvest ~~E&P,~~ the ~~Company~~proceeds ~~made~~on ~~distributions~~a oftax-deferred basis. Approximately $~~128~~12.0 million ~~in cash~~ and $10.70 million ~~shares of Catellus stock valued~~ at ~~$252~~June 30, ~~million~~2005 inand ~~the~~December 31, ~~fourth~~2004, ~~quarter of 2003. The amount of the distributions~~respectively, ~~was~~represents ~~based,~~funds in ~~part,~~escrow ~~upon~~for ~~the~~environmental ~~estimated~~work ~~amount~~related ofto ~~accumulated~~a ~~E&P~~land acquisition. atApproximately ~~year-end 2003~~$0.7 ~~Although~~million ~~the~~at ~~Company believes that the distributions were sufficient to eliminate all of its accumulated E&P~~June 30, to2005 ~~the~~and ~~extent that adjustments to prior~~December 31, ~~years’~~2004, ~~taxable~~represent ~~income~~funds ~~results~~held in ~~higher~~pledge ~~cumulative~~accounts ~~E&P,~~at ~~the~~a ~~Company~~bank ~~will~~until ~~make~~certain anloan collateral ~~additional~~pool ~~taxable~~requirements ~~distribution~~are ~~(in the form of cash and/or securities) at that time~~met.

Income tax (expense) benefit for the nine months ended September 30, 2004 was generated at both the REIT level and the TRS. The TRS income before income taxes was $13.8 million with an effective overall rate of 40.08%. The Company has accrued $2.3 million state taxes at the REIT level to reflect expected state tax liability resulting from projected taxable income in California in excess of federal taxable income that is not distributed to stockholders and therefore taxed in the REIT. 9

~~Income~~Note ~~tax~~4. ~~(expense)~~Income ~~benefit~~Per ~~on consolidated income from continuing operations is as follows:~~ Share

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In thousands)						(In thousands)
Current	$	(6,919	)	$	(11,949	)	$	(14,069	)	$	(34,061	)
Deferred		1,014			(507	)		6,251			(781	)
Total	$	(5,905	)	$	(12,456	)	$	(7,818	)	$	(34,842	)

Income from continuing and discontinued operations per share of common stock applicable to common stockholders is computed by dividing respective income by the weighted average number of shares of common stock and equivalents outstanding during the period (see table below for effect of dilutive securities).

Non – strategic asset sales

	Three months Ended June 30,
	2005							2004
	Income			Shares	Per Share Amount			Income		Shares	Per Share Amount
	(In thousands, except per share data)
Income from continuing operations	$	33,095		103,912	$	0.32		$	34,107	103,023	$	0.33

Effect of dilutive securities:
Stock options	—			570				—		699
Restricted stock and restricted stock units	—			763				—		350
Other compensation incentive plans	—			212				—		6

Income from continuing operations assuming dilution	$	33,095		105,457	$	0.31		$	34,107	104,078	$	0.33

Net (loss) gain from discontinued operations	$	(6,913	)	103,912	$	(0.07	)	$	1,227	103,023	$	0.01

Effect of dilutive securities:
Stock options	—			570				—		699
Restricted stock and restricted stock units	—			763				—		350
Other compensation incentive plans	—			212				—		6

Net (loss) gain from discontinued operations assuming dilution	$	(6,913	)	105,457	$	(0.06	)	$	1,227	104,078	$	0.01

Net income	$	26,182		103,912	$	0.25		$	35,334	103,023	$	0.34

Effect of dilutive securities:
Stock options	—			570				—		699
Restricted stock and restricted stock units	—			763				—		350
Other compensation incentive plans	—			212				—		6

Net income assuming dilution	$	26,182		105,457	$	0.25		$	35,334	104,078	$	0.34

~~The Company’s sales of non-strategic assets are summarized as follows:~~ 10

	Three Months Ended September 30,							Nine Months Ended September 30,
	Six months Ended June 30,
	2004			2003				2004			2003
	2005								2004
	(In thousands)							(In thousands)
	Income			Shares		Per Share Amount			Income		Shares		Per Share Amount
Sales	$	—		$	1,150			$	16,497		$	9,088
	(In thousands, except per share data)
Cost of sales		—			(222	)			(56	)		(803	)
Income from continuing operations	$	65,559		103,832		$	0.63		$	64,391	102,933		$	0.63
Gain	$	—		$	928			$	16,441		$	8,285
Effect of dilutive securities:
Stock options	—			594					—		780
Restricted stock and restricted stock units	—			757					—		396
Other compensation incentive plans	—			223					—		7
Income from continuing operations assuming dilution	$	65,559		105,406		$	0.62		$	64,391	104,116		$	0.62
Net (loss) gain from discontinued operations	$	(6,059	)	103,832		$	(0.06	)	$	3,034	102,933		$	0.03
Effect of dilutive securities:
Stock options	—			594					—		780
Restricted stock and restricted stock units	—			757					—		396
Other compensation incentive plans	—			223					—		7
Net (loss) gain from discontinued operations assuming dilution	$	(6,059	)	105,406		$	(0.06	)	$	3,034	104,116		$	0.03
Net income	$	59,500		103,832		$	0.57		$	67,425	102,933		$	0.66
Effect of dilutive securities:
Stock options	—			594					—		780
Restricted stock and restricted stock units	—			757					—		396
Other compensation incentive plans	—			223					—		7
Net income assuming dilution	$	59,500		105,406		$	0.56		$	67,425	104,116		$	0.65

~~During the second quarter of 2004, the Company sold substantially all of its remaining desert properties for $16.4 million.~~ 11

7Note 5. Mortgage and Other Debt

~~Table~~Mortgage ofand ~~Contents~~other debt at June 30, 2005 and December 31, 2004, are summarized as follows:

CATELLUS DEVELOPMENT CORPORATION

	June 30, 2005		December 31, 2004
	(In thousands)
Fixed rate mortgage loans	$	1,059,686	$	1,084,259
Floating rate mortgage loans	87,874		114,689
Assessment district bonds	60,531		63,210
Construction loans	—		30,000
Revolving credit facility	—		148,000
Other loans	744		370
Mortgage and other debt	1,208,835		1,440,528
Liabilities of assets held for sale:
Fixed rate mortgage loans	54,755		—
Floating rate mortgage loans	25,297		—
Total mortgage and other debt	$	1,288,887	$	1,440,528

Due within one year	$	190,939	$	142,429

~~NOTES~~During TOthe ~~CONDENSED~~second ~~CONSOLIDATED~~quarter ~~FINANCIAL~~of 2005, ~~STATEMENTS—~~the Company acquired the remaining 50% interest in Pacific Market Investment Company (~~Continued~~“PMIC”) from its joint venture partner (see Note 2). As a result, it now consolidates the assets and liabilities of PMIC which include a $40.7 million fixed rate mortgage loan bearing interest at 6.56% with a 25-year amortization schedule and maturity in April 2013.

~~Note~~Interest 3.costs ~~Restricted~~relating ~~Cash~~to mortgage and ~~Investments~~other debt for the three and six months ended June 30, 2005 and 2004, are summarized as follows:

Of the total restricted cash and investments of $12.6 million at September 30, 2004, and $64.6 million at December 31, 2003, $2.0 million and $38.1 million, respectively, represent proceeds from property sales held in separate cash accounts at trust companies in order to preserve the Company’s option to reinvest the proceeds on a tax-deferred basis. Approximately $10.0 million at September 30, 2004 represents funds in escrow for environmental work related to a land acquisition. Approximately $0.6 million and $23.1 million at September 30, 2004 and December 31, 2003, respectively, represent funds held in pledge accounts at a bank until certain loan collateral pool requirements are met. These requirements relating to the December 31, 2003 funds were met in 2004 and the restricted cash of $23.1 million was released accordingly and was used to pay down debt. In addition, restricted investments of $3.4 million at December 31, 2003, represented certificates of deposits used to guarantee lease performance; this $3.4 million of restricted cash was released in April 2004.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Total interest incurred	$	20,783		$	21,443		$	42,035		$	43,017
Interest capitalized	(4,495		)	(4,751		)	(8,166		)	(10,572		)
Interest expensed	16,288			16,692			33,869			32,445
Less discontinued operations	(1,271		)	(1,378		)	(2,530		)	(2,818		)
Interest expense from continuing operations	$	15,017		$	15,314		$	31,339		$	29,627

~~Note 4. Income Per Share~~ 12

~~Income~~Note from continuing and discontinued operations per share of common stock applicable to common stockholders is computed by dividing respective income by the weighted average number of shares of common stock and equivalents outstanding during the period (see table below for effect of dilutive securities)6. ~~Prior year’s shares have been increased as a result of a stock dividend in the fourth quarter of 2003.~~ Property

	Three Months Ended September 30,
	2004					2003
	Income		Shares	Per ShareAmount		Income			Shares	Per ShareAmount
	(In thousands, except per share data)
Income from continuing operations	$	17,897	103,053	$	0.17	$	21,012		100,879	$	0.21
Effect of dilutive securities:
Stock options		—	748				—		2,115
Restricted stock and restricted stock units		—	546				—		—
Other compensation incentive plans		—	77				—		—
Income from continuing operations assuming dilution	$	17,897	104,424	$	0.17	$	21,012		102,994	$	0.20
Net gain (loss) from discontinued operations	$	11,916	103,053	$	0.12	$	(63	)	100,879	$	—
Effect of dilutive securities:
Stock options		—	748				—		2,115
Restricted stock and restricted stock units		—	546				—		—
Other compensation incentive plans		—	77				—		—
Net gain from discontinued operations assuming dilution	$	11,916	104,424	$	0.12	$	(63	)	102,994	$	—
Net income	$	29,813	103,053	$	0.29	$	20,949		100,879	$	0.21
Effect of dilutive securities:
Stock options		—	748				—		2,115
Restricted stock and restricted stock units		—	546				—		—
Other compensation incentive plans		—	77				—		—
Net income assuming dilution	$	29,813	104,424	$	0.29	$	20,949		102,994	$	0.20

Book value by property type consists of the following:

	June 30, 2005			December 31, 2004
	(In thousands)
Rental properties:
Industrial buildings	$	1,299,473		$	1,278,227
Office buildings	285,488			383,763
Retail buildings	134,768			105,066
Ground leases and other	257,299			178,007
Investment in operating joint ventures	(13,512		)	(21,184		)
	1,963,516			1,923,879
Developable properties:
Commercial	211,918			173,305
Urban	55,292			80,959
Investment in development joint ventures	28,409			13,852
	295,619			268,116
Work-in-process:
Commercial	99,726			97,624
Urban	—			8,380
	99,726			106,004

Furniture, fixtures and equipment	22,017			17,584
Other	706			706
Gross book value	2,381,584			2,316,289
Accumulated depreciation	(487,227		)	(490,409		)
Net book value	$	1,894,357		$	1,825,880

~~Table~~During the second quarter of 2005, ~~Contents~~the Company acquired the remaining 50% interest in Pacific Market Investment Company (see Note 2). The acquisition increased the book value of the Company’s properties $62.3 million.

~~CATELLUS~~At ~~DEVELOPMENT~~June 30, ~~CORPORATION~~2005, two office properties with a book value of $94.9 million were under contract to be sold and therefore classified as “Assets held for sale” on the Condensed Consolidated Balance Sheet (see Note 10).

~~NOTES~~Note TO7. ~~CONDENSED~~Segment ~~CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~ Reporting

	Nine months Ended September 30,
	2004					2003
	Income		Shares	Per ShareAmount		Income		Shares	Per ShareAmount
	(In thousands, except per share data)
Income from continuing operations	$	82,452	102,974	$	0.80	$	58,807	99,064	$	0.59
Effect of dilutive securities:
Stock options		—	770				—	2,673
Restricted stock and restricted stock units		—	519				—	—
Other compensation incentive plans		—	9				—	—
Income from continuing operations assuming dilution	$	82,452	104,272	$	0.79	$	58,807	101,737	$	0.58
Net gain from discontinued operations	$	14,786	102,974	$	0.14	$	4,807	99,064	$	0.05
Effect of dilutive securities:
Stock options		—	770				—	2,673
Restricted stock and restricted stock units		—	519				—	—
Other compensation incentive plans		—	9				—	—
Net gain from discontinued operations assuming dilution	$	14,786	104,272	$	0.14	$	4,807	101,737	$	0.05
Net income	$	97,238	102,974	$	0.94	$	63,614	99,064	$	0.64
Effect of dilutive securities:
Stock options		—	770				—	2,673
Restricted stock and restricted stock units		—	519				—	—
Other compensation incentive plans		—	9				—	—
Net income assuming dilution	$	97,238	104,272	$	0.93	$	63,614	101,737	$	0.63

The Company’s reportable segments are based on the Company’s method of internal reporting, which disaggregates its business between long-term operations and those which the Company intends to transition out of over time and before the adjustments for discontinued operations. The Company has two reportable segments: Core Segment, and Urban, Residential and Other Segment (“URO”). Core Segment includes (1) the management and leasing of the Company’s rental portfolio, (2) commercial development activities, which focuses primarily on acquiring and developing suburban commercial business parks for the Company’s own rental portfolio and selling land and/or buildings that the Company has developed to users and other parties, and (3) select land development opportunities that may not always be industrial, especially projects that may not require significant capital investment on the Company’s part, where the Company can utilize its land development skills. URO includes the remaining residential projects, urban development activities and desert land sales, which the Company intends to transition out of over time of which a majority portion was sold during 2004, and REIT transition costs, including tax matters prior to becoming a REIT.

~~Note~~Inter-segment 5gains and losses are not recognized. ~~Mortgage~~Debt and ~~Other~~interest-bearing ~~Debt~~assets are allocated to segments based upon the grouping of the underlying assets. All other assets and liabilities are specifically identified.

~~Mortgage and other debt at September 30, 2004 and December 31, 2003, are summarized as follows:~~ 13

	September 30,2004		December 31,2003
	(In thousands)
Fixed rate mortgage loans	$	1,089,411	$	1,051,004
Floating rate mortgage loans		115,471		139,223
Assessment district bonds		63,664		63,802
Construction loans		50,000		54,220
Revolving credit facility		35,000		50,000
Other loans		395		19,805
Mortgage and other debt		1,353,941		1,378,054
Liabilities of assets held for sale:
Floating rate mortgage loans		—		2,071
Total mortgage and other debt	$	1,353,941	$	1,380,125
Due within one year	$	73,978	$	97,968

Financial data by reportable segment is as follows:

During the first nine months of 2004, the Company closed a $75.0 million fixed rate mortgage loan bearing interest at 5.96% (6.38% effective rate considering financing costs) with a 25-year amortization schedule and maturity in November 2008. The loan is collateralized by certain of the Company’s operating properties and by an assignment of rents generated by the underlying properties and has a prepayment penalty if paid prior to maturity.

	Core			URO			Subtotal			Discontinued Operations			Total
	(In thousands)
Three Months Ended June 30, 2005
Revenue
Rental revenue	$	78,714		$	—		$	78,714		$	(3,989	)	$	74,725
Sales revenue	18,726			13,264			31,990			—			31,990
Management, development and other fees	3,250			—			3,250			—			3,250
	100,690			13,264			113,954			(3,989		)	109,965

Costs and expenses
Property operating costs	(22,830		)	—			(22,830		)	2,048			(20,782		)
Cost of sales	(16,318		)	(3,840		)	(20,158		)	17			(20,141		)
Selling, general and administrative expenses	(10,392		)	(2,842		)	(13,234		)	—			(13,234		)
Depreciation and amortization	(18,271		)	(93		)	(18,364		)	777			(17,587		)
	(67,811		)	(6,775		)	(74,586		)	2,842			(71,744		)
Operating income	32,879			6,489			39,368			(1,147		)	38,221

Other income
Equity in earnings of operating joint ventures, net	2,665			—			2,665			—			2,665
Equity in earnings of development joint ventures, net	1,307			5,344			6,651			—			6,651
Gain on non-strategic asset sales	—			—			—			—			—
Interest income	7,878			1,005			8,883			—			8,883
Other	645			135			780			—			780
	12,495			6,484			18,979			—			18,979
Other expenses
Interest expense	(16,288		)	—			(16,288		)	1,271			(15,017		)
Other	(6,206		)	(425		)	(6,631		)	6,789			158
	(22,494		)	(425		)	(22,919		)	8,060			(14,859		)
Income before income taxes and discontinued operations	22,880			12,548			35,428			6,913			42,341
Income tax expense	(1,328		)	(7,918		)	(9,246		)	—			(9,246		)
Income from continuing operations	21,552			4,630			26,182			6,913			33,095
Discontinued operations, net of tax:
Loss from disposal of discontinued operations	—			—			—			(17		)	(17		)
Loss from discontinued operations	—			—			—			(6,896		)	(6,896		)
Net loss from discontinued operations	—			—			—			(6,913		)	(6,913		)
Net income	$	21,552		$	4,630		$	26,182		$	—		$	26,182

In October 2004, the Company’s $50.0 million variable rate construction loan matured. The Company exercised its option to extend $30.0 million for one year and repaid $20.0 million with funds from the revolving credit facility. The $50.0 million is included in the $74.0 million “Due within one year” reflected in the table above. 14

9Financial data by reportable segment is as follows:

	Core			URO			Subtotal			Discontinued Operations			Total
	(In thousands)
Three Months Ended June 30, 2004
Revenue
Rental revenue	$	78,011		$	—		$	78,011		$	(5,583	)	$	72,428
Sales revenue	10,980			2,691			13,671			(6,372		)	7,299
Management, development and other fees	542			216			758			—			758
	89,533			2,907			92,440			(11,955		)	80,485
Costs and expenses
Property operating costs	(20,283		)	—			(20,283		)	2,191			(18,092		)
Cost of sales	(8,311		)	(2,537		)	(10,848		)	5,974			(4,874		)
Selling, general and administrative expenses	(7,247		)	(5,364		)	(12,611		)	—			(12,611		)
Depreciation and amortization	(18,957		)	(273		)	(19,230		)	1,185			(18,045		)
	(54,798		)	(8,174		)	(62,972		)	9,350			(53,622		)
Operating income (loss)	34,735			(5,267		)	29,468			(2,605		)	26,863
Other income
Equity in earnings of operating joint ventures, net	2,379			—			2,379			—			2,379
Equity in earnings of development joint ventures, net	—			3,391			3,391			—			3,391
Gain on non-strategic asset sales	—			16,380			16,380			—			16,380
Interest income	1,813			648			2,461			—			2,461
Other	(18		)	974			956			—			956
	4,174			21,393			25,567			—			25,567
Other expenses
Interest expense	(16,692		)	—			(16,692		)	1,378			(15,314		)
REIT transition costs	—			(208		)	(208		)	—			(208		)
Other	(731		)	(1,088		)	(1,819		)	—			(1,819		)
	(17,423		)	(1,296		)	(18,719		)	1,378			(17,341		)

Income before income taxes and discontinued operations	21,486			14,830			36,316			(1,227		)	35,089
Income taxes	(553		)	(429		)	(982		)	—			(982		)
Income from continuing operations	20,933			14,401			35,334			(1,227		)	34,107
Discontinued operations, net of tax:
Gain from disposal of discontinued operations	—			—			—			398			398
Income from discontinued operations	—			—			—			829			829
Net gain from discontinued operations	—			—			—			1,227			1,227
Net income	$	20,933		$	14,401		$	35,334		$	—		$	35,334

~~CATELLUS DEVELOPMENT CORPORATION~~ 15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Core				URO				Subtotal				Discontinued Operations				Total
	(In thousands)
Six Months Ended June 30, 2005

Revenue
Rental revenue	$	157,114			$	—			$	157,114			$	(8,190		)	$	148,924
Sales revenue	41,042				26,978				68,020				(2,886			)	65,134
Management, development and other fees	6,960				3,834				10,794				—				10,794
	205,116				30,812				235,928				(11,076			)	224,852
Costs and expenses
Property operating costs	(45,130			)	—				(45,130			)	4,073				(41,057		)
Cost of sales	(30,265			)	(14,941			)	(45,206			)	2,170				(43,036		)
Selling, general and administrative expenses	(20,113			)	(5,411			)	(25,524			)	—				(25,524		)
Depreciation and amortization	(36,874			)	(204			)	(37,078			)	1,573				(35,505		)
	(132,382			)	(20,556			)	(152,938			)	7,816				(145,122		)
Operating income (loss)	72,734				10,256				82,990				(3,260			)	79,730
Other income
Equity in earnings of operating joint ventures, net	5,498				—				5,498				—				5,498
Equity in earnings of development joint ventures, net	2,841				8,896				11,737				—				11,737
Gain on non-strategic asset sales	—				20				20				—				20
Interest income	15,861				1,917				17,778				—				17,778
Other	662				207				869				—				869
	24,862				11,040				35,902				—				35,902
Other expenses
Interest expense	(33,869			)	—				(33,869			)	2,530				(31,339		)
Other	(7,761			)	(368			)	(8,129			)	6,789				(1,340		)
	(41,630			)	(368			)	(41,998			)	9,319				(32,679		)
Income before income taxes and discontinued operations	55,966				20,928				76,894				6,059				82,953
Income taxes	(4,564			)	(12,830			)	(17,394			)	—				(17,394		)
Income from continuing operations	51,402				8,098				59,500				6,059				65,559
Discontinued operations, net of tax:
Gain from disposal of discontinued operations	—				—				—				716				716
(Loss) income from discontinued operations	—				—				—				(6,775			)	(6,775		)
Net loss from discontinued operations	—				—				—				(6,059			)	(6,059		)
Net income	$		51,402		$		8,098		$		59,500		$		—		$	59,500

~~Interest costs relating to mortgage and other debt for the three and nine months ended September 30, 2004 and 2003, are summarized as follows:~~ 16

	Three Months Ended September 30,								Nine Months Ended September 30,
	Core			URO			Subtotal			Discontinued Operations			Total
	2004				2003				2004				2003
	(In thousands)
	(In thousands)								(In thousands)
Six Months Ended June 30, 2004
Total interest incurred	$	21,487			$	21,673			$	64,504			$	65,384
Revenue
Interest capitalized		(5,528	)			(5,750	)			(16,100	)			(15,476	)
Rental revenue	$	155,176		$	—		$	155,176		$	(10,973	)	$	144,203
Interest expensed		15,959				15,923				48,404				49,908
Sales revenue	41,564			13,348			54,912			(9,922		)	44,990
Less discontinued operations		(196	)			(340	)			(583	)			(1,130	)
Management, development and other fees	1,526			931			2,457			—			2,457
Interest expense from continuing operations	$	15,763			$	15,583			$	47,821			$	48,778
	198,266			14,279			212,545			(20,895		)	191,650
Costs and expenses
Property operating costs	(41,699		)	—			(41,699		)	4,767			(36,932		)
Cost of sales	(23,167		)	(12,705		)	(35,872		)	7,908			(27,964		)
Selling, general and administrative expenses	(13,887		)	(11,675		)	(25,562		)	—			(25,562		)
Depreciation and amortization	(36,734		)	(573		)	(37,307		)	2,368			(34,939		)
	(115,487		)	(24,953		)	(140,440		)	15,043			(125,397		)
Operating income (loss)	82,779			(10,674		)	72,105			(5,852		)	66,253
Other income
Equity in earnings of operating joint ventures, net	4,793			—			4,793			—			4,793
Equity in earnings of development joint ventures, net	—			4,618			4,618			—			4,618
Gain on non-strategic asset sales	—			16,441			16,441			—			16,441
Interest income	4,188			1,050			5,238			—			5,238
Other	266			991			1,257			—			1,257
	9,247			23,100			32,347			—			32,347
Other expenses
Interest expense	(32,445		)	—			(32,445		)	2,818			(29,627		)
REIT transition costs	—			(420		)	(420		)	—			(420		)
Other	(749		)	(1,500		)	(2,249		)	—			(2,249		)
	(33,194		)	(1,920		)	(35,114		)	2,818			(32,296		)
Income before income taxes and discontinued operations	58,832			10,506			69,338			(3,034		)	66,304
Income taxes	(5,885		)	3,972			(1,913		)	—			(1,913		)
Income from continuing operations	52,947			14,478			67,425			(3,034		)	64,391
Discontinued operations, net of tax:
Gain from disposal of discontinued operations	—			—			—			2,014			2,014
Income from discontinued operations	—			—			—			1,020			1,020
Net gain from discontinued operations	—			—			—			3,034			3,034
Net income	$	52,947		$	14,478		$	67,425		$	—		$	67,425

~~Note 6. Property~~ 17

~~Book~~Note ~~value~~8. byCommitments ~~property~~and ~~type consists of the following:~~ Contingencies

	September 30,2004			December 31,2003
	(In thousands)
Rental properties:
Industrial buildings	$	1,281,977		$	1,202,788
Office buildings		393,728			386,438
Retail buildings		98,313			99,198
Ground leases and other		173,641			169,127
Investment in operating joint ventures		(20,829	)		(19,876	)
		1,926,830			1,837,675
Developable properties:
Commercial		181,003			165,199
Residential		86,762			59,914
Urban		303,971			263,385
Investment in development joint ventures		49,853			54,467
		621,589			542,965
Work-in-process:
Commercial		60,619			75,458
Urban		7,073			12,759
		67,692			88,217
Furniture, fixtures and equipment		18,548			28,434
Other		708			724
Gross book value		2,635,367			2,498,015
Accumulated depreciation		(486,288	)		(446,872	)
Net book value	$	2,149,079		$	2,051,143

The Company has standby letters of credit related to various development projects, various debt and debt service guarantees, and capital contribution commitments related to certain unconsolidated real estate joint ventures. These standby letters of credit, guarantees and capital contribution commitments as of June 30, 2005, are summarized in the following categories (in thousands):

Subsequent to September 2004, the Company signed a contract to sell its assets in Third and King Investors, LLC, a development joint venture. In the third quarter 2004, an impairment charge of $1.0 million on the net realizable value of our investment in the joint venture was recorded.

Off-balance sheet liabilities:
Standby letters of credit	$		52,689
Debt service guarantees	213
Contribution requirements	6,850
Sub-total	59,752
Liabilities included in balance sheet:
Standby letters of credit	10,836
Total	$	70,588

Standby letters of credit consist of two types: performance and financial. Performance standby letters of credit are to guarantee the construction of infrastructure and public improvements as a requirement of entitlement. Financial standby letters of credit are a form of credit enhancement commonly required in real estate development when bonds are issued to finance public improvements. As of June 30, 2005, the Company has a total of $63.5 million in these standby letters of credit, which are scheduled to expire between August 2005 and June 2006. Of this total, $52.7 million is off-balance sheet ($46.5 million in financial letters of credit and $6.2 million in performance letters of credit). The remaining $10.8 million is related to obligations that are reflected in “Mortgage and other debt” in the Company’s Condensed Consolidated Balance Sheet and were issued as additional security for liabilities already recorded on the balance sheet for separate accounting reasons (primarily assessment bond obligations of assessment districts whose operating boards the Company controls). This is different from the $52.7 million in letters of credit that are related to non-balance sheet items. When the assessment district bonds are consolidated, the full issuance proceeds amount is consolidated in “Mortgage and other debt” with a corresponding asset in “Other assets and deferred charges, net.” An example of the type of event that would require the Company to perform under the performance standby letters of credit would be the failure of the Company to construct or complete the required improvements. An example of the type of event that would require the Company to perform under the financial standby letters of credit would be a debt service shortfall in the municipal district that issued the municipal bonds. At June 30, 2005, the Company has not been required to satisfy any of these standby letters of credit.

~~Table~~The Company has made debt service guarantees for one of ~~Contents~~its unconsolidated joint ventures. At June 30, 2005, based on the joint venture’s outstanding balance, these debt guarantees totaled $0.2 million and are scheduled to expire between October 2005 and December 2005. Debt service guarantees are typical business arrangements commonly required of real estate developers. An example of the types of event that would require the Company to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service its debt when due, or non-compliance of the primary borrower with financial covenants or inadequacy of asset collateral. At June 30, 2005, the Company has not been required to satisfy any amounts under these debt service guarantees.

~~CATELLUS DEVELOPMENT CORPORATION~~ 18

~~NOTES~~The TOCompany ~~CONDENSED~~is ~~CONSOLIDATED~~required ~~FINANCIAL~~to make ~~STATEMENTS—~~additional capital contributions to four of its unconsolidated joint ventures if additional capital contributions are necessary to fund development costs or operating shortfalls. The Company agreed with two unconsolidated joint ventures, Serrano Associates, LLC and SAMS Venture, LLC, to make additional contributions should there be insufficient funds to meet its current or projected financial requirements. As of June 30, 2005, the Company cumulatively contributed $20.0 million to Serrano Associates, LLC as additional contributions and $4.0 million as additional contributions to SAMS Venture, LLC. The Company is also required to make additional capital contributions to another two of its unconsolidated joint ventures should additional capital contributions be necessary (~~Continued~~see chart below). As of June 30, 2005, the Company does not expect to fund any significant capital contributions beyond the maximum capital requirements.

Note 7. Segment Reporting

	Contribution Committed		Remaining Contribution Commitment
	(In thousands)
Talega Village, LLC (1)	$	14,000	$	4,570
Parkway Company, LLC	38,000		2,280
	$	52,000	$	6,850

The Company’s reportable segments are based on the Company’s method of internal reporting, which disaggregates its business between long-term operations and those which the Company intends to transition out of over time and before the adjustments for discontinued operations. The Company has two reportable segments: Core Segment, and Urban, Residential and Other Segment (~~“URO”). Core Segment includes (~~1) Talega ~~the management and leasing of the Company’s rental portfolio~~Village, ~~(2)~~LLC ~~commercial~~has ~~development~~substantially ~~activities,~~wound ~~which focuses primarily on~~up ~~acquiring~~operations and ~~developing suburban commercial business parks for~~ the Company’s ~~own~~does ~~rental~~not ~~portfolio~~expect ~~and selling land and/or buildings that the Company has developed~~ to ~~users~~make ~~and~~any ~~other~~future ~~parties; and (3) select land development opportunities where the Company can utilize its land development skills with minimal~~ capital ~~investment. URO includes the remaining residential projects, urban development activities and desert land sales, which the Company intends to transition out of over time, and~~ ~~REIT transition costs~~contributions.

~~Inter-segment~~Generally, ~~gains~~any ~~and~~funding ~~losses~~of off-balance ~~are~~sheet ~~not recognized.~~guarantees ~~Debt~~would ~~and~~result ~~interest-bearing~~in ~~assets~~the ~~are~~increase ~~allocated~~of toCatellus’ ownership ~~segments~~interest ~~based~~in ~~upon~~a ~~the~~project ~~grouping~~or ofentity ~~the~~similar ~~underlying~~to ~~assets.~~the ~~All~~treatment ~~other~~of ~~assets~~a unilateral ~~and~~additional ~~liabilities~~capital ~~are~~contribution ~~specifically~~to ~~identified.~~an investee.

11In addition to the contingent liabilities summarized in the table above, the Company also has the following contingencies:

~~Table~~Prior to the November 2004 sales of ~~Contents~~a significant portion of the Company’s remaining urban and residential development assets to FOCIL Holdings LLC (“FOCIL”), an affiliate of Farallon Capital Management, L.L.C. (see Note 12), the Company had already negotiated on certain land asset sales and agreed to provide acquisition financings, up to $164 million, to these third party purchasers. A substantial portion of the money required to fund the $164 million financing will come from the paydowns under the loans to FOCIL as part of the FOCIL transaction in November 2004. These land parcels were ultimately included as part of the assets sold to FOCIL. Therefore, as FOCIL eventually finalizes the sale of these land parcels, the Company will provide the financing to these third party purchasers, as previously agreed. As of June 30, 2005, the Company has financed $26.2 million on one of these sales. During the second quarter of 2005, two additional sales were closed, however, approximately $23 million of the agreed-upon acquisition financings was not required. Therefore, subsequent to the end of this quarter, the remaining agreed-upon acquisition financing is approximately $115 million.

~~CATELLUS~~As ~~DEVELOPMENT~~of ~~CORPORATION~~June 30, 2005, $30.0 million of Community Facility District bonds were sold to finance public infrastructure improvements at a Company project. The Company is required to satisfy any shortfall in annual debt service obligation for these bonds if tax revenues generated by the project is insufficient. As of June 30, 2005, the Company does not expect to be required to satisfy any shortfall in annual debt service obligation for these bonds other than through its payment of normal project and special district taxes. Subsequently, on July 21, 2005, an additional $38.0 million of Community Facility District bonds were sold.

~~NOTES~~The TOCompany ~~CONDENSED~~is ~~CONSOLIDATED~~a ~~FINANCIAL~~party ~~STATEMENTS—(Continued)~~to a number of legal actions arising in the ordinary course of business. The Company cannot predict with certainty the final outcome of these proceedings. Considering current insurance coverages and the substantial legal defenses available, however, management believes that none of these actions, when finally resolved, will have a material adverse effect on the consolidated financial conditions, results of operations, or cash flows of the Company. Where appropriate, the Company has established reserves for potential liabilities related to legal actions or threatened legal actions. These reserves are necessarily based on estimates and probabilities of the occurrence of events and therefore are subject to revision from time to time.

~~Financial~~Inherent ~~data~~in bythe ~~reportable~~operations of ~~segment~~the real estate business is the possibility that environmental liability may arise from the current or past ownership, or current or past operation, of real properties. The Company may be required in the future to take action to correct or reduce the environmental effects of prior disposal or release of hazardous substances by third parties, the Company, or its corporate predecessors. Future environmental costs are difficult to estimate because of such factors as ~~follows:~~the unknown magnitude of possible contamination, the unknown timing and extent of the corrective actions that may be required, the determination of the Company’s potential liability in proportion to that of other potentially responsible parties, and the extent to which such costs are recoverable from insurance. Also, the Company does not generally have access to properties sold by it in the past.

	Core			URO			Subtotal			DiscontinuedOperations			Total
	(In thousands)
Three Months Ended September 30, 2004
Revenue
Rental revenue	$	77,543		$	—		$	77,543		$	(995	)	$	76,548
Sales revenue		33,434			36,824			70,258			(30,771	)		39,487
Management, development and other fees		394			—			394			—			394
		111,371			36,824			148,195			(31,766	)		116,429
Costs and expenses
Property operating costs		(22,014	)		—			(22,014	)		239			(21,775	)
Cost of sales		(21,436	)		(20,862	)		(42,298	)		19,154			(23,144	)
Selling, general and administrative expenses		(7,418	)		(6,201	)		(13,619	)		—			(13,619	)
Depreciation and amortization		(20,409	)		(166	)		(20,575	)		231			(20,344	)
		(71,277	)		(27,229	)		(98,506	)		19,624			(78,882	)
Operating income		40,094			9,595			49,689			(12,142	)		37,547
Other income
Equity in losses of operating joint ventures, net		(802	)		—			(802	)		—			(802	)
Equity in earnings of development joint ventures, net		100			1,104			1,204			—			1,204
Gain on non-strategic asset sales		—			—			—			—			—
Interest income		1,662			481			2,143			—			2,143
Other		1,515			(342	)		1,173			(7	)		1,166
		2,475			1,243			3,718			(7	)		3,711
Other expenses
Interest expense		(15,959	)		—			(15,959	)		196			(15,763	)
Other		(498	)		(1,232	)		(1,730	)		37			(1,693	)
		(16,457	)		(1,232	)		(17,689	)		233			(17,456	)
Income before income taxes and discontinued operations		26,112			9,606			35,718			(11,916	)		23,802
Income tax expense		(1,421	)		(4,484	)		(5,905	)		—			(5,905	)
Income from continuing operations		24,691			5,122			29,813			(11,916	)		17,897
Discontinued operations, net of income tax
Gain from disposal of discontinued operations		—			—			—			11,617			11,617
Income from discontinued operations		—			—			—			299			299
Net gain from discontinued operations		—			—			—			11,916			11,916
Net income	$	24,691		$	5,122		$	29,813		$	—		$	29,813

At June 30, 2005, management estimates that future costs for remediation of environmental contamination on operating properties and properties previously sold approximate $2.3 million, and has provided a reserve for that amount. It is anticipated that such costs will be incurred over the next several years. Management also estimates approximately $8.6 million of similar costs relating to the Company’s properties to be developed or sold. In addition, the Company has approximately $12.0 million in escrow for environmental work related to a land acquisition (see Note 3). The Company may incur additional costs related to management of excess contaminated soil from our projects; however, the necessity of this activity depends on the type of future development activities, and, therefore, the related costs are not currently determinable. These costs will be capitalized as components of development costs when incurred, which is anticipated to be over a period of approximately twenty years, or will be deferred and charged to cost of sales when the properties are sold. Environmental costs capitalized during the six months ended June 30, 2005 and 2004 totaled $0.2 million and $1.9 million, respectively. The Company’s estimates were developed based on reviews that took place over several years based upon then-prevailing law and identified site conditions. Because of the breadth of its portfolio, and past sales, the Company is unable to review each property extensively on a regular basis. Such estimates are not precise and are always subject to the availability of further information about the prevailing conditions at the site, the future requirements of regulatory agencies, and the availability and ability of other parties to pay some or all of such costs.

~~Table~~The Company owns an interest in a limited liability company of ~~Contents~~a residential project near Sacramento, California. At June 30, 2005, the book value of our investment is approximately $17.6 million and the terms of the investment require additional contributions from the members should there be insufficient operating funds (see Liquidity and Capital Resources section). The project is located in a county known to contain naturally occurring asbestos in native rock material. The EPA has conducted studies for potential risks associated with asbestos exposure from the native rock materials at various locations, including at a school site that is adjacent to the Company’s project, and the EPA has concluded that its initial exposure study raises further concerns. At this time the Company does not know if the results of the studies will have any adverse impact on the project, and the ultimate impact to its financial statements is undeterminable.

~~CATELLUS~~Note ~~DEVELOPMENT~~9. ~~CORPORATION~~Related Party Transactions

~~NOTES~~The TOentities ~~CONDENSED~~below ~~CONSOLIDATED~~are considered ~~FINANCIAL~~related ~~STATEMENTS—(Continued)~~parties because the listed transactions are with entities in which the Company has an ownership interest. There are no affiliated persons involved with these entities.

	Core			URO			Subtotal			DiscontinuedOperations			Total
	(In thousands)
Three Months Ended September 30, 2003
Revenue
Rental revenue	$	75,337		$	—		$	75,337		$	(1,258	)	$	74,079
Sales revenue		2,106			43,409			45,515			—			45,515
Management, development and other fees		1,695			1,259			2,954			—			2,954
		79,138			44,668			123,806			(1,258	)		122,548
Costs and expenses
Property operating costs		(23,102	)		—			(23,102	)		342			(22,760	)
Cost of sales		(2,090	)		(25,416	)		(27,506	)		335			(27,171	)
Selling, general and administrative expenses		(8,241	)		(7,124	)		(15,365	)		—			(15,365	)
Depreciation and amortization		(17,788	)		(278	)		(18,066	)		345			(17,721	)
		(51,221	)		(32,818	)		(84,039	)		1,022			(83,017	)
Operating income		27,917			11,850			39,767			(236	)		39,531
Other income
Equity in earnings of operating joint ventures, net		540			—			540			—			540
Equity in earnings of development joint ventures, net		—			7,553			7,553			—			7,553
Gain on non-strategic asset sales		—			928			928			—			928
Interest income		915			830			1,745			—			1,745
Other		(4	)		585			581			—			581
		1,451			9,896			11,347			—			11,347
Other expenses
Interest expense		(15,923	)		—			(15,923	)		340			(15,583	)
REIT transition costs		—			(1,416	)		(1,416	)		—			(1,416	)
Other		(258	)		(153	)		(411	)		—			(411	)
		(16,181	)		(1,569	)		(17,750	)		340			(17,410	)
Income before income taxes and discontinued operations		13,187			20,177			33,364			104			33,468
Income tax expense		(4,344	)		(8,071	)		(12,415	)		(41	)		(12,456	)
Income from continuing operations		8,843			12,106			20,949			63			21,012
Discontinued operations, net of income tax
Loss from disposal of discontinued operations		—			—			—			(201	)		(201	)
Income from discontinued operations		—			—			—			138			138
Net loss from discontinued operations		—			—			—			(63	)		(63	)
Net income	$	8,843		$	12,106		$	20,949		$	—		$	20,949

The Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $0.2 million and $0.4 million for the three and six months ended June 30, 2005, respectively, primarily from SAMS Venture, LLC. Fees earned were $0.3 million and $1.2 million for the three and six months ended June 30, 2004, respectively, primarily from Third and King Investors, LLC, with the remainder primarily from SAMS Venture, LLC. Deferred fees of $1.5 million primarily from SAMS Venture, LLC, Serrano Associates, LLC and Bergstrom Partners, L.P. at June 30, 2005, will be earned as completed projects are sold or the venture is sold or liquidated. In 2004, the Company sold its investment in Third and King Investors, LLC.

13In 2001, the Company entered into a 99-year ground lease with one of its unconsolidated joint venture investments, Third and King Investors, LLC. Rent and reimbursable payments of $1.3 million and $2.5 million were received and recognized as rental income during the three and six months ended June 30, 2004, respectively. This joint venture investment was sold in 2004.

~~Table~~The Company has a $4.6 million collateralized 9.0% note receivable from an unconsolidated joint venture, East Baybridge Partners, LP, for project costs plus accrued interest. The note is collateralized by property owned by the joint venture and matures in October 2028. The Company has entered into various lease agreements with this unconsolidated joint venture. As lessee, rent expense was $34,000 for each of ~~Contents~~the three-month periods ended June 30, 2005 and 2004, and $68,000 for each of the six-month periods ended June 30, 2005 and 2004. This lease will expire in November 2011. As lessor, the Company entered into a ground lease, which will expire in August 2054. The Company earned rental income of $0.1 million for each of the three-month periods ended June 30, 2005 and 2004, $0.2 million for each of the six-month periods ended June 30, 2005 and 2004 and has recorded a $2.8 million receivable and a $1.3 million reserve associated with this lease. The venture’s current projection reflects approximately $0.2 million available funds, per year, to pay down this receivable.

~~CATELLUS~~In ~~DEVELOPMENT~~January 2004, ~~CORPORATION~~the Company sold its 45% investment interest in Colorado International Center, an unconsolidated joint venture, for its capital investment balance of $0.3 million to an entity whose principal was a former Company employee.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~ 20

	Core			URO			Subtotal			DiscontinuedOperations			Total
	(In thousands)
Nine Months Ended September 30, 2004
Revenue
Rental revenue	$	232,719		$	—		$	232,719		$	(3,346	)	$	229,373
Sales revenue		74,998			50,172			125,170			(40,693	)		84,477
Management, development and other fees		1,920			931			2,851			—			2,851
		309,637			51,103			360,740			(44,039	)		316,701
Costs and expenses
Property operating costs		(63,713	)		—			(63,713	)		676			(63,037	)
Cost of sales		(44,603	)		(33,567	)		(78,170	)		27,062			(51,108	)
Selling, general and administrative expenses		(21,305	)		(17,876	)		(39,181	)		—			(39,181	)
Depreciation and amortization		(57,143	)		(739	)		(57,882	)		902			(56,980	)
		(186,764	)		(52,182	)		(238,946	)		28,640			(210,306	)
Operating income (loss)		122,873			(1,079	)		121,794			(15,399	)		106,395
Other income
Equity in earnings of operating joint ventures, net		3,991			—			3,991			—			3,991
Equity in earnings of development joint ventures, net		100			5,722			5,822			—			5,822
Gain on non-strategic asset sales		—			16,441			16,441			—			16,441
Interest income		5,850			1,531			7,381			—			7,381
Other		1,781			649			2,430			(7	)		2,423
		11,722			24,343			36,065			(7	)		36,058
Other expenses
Interest expense		(48,404	)		—			(48,404	)		583			(47,821	)
REIT transition costs		—			(420	)		(420	)		—			(420	)
Other		(1,247	)		(2,732	)		(3,979	)		37			(3,942	)
		(49,651	)		(3,152	)		(52,803	)		620			(52,183	)
Income before income taxes and discontinued operations		84,944			20,112			105,056			(14,786	)		90,270
Income tax expense		(7,306	)		(512	)		(7,818	)		—			(7,818	)
Income from continuing operations		77,638			19,600			97,238			(14,786	)		82,452
Discontinued operations, net of income tax
Gain from disposal of discontinued operations		—			—			—			13,631			13,631
Income from discontinued operations		—			—			—			1,155			1,155
Net gain from discontinued operations		—			—			—			14,786			14,786
Net income	$	77,638		$	19,600		$	97,238		$	—		$	97,238

Note 10. Discontinued Operations

14In general, sales of rental property are classified as discontinued operations. Therefore, income or loss attributed to the operations and gain or loss on rental property sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the income or loss related to rental properties that were sold or held for sale and presented as discontinued operations during the period up to June 30, 2005. Additionally, all periods presented will likely require further reclassification in future periods as additional sales of rental properties occur.

~~Table~~Discontinued ofoperations activities ~~Contents~~for the three and six months ended June 30, 2005 and 2004, are summarized as follows:

CATELLUS DEVELOPMENT CORPORATION

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)
Gain from disposal of discontinued operations
Sales revenue	$	—		$	6,372		$	2,886		$	9,922
Cost of sales	(17		)	(5,974		)	(2,170		)	(7,908		)
	(17		)	398			716			2,014
Income tax expense	—			—			—			—
Net (loss) gain	$	(17	)	$	398		$	716		$	2,014
Rental Revenue	$	3,989		$	5,583		$	8,190		$	10,973
(Loss) income from discontinued operations (1)	$	(6,896	)	$	829		$	(6,775	)	$	1,020
Income tax expense	—			—			—			—
Net (loss) income	$	(6,896	)	$	829		$	(6,775	)	$	1,020

~~NOTES~~(1) An impairment TOcharge ~~CONDENSED~~of ~~CONSOLIDATED~~$6.8 ~~FINANCIAL~~million ~~STATEMENTS—(Continued)~~was recognized in the second quarter of 2005 for an office building which is under contract to be sold.

	Core			URO			Subtotal			DiscontinuedOperations			Total
	(In thousands)
Nine Months Ended September 30, 2003
Revenue
Rental revenue	$	224,520		$	—		$	224,520		$	(4,613	)	$	219,907
Sales revenue		58,616			48,011			106,627			(28,202	)		78,425
Management, development and other fees		5,599			4,302			9,901			—			9,901
		288,735			52,313			341,048			(32,815	)		308,233
Costs and expenses
Property operating costs		(62,882	)		—			(62,882	)		1,314			(61,568	)
Cost of sales		(45,215	)		(26,381	)		(71,596	)		21,172			(50,424	)
Selling, general and administrative expenses		(21,999	)		(13,424	)		(35,423	)		—			(35,423	)
Depreciation and amortization		(51,675	)		(828	)		(52,503	)		1,192			(51,311	)
		(181,771	)		(40,633	)		(222,404	)		23,678			(198,726	)
Operating income		106,964			11,680			118,644			(9,137	)		109,507
Other income
Equity in earnings of operating joint ventures, net		5,199			—			5,199			—			5,199
Equity in earnings of development joint ventures, net		—			16,834			16,834			—			16,834
Gain on non-strategic asset sales		—			8,285			8,285			—			8,285
Interest income		2,427			3,036			5,463			(5	)		5,458
Other		1,945			585			2,530			—			2,530
		9,571			28,740			38,311			(5	)		38,306
Other expenses
Interest expense		(49,908	)		—			(49,908	)		1,130			(48,778	)
REIT transition costs		—			(4,779	)		(4,779	)		—			(4,779	)
Other		(591	)		(16	)		(607	)		—			(607	)
		(50,499	)		(4,795	)		(55,294	)		1,130			(54,164	)
Income before income taxes and discontinued operations		66,036			35,625			101,661			(8,012	)		93,649
Income tax expense		(23,797	)		(14,250	)		(38,047	)		3,205			(34,842	)
Income from continuing operations		42,239			21,375			63,614			(4,807	)		58,807
Discontinued operations, net of income tax
Gain from disposal of discontinued operations		—			—			—			4,218			4,218
Income from discontinued operations		—			—			—			589			589
Net gain from discontinued operations		—			—			—			4,807			4,807
Net income	$	42,239		$	21,375		$	63,614		$	—		$	63,614

Asset and liability balances of rental properties under contract to be sold at June 30, 2005 and December 31, 2004, consist of the following:

	June 30, 2005				December 31, 2004
	(In thousands)

Assets
Properties	$		94,908		$	10,949
Accumulated depreciation	(43,869			)	(894			)
Net	51,039				10,055
Other assets	4,445				281
Total assets	55,484				10,336

Liabilities
Mortgage and other debt	(80,052			)	(—			)
Payable	(1,214			)	(27			)
Other liabilities	(625			)	(61			)
Total liabilities	(81,891			)	(88			)
Net (liabilities) assets	$	(26,407		)	$		10,248

~~Table of Contents~~21

~~CATELLUS~~Note ~~DEVELOPMENT~~11. ~~CORPORATION~~REIT Conversion

~~NOTES~~On TOJanuary 5, ~~CONDENSED~~2004, ~~CONSOLIDATED~~the Company ~~FINANCIAL~~announced ~~STATEMENTS—(Continued)~~that it had completed the restructuring of its operations to qualify as a REIT and began operating as a REIT as of January 1, 2004. The REIT conversion had the following effects on the financial statements as of or for the three months ended June 30, 2005 and 2004:

~~Note~~• on May 4, 82005, the Company’s Board declared a regular cash dividend for the quarter ended June 30, 2005, of $0.27 ~~Commitments~~per share of common stock, or $28.0 million, that was paid on July 15, 2005 to stockholders of record at the close of business on June 28, 2005. Subsequently, on July 27, 2005, the Company’s Board declared a regular cash dividend for the quarter ending September 30, 2005, of $0.27 per share of common stock payable on August 31, 2005, to stockholders of record at the close of business on August 16, 2005. In December 2004, the Company’s Board declared a regular cash dividend for the quarter ending December 31, 2004, of $0.27 per share of common stock, or $27.9 million, and ~~Contingencies~~a special dividend of $0.45 per share of common stock, or $46.5 million, that were paid on January 18, 2005. Cash dividends of $0.27 per common share for the fourth quarter 2003 and the first, second, and third quarters of 2004 and first quarter of 2005 were paid on January 15, 2004, April 15, 2004, July 15, 2004, October 15, 2004, and April 15, 2005; respectively. The actual amount of the dividends for subsequent quarters will be as determined and declared by the Company’s Board of Directors and will depend on the Company’s financial condition, earnings, and other factors, many of which are beyond the Company’s control;

~~The Company has surety bonds~~ • conversion and ~~standby letters of credit~~ related ~~to various~~restructuring ~~development~~costs ~~projects,~~of ~~various~~$0.2 ~~debt~~million and ~~debt~~$0.4 ~~service~~million ~~guarantees,~~were ~~and~~paid ~~capital contribution commitments related~~ to third ~~certain~~parties ~~unconsolidated~~for ~~real~~the ~~estate~~three ~~joint ventures. These surety bonds, standby letters of credit, guarantees,~~ and ~~capital contribution~~six ~~commitments~~months asended ~~of September~~ June 30, 2004, ~~are summarized in the following categories (in thousands).~~ respectively;

Off-balance sheet liabilities:
Surety bonds	$	219,713
Standby letters of credit		51,826
Debt service guarantees		72,064
Contribution commitments		7,315
Sub-total		350,918
Liabilities included in balance sheet:
Standby letters of credit		10,836
Total	$	361,754

• one-time costs associated with the stock option exchange offer approximated $32 million, which includes the costs for the restricted stock and restricted stock units of $25.6 million (such cost will be amortized over three years until December 31, 2006), and compensation expenses of $6.6 million as a result of the required variable accounting treatment for the remaining outstanding options upon the expiration of the exchange offer program on October 29, 2003 (such expense will be amortized over the remaining vesting period of the options from November 2003). Amortization costs, for the three months ended June 30, 2005 and 2004 associated with the 2003 stock option exchange offer, which includes the costs for the restricted stock and restricted stock units, were $1.9 million and $2.5 million, respectively, and compensation expenses of $0.3 million and $0.5 million, respectively, were recognized as a result of the required variable accounting treatment for options. Amortization costs, for the six months ended June 30, 2005 and 2004 associated with the 2003 stock option exchange offer, which includes the costs for the restricted stock and restricted stock units, were $4.1 million and $5.0 million, respectively, and compensation (benefit) expense of $(0.03) million and $1.7 million, respectively, was recognized as a result for the required variable accounting treatment for options.

~~Surety~~Note ~~bonds are used to guarantee the construction of infrastructure and public improvements as a requirement of entitlement~~12. ~~Surety~~Sale ~~bonds are commonly required by public agencies from real estate developers, are renewable, and expire upon completion~~ of ~~the~~Non-Core required improvements. The typical development period of the Company’s development projects is approximately one to three years. An example of the type of event that would require the Company to perform under these surety bonds would be the failure of the Company to construct or complete the required improvements. At September 30, 2004, the Company has not been required to fund any of the surety bonds. Assets

~~Standby~~In ~~letters~~November 2004, ofthe Company ~~credit~~sold ~~consist~~a ofsignificant ~~two~~portion ~~types: performance and financial. Performance standby letters~~ of ~~credit~~its ~~are~~remaining ~~similar~~urban ~~in nature~~ and ~~term as the~~residential ~~surety~~development ~~bonds~~assets, ~~described~~with ~~above.~~a ~~Financial~~book ~~standby~~value ~~letters~~ of ~~credit~~$295.9 ~~are~~million, ~~a form of credit enhancement commonly required in real estate development when bonds are issued~~ to ~~finance~~FOCIL ~~public~~for ~~improvements~~$343.3 million. A Assales ofgain ~~September 30, 2004, the Company has a total~~ of $624.76 million has inbeen ~~standby~~deferred ~~letters~~at ofJune 30, ~~credit which are scheduled to expire between March~~ 2005 ~~and~~until ~~June~~certain ~~2006.~~future Ofrequirements ~~this total, $51~~are met.8 ~~million~~The ispurchase ~~off-balance~~price ~~sheet~~consisted (of $4668.37 million in ~~financial~~cash ~~letters of credit~~ and $5274.56 million in ~~performance~~debt ~~letters~~financed ~~of credit).~~by ~~The~~the ~~remaining~~Company ~~$10.8~~that ~~million~~ is ~~related~~collateralized toby ~~obligations~~the ~~that~~assets ~~are~~sold. The ~~reflected~~financings inprovided ~~“Mortgage~~to FOCIL and ~~other debt” in~~ the additional ~~Company’s~~agreed-upon ~~condensed~~financings ~~consolidated~~as ~~balance~~disclosed ~~sheet~~at ~~and~~Note 8 were ~~issued~~considered ~~as additional security for liabilities already~~in ~~recorded~~determining oninitial ~~the~~and ~~balance~~continuing ~~sheet~~involvement for ~~separate~~purposes ~~accounting~~of ~~reasons~~ensuring ~~(primarily~~the appropriate ~~assessment~~revenue ~~bond~~recognition ~~obligations~~method. ofFOCIL ~~assessment~~has ~~districts~~engaged ~~whose operating boards~~ the Company ~~controls).~~to ~~This~~act isas development ~~different~~manager ~~from~~for the ~~$51~~assets.~~8 million in letters of credit that are related~~ For ~~to non-balance sheet items. When~~ the ~~assessment~~three ~~districts~~months ~~are~~ended ~~consolidated~~June 30, ~~the balance sheet is fully consolidated~~2005, ~~so there are several corresponding debits,~~ the ~~most~~Company ~~significant~~has ofearned ~~which is the associated improvements~~$6.3 ~~An example of the type of~~million ~~event~~in ~~that~~interest ~~would~~and ~~require~~$3.0 ~~the~~million ~~Company~~in todevelopment ~~perform~~and ~~under~~other ~~the performance standby letters of credit would be the failure of the Company to construct or complete the required improvements~~fees. For ~~An example of~~ the ~~type~~six ofmonths ~~event~~ended ~~that~~June 30, ~~would require~~ 2005, the Company ~~to perform~~has ~~under~~earned ~~the~~$13.0 ~~financial~~million ~~standby~~in ~~letters~~interest ofand ~~credit~~$9.6 ~~would~~million ~~be a debt service shortfall~~ in development ~~the~~and ~~municipal~~other ~~district~~fees, ~~that~~and ~~issued~~at ~~the municipal bonds. At September~~ June 30, ~~2004,~~2005 ~~the Company~~ has ~~not~~deferred ~~been~~the recognition ~~required~~of toan ~~satisfy~~additional ~~any~~$10.0 million of ~~these~~development ~~standby~~fees ~~letters~~until ofcertain ~~credit.~~future requirements are met.

The Company has made debt service guarantees for certain of its unconsolidated joint ventures. At September 30, 2004, based on the joint ventures’ outstanding debt balances, these debt guarantees totaled $72.1 million and are scheduled to expire between March 2005 and September 2005. These debt service guarantees are typical business arrangements commonly required of real estate developers. An example of the types of events that would require the Company to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service its debt when due, or non-compliance of the primary borrower with financial covenants or inadequacy of asset collateral. At September 30, 2004, the Company has not been required to satisfy any amounts under these debt service guarantees. 22

~~The~~Note Company is required to make additional capital contributions to six of its unconsolidated joint ventures should additional capital contributions be necessary to fund development costs or operating shortfalls13. ~~The~~Merger ~~Company agreed~~ with ~~two unconsolidated joint~~ ventures, Serrano Associates, LLC and SAMS Venture, LLC to make additional contributions should there be insufficient funds to meet its current or projected financial requirements. As of September 30, 2004, the Company cumulatively contributed $20.0 million to Serrano Associates, LLC, as additional contributions, and $0.6 million as additional contributions to SAMS Venture, LLC. The Company is also required to make additional capital contributions to another four of its unconsolidated joint ventures should additional capital contributions be necessary (see chart below). ProLogis

16 On June 6, 2005, the Company and ProLogis announced that their boards have unanimously approved a definitive merger agreement under which ProLogis will acquire all of the outstanding common stock of Catellus for a total consideration of approximately $5.6 billion, including assumed liabilities and transaction costs. Under the terms of the merger agreement, each Catellus stockholder has the right to elect to receive either 0.822 of a ProLogis common share or $33.81 in cash, without interest, for each share of the Company’s common stock that the stockholder owns immediately prior to the effective time of the merger. Catellus stockholder elections will be reallocated and prorated to fix the aggregate cash consideration to be paid by ProLogis pursuant to the merger agreement at $1.255 billion, which means that the total merger consideration (regardless of what form of consideration Catellus stockholders may elect to receive) will consist of about 65% ProLogis common shares and about 35% cash. On July 13, 2005, ProLogis filed with the Securities and Exchange Commission a registration statement on Form S-4, which contains a preliminary joint proxy statement/prospectus. The preliminary joint proxy statement/prospectus provides important information, including detailed risk factors, regarding the proposed merger. There are a number of conditions that must occur for the merger to close. These conditions include the approval of the merger agreement by the stockholders of both Catellus and ProLogis. It is anticipated that the merger will be completed in September 2005.

~~Table of Contents~~23

~~CATELLUS~~Item ~~DEVELOPMENT~~2. ~~CORPORATION~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~NOTES~~The ~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~ Company

	ContributionCommitted		RemainingContributionCommitment
	(In thousands)
Talega Village, LLC (1)	$	14,000	$	4,570
Parkway Company, LLC		38,000		2,530
Third and King Investors, LLC		25,000		—
Bergstrom Partners, L.P.		1,000		168
	$	78,000	$	7,268

Catellus Development Corporation is a publicly traded real estate development company that began operating as a REIT effective January 1, 2004. We operated as a C-corporation through December 31, 2003. We focus on managing, acquiring, and developing predominantly industrial rental property in many of the country’s major distribution centers and transportation corridors. Catellus’ principal objective is sustainable, long-term growth in earnings, which we seek to achieve by applying our strategic resources: a lower-risk/higher-return rental portfolio, a focus on expanding that portfolio through development, and the deployment of our proven land development skills to select opportunities that may not always be industrial, especially projects that may not require significant capital investments on our part.

~~(1)~~Catellus ~~Talega~~was ~~Village,~~originally formed ~~LLC~~in 1984 to conduct the non-railroad real estate activities of the Santa Fe Pacific Corporation and was spun off to stockholders effective in 1990. Our railroad heritage gave us a diverse base of developable properties located near transportation corridors in major western United States markets. This land has proven ~~substantially~~suitable ~~wound~~for upthe ~~operations~~development of a variety of product types, including industrial, retail, office, and residential. Over time, we have expanded our business by acquiring land suitable for primarily industrial development in many of the ~~Company~~same ~~does~~suburban ~~not~~locations ~~expect~~where towe ~~make~~have ~~any~~an ~~future~~established ~~capital~~presence ~~contributions~~as well as additional locations including recent expansion into northern New Jersey.

AsOur rental portfolio provides a relatively consistent source of earnings and our development ~~September~~activities 30provide cash flow through sales of land or the conversion of our developable land to property that is either added to our portfolio or sold to tenants, ~~2004~~developers, ~~the~~investors ~~Company~~or ~~does~~other ~~not~~interested ~~expect~~parties. We invest in new land to ~~fund~~ensure ~~any~~our ~~significant~~potential ~~capital~~for ~~contributions~~growth. ~~beyond~~As ~~the~~of ~~maximum~~June 30, ~~capital~~2005 ~~requirements~~we owned 41.1 million square feet of commercial rental properties, of which approximately 90% is industrial space. Our industrial rental portfolio is geographically diverse, located in major transportation corridors and distribution centers such as southern California, Chicago, Dallas, and Atlanta. The majority of our rental portfolio is of newer construction and leased to diverse, high quality tenants through long-term leases with staggered lease expirations.

~~Generally~~On June 6, 2005, ~~any~~Catellus ~~funding~~and ProLogis announced that their boards had unanimously approved a definitive merger agreement under which ProLogis will acquire all of our ~~off-balance~~outstanding ~~sheet~~common ~~guarantees~~stock ~~would~~for ~~result~~a intotal consideration of approximately $5.6 billion, including assumed liabilities and transaction costs. Under the ~~increase~~terms of ~~Catellus’~~the ~~ownership~~merger ~~interest~~agreement, ineach of our stockholders has the right to elect to receive either 0.822 of a ProLogis ~~project~~common share or ~~entity~~$33.81 ~~similar~~in cash, without interest, for each share of our common stock that the stockholder owns immediately prior to the effective time of the ~~treatment~~merger. Catellus stockholder elections will be reallocated and prorated to fix the aggregate cash consideration to be paid by ProLogis pursuant to the merger agreement at $1.255 billion, which means that the total merger consideration (regardless of what form of consideration Catellus stockholders may elect to receive) will consist of about 65% ProLogis common shares and about 35% cash. On July 13, 2005, ProLogis filed with the Securities and Exchange Commission a ~~unilateral~~registration ~~additional~~statement ~~capital~~on ~~contribution~~Form S-4, which contains a preliminary joint proxy statement/prospectus. The preliminary joint proxy statement/prospectus provides important information, including detailed risk factors, regarding the proposed merger. There are a number of conditions that must occur for the merger to anclose. ~~investee~~These conditions include the approval of the merger agreement by the stockholders of both Catellus and ProLogis. It is anticipated that the merger will be completed in September 2005.

InCritical ~~addition~~Accounting ~~to the contingent liabilities summarized in the tables above, the Company also has the following contingencies:~~ Policies

AsOur ofdiscussion ~~September~~and ~~30,~~analysis of ~~2004,~~financial ~~$163.3~~condition ~~million~~and results of ~~Community~~operations ~~Facility~~is ~~District~~based ~~bonds~~on ~~were~~our ~~sold~~Condensed Consolidated toFinancial ~~finance~~Statements, ~~public~~which ~~infrastructure~~have ~~improvements~~been atprepared ~~several~~in ~~Company~~accordance with ~~projects.~~accounting ~~The~~principles ~~Company~~generally ~~provided~~accepted ~~letters~~in ofthe ~~credit~~United ~~totaling $40~~States.5 ~~million~~The inpreparation of ~~support~~our ofCondensed ~~some~~Consolidated ofFinancial ~~these~~Statements ~~bonds.~~requires ~~The~~us ~~$40.5~~to ~~million~~make estimates isand ~~included~~judgments inthat affect the ~~standby~~reported ~~letters~~amounts of ~~credit~~assets, liabilities, revenues and ~~surety~~expenses, ~~bonds~~and ~~amounts~~related ~~disclosed~~disclosure ~~above~~of contingent assets and liabilities. ~~The~~On ~~Company~~an ison-going ~~required~~basis, we evaluate our estimates, including those related to ~~satisfy~~revenue recognition, impairment of real estate assets, ~~any~~capitalization ~~shortfall~~of incosts, ~~annual~~including ~~debt~~job ~~service~~costing, ~~obligation~~allowances for ~~these~~doubtful accounts, ~~bonds~~environmental ifand ~~tax~~legal ~~revenues~~reserves, ~~generated~~stock-based bycompensation ~~the~~plans, ~~projects~~and income ~~are insufficient~~taxes. AsWe ofbase ~~September~~our ~~30,~~estimates ~~2004,~~on ~~the~~historical ~~Company~~experience ~~does~~and ~~not~~various ~~expect~~other assumptions that we believe to be ~~required~~reasonable tounder ~~satisfy~~the ~~any~~circumstances, ~~shortfall~~the results inof ~~annual~~which ~~debt~~form ~~service obligation~~the basis for ~~these~~making ~~bonds~~judgments ~~other~~about ~~than~~the ~~through~~carrying ~~its~~values of ~~payment~~assets ofand ~~normal~~liabilities ~~property~~that ~~and~~are ~~special~~not ~~district~~readily ~~taxes~~apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

~~The~~We ~~Company~~believe ~~is a party to a number of legal actions arising in~~ the ~~ordinary course of business. The Company cannot predict with certainty the final~~following ~~outcome~~critical ofaccounting ~~these~~policies ~~proceedings.~~reflect ~~Considering~~our ~~current~~more ~~insurance~~significant ~~coverages~~judgments and ~~the substantial legal defenses available, however, management believes that none of these actions, when finally resolved, will have a material adverse effect on the~~ ~~consolidated~~estimates ~~financial~~used ~~condition,~~in ~~results of operations, or cash flows of~~ the ~~Company.~~preparation Where appropriate, the Company has established reserves for potential liabilities related to legal actions or threatened legal actions. These reserves are necessarily based on estimates and probabilities of the ~~occurrence~~Condensed ofConsolidated ~~events and therefore are subject to revision from time to time~~Financial Statements.

~~Inherent~~Revenue in the operations of the real estate business is the possibility that environmental liability may arise from the current or past ownership, or current or past operation, of real properties. The Company may be required in the future to take action to correct or reduce the environmental effects of prior disposal or release of hazardous substances by third parties, the Company, or its corporate predecessors. Future environmental costs are difficult to estimate because of such factors as the unknown magnitude of possible contamination, the unknown timing and ~~extent~~profit of the corrective actions that may be required, the determination of the Company’s potential liability in proportion to that of other potentially responsible parties, and the extent to which such costs are recoverable from insurance. Also, the Company does not generally have access to properties sold by it in the past. recognition

17Our revenue is primarily derived from three sources: rental revenue from our rental portfolio, management, development and other fees, and property sales.

~~Table~~Rental revenue is recognized when due from tenants. Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of ~~Contents~~the related lease. The financial terms of leases are contractually defined. Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy. We have various retail and ground leases that provide for rental revenues which are contingent upon the lessee’s operations. Contingent rental income on these leases is recognized when the specified target is achieved.

~~CATELLUS DEVELOPMENT CORPORATION~~ 24

~~NOTES~~Revenue TOfrom ~~CONDENSED~~sales ~~CONSOLIDATED~~of properties ~~FINANCIAL~~is ~~STATEMENTS—(Continued)~~recognized using the accrual method. If a sale does not qualify for the accrual method of recognition, other deferral methods are used as appropriate including the percentage-of-completion method. In certain instances, when we receive an inadequate cash down payment and take a promissory note for the balance of the sale price, the sale is deferred until such time as sufficient cash is received to meet minimum down payment requirements. Specific identification and relative sales value methods are also used to determine the cost of sales. A change in circumstances that causes the estimate of future costs, such as carrying costs and construction costs, to increase or decrease significantly would affect the gain or loss recognized on future sales.

~~At September 30~~Management, ~~2004~~development, ~~management estimates that future costs for remediation of environmental contamination on operating properties~~ and ~~properties previously sold approximate $2.3 million, and has provided a reserve for that amount. It is anticipated that such costs will be incurred over the next several years. Management~~ ~~also~~other ~~estimates~~fees ~~approximately~~are ~~$8.7~~recognized ~~million~~as ~~of similar costs relating to the Company’s properties to be developed or sold~~earned. InFees ~~addition,~~earned ~~the~~from ~~Company~~our ~~has~~unconsolidated ~~approximately $10.0 million in escrow for environmental work related to a land acquisition~~joint ~~(see~~ventures ~~Note~~are ~~3).~~recognized ~~The Company may incur additional costs related~~ to ~~management of excess contaminated soil from its projects; however,~~ the ~~necessity~~extent of ~~this~~outside ~~activity~~ownership ~~depends~~with onour ~~the type of future development activities, and, therefore, the~~share ~~related costs are not currently determinable~~deferred. These ~~costs~~deferred ~~will~~fees ~~be capitalized as components of development costs when incurred, which is anticipated to be over a period of approximately twenty years, or~~ will be ~~deferred~~recognized ~~and charged to cost of sales~~ when the ~~properties~~assets ~~are~~or ~~sold.~~venture Environmental costs capitalized during the nine months ended September 30, 2004, totaled $2.4 million. The Company’s estimates were developed based on reviews that took place over several years based upon then-prevailing law and identified site conditions. Because of the breadth of its portfolio, and past sales, the Company is ~~unable to review each property extensively on a regular basis. Such estimates are not precise and are always subject to the~~ ~~availability~~either ofsold ~~further~~or ~~information about the prevailing conditions at the site~~liquidated, ~~the~~as ~~future requirements of regulatory agencies, and the availability and ability of other parties to pay some or all of such costs~~appropriate.

~~Note~~We 9may receive fees from tenants as consideration for early termination of their lease agreement. ~~Related~~These ~~Party~~lease ~~Transactions~~termination fees are amortized over the revised remaining lease term, if any. In conjunction with the receipt of lease termination fees, we perform a review of all lease related assets and liabilities to determine if impairment has occurred and whether or not the amortization period continues to be appropriate.

~~The~~Impairment ~~entities~~of ~~below~~real ~~are~~estate ~~considered related parties because the listed transactions are with entities in which the Company has an ownership interest. There are no affiliated persons involved with these entities.~~ assets

~~The~~We ~~Company~~assess ~~provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees recognized were $0.1 million and $1.3 million for~~ the ~~three~~impairment ~~and nine months ended September 30, 2004, respectively, primarily from SAMS Venture, LLC for the third quarter and Third and King Investors, LLC and SAMS Venture, LLC for the nine-month period. Fees~~of ~~recognized~~a ~~were~~real ~~$2.8~~estate ~~million~~asset ~~and~~when ~~$6.1~~events ~~million~~or ~~for~~changes ~~the~~in ~~three~~circumstances ~~and~~indicate ~~nine~~that ~~months ended September 30, 2003, respectively, of which $1.2 million and $4.0 million, respectively, were from Third and King Investors, LLC, with~~ the ~~remainder primarily from~~ ~~Traer~~net ~~Creek~~book ~~LLC,~~value ~~Serrano~~may ~~Associates,~~not ~~LLC,~~be ~~and Talega Village~~recoverable, ~~LLC.~~as ~~Deferred~~well ~~fees of $2.2 million primarily from Serrano Associates, LLC, Third and King Investors, LLC, and Bergstrom Partners, L.P. at September 30, 2004, will be recognized~~ as ~~completed~~ ~~projects~~on ~~are sold or the venture is sold or liquidated. In September 2003, the Company sold its investment interest in Traer Creek LLC. A provision in the sales agreement allowed for~~ a ~~discount~~quarterly ~~on the purchase price of $1~~basis.~~0 million~~ ~~depending~~Indicators onwe ~~the~~consider ~~buyer’s~~important ~~timing of payment of the note. Thus the Company deferred a gain of $5.4 million at December 31, 2003,~~ which ~~was~~could ~~subsequently~~trigger ~~fully~~an ~~recognized~~impairment inreview include ~~2004 upon~~ the ~~buyer’s full payment of the note.~~ following:

~~In 2001, the Company entered into~~ • a ~~99-year ground lease with one of its~~ ~~unconsolidated~~significant ~~joint~~negative ~~venture~~industry ~~investments,~~or ~~Third~~economic and King Investors, LLC. Rent and reimbursable payments of $1.3 million and $0.9 million were received and recognized as rental income during each of the three months ended September 30, 2004 and 2003, respectively, and $3.8 million and $2.7 million in each of the nine months ended September 30, 2004 and 2003. Rent payments of $1.3 million of previously received rent were deferred at September 30, 2004, and will be recognized, together with annual rents, over the life of the lease. trend;

~~The Company has~~ • a ~~$4.5~~ ~~million~~significant ~~collateralized~~underperformance ~~9.0%~~relative ~~note~~to ~~receivable~~historical ~~from~~or anprojected ~~unconsolidated joint venture, East Baybridge Partners, LP, for project costs plus accrued interest. The note is collateralized by property owned by the joint venture and matures in October 2028.~~future ~~The~~operating Company has entered into various lease agreements with this unconsolidated joint venture. As lessee, rent expense was $33,000 for each of the three-month periods ended September 30, 2004 and 2003, and $101,000 for each of the nine-month periods ended September 30, 2004 and 2003. This lease will expire in November 2011. As lessor, the Company entered into a ground lease with this joint venture, which will expire in August 2054. The Company earned rental income of $0.1 million for each of the three-month periods ended September 30, 2004 and 2003, and $0.3 million for each of the nine-month periods ended September 30, 2004 and 2003, and has recorded a $2.5 million receivable and a $1.0 million reserve associated with this lease. results;

In• a significant ~~January~~change ~~2004,~~in the ~~Company~~manner ~~sold its 45% investment interest~~ in ~~Colorado~~which ~~International Center,~~ an ~~unconsolidated~~asset ~~joint~~is ~~venture,~~used; ~~for its capital investment balance of $0.3 million to an entity whose principal was a former Company employee.~~ and

In• an accumulation ~~June~~of ~~2004,~~costs ~~the~~significantly ~~Company~~in ~~sold~~excess ~~a small parcel~~ of ~~land~~the toamount ~~SAMS~~originally ~~Venture, LLC for $0.7 million for a $0.1 million gain, of~~expected ~~which~~to ~~50%~~construct ~~was~~an ~~deferred~~asset.

18Real estate is stated at cost and impairments are evaluated using the methodology described as follows: (a) for operating properties and properties held for development, a write-down to estimated fair value is recognized when a property’s estimated undiscounted future cash flow based on the projected holding period, is less than its net book value; and (b) for properties held for sale, a write-down to estimated fair value is recorded when we determine that the net book value exceeds the estimated selling price, less cost to sell. Fair value is determined by a combination of expected cash flow and recent comparable sales and these evaluations are made on a property-by-property basis. When we determine that the net book value of an asset may not be recoverable based upon the estimated undiscounted cash flow, we measure any impairment write-down based on projected discounted cash flows, using an estimated market discount rate; these discounted cash flows are also probability weighted. When performing the impairment review, we consider capitalized interest and other expenses as costs of development in cost projections; value from comparable property sales will also be considered. The evaluation of future cash flows, discount rates, and fair value of individual properties requires significant judgment and assumptions, including estimates of market value, lease terms, development absorption, development costs, lease up costs, and financings. Significant adverse changes in circumstances affecting these judgments and assumptions in future periods could cause a significant impairment adjustment to be recorded.

~~Table~~Capitalization of ~~Contents~~costs

~~CATELLUS~~We ~~DEVELOPMENT~~capitalize ~~CORPORATION~~direct construction and development costs, including predevelopment costs, property taxes, insurance, and certain indirect project costs, including a portion of our general and administrative costs that are associated with the acquisition, development, or construction of a project. General and administrative costs are capitalized based on projected activities on actual projects. Interest is capitalized in accordance with FAS 34 (i.e., interest costs incurred during construction/development periods to get the assets ready for their intended use). Costs previously capitalized related to any abandoned sales or acquisition opportunities are written off. Should development activity decrease, a portion of interest, property taxes, insurance, and certain general and administrative costs would no longer be eligible for capitalization and would be expensed as incurred.

~~NOTES~~Allowance TOfor ~~CONDENSED~~doubtful ~~CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~ accounts

~~Note~~We 10make estimates with respect to the collectability of our receivables and provide for doubtful accounts based on several factors, including our estimate of collectability and the age of the outstanding balances. ~~Discontinued~~Our ~~Operations~~estimate of collectability is based on our contacts with the debtors, collection agencies, our knowledge of the debtors’ credit and financial condition, debtors’ payment terms, and current economic trends. If a debtor becomes insolvent or files for bankruptcy, we provide an allowance for the entire outstanding amount of the debtors’ receivable. Significant judgments and estimates must be made and used in connection with establishing allowances in any accounting period. Material differences may result in the amount and timing of our allowances for any period if adverse general economic conditions cause widespread financial difficulties among our tenants.

In general, sales of rental property are classified as discontinued operations. Therefore, income or loss attributed to the operations and sale of rental property sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the income or loss related to rental properties that were sold or held for sale and presented as discontinued operations during the period up to September 30, 2004. Additionally, all periods presented will likely require further reclassification in future periods as additional sales of rental properties occur. 25

~~Discontinued~~Environmental ~~operations activities for the three~~ and ~~nine~~legal ~~months ended September 30, 2004 and 2003, are summarized as follows:~~ reserves

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In thousands)
Gain from disposal of discontinued operations
Sales revenue	$	30,771		$	—		$	40,693		$	28,202
Cost of sales		(19,154	)		(335	)		(27,062	)		(21,172	)
		11,617			(335	)		13,631			7,030
Income tax expense		—			134			—			(2,812	)
Net gain (loss)	$	11,617		$	(201	)	$	13,631		$	4,218
Rental Revenue	$	995		$	1,258		$	3,346		$	4,613
Income from discontinued operations	$	299		$	231		$	1,155		$	982
Income tax expense		—			(93	)		—			(393	)
Net gain from discontinued operations	$	299		$	138		$	1,155		$	589

We incur ongoing environmental remediation costs, including cleanup costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We maintain a reserve for estimated costs of environmental remediation to be incurred in connection with operating properties and properties previously sold. These reserves, when established, are expensed. Costs relating to undeveloped land are capitalized as part of development costs, and costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold. It is anticipated that these costs may be incurred over an extended period. Our estimates are developed based on reviews that took place over many years based upon then-prevailing law and identified site conditions. Because of the breadth of our portfolio, and past sales, we are unable to review each property extensively on a regular basis. Such estimates are not precise and are always subject to the availability of further information about the prevailing conditions at the site, the future requirements of regulatory agencies, and the availability and ability of other parties to pay some or all of such costs. Should a previously undetected, substantial environmental hazard be found on our properties, significant liquidity could be consumed by the resulting cleanup requirements, and a material expense may be recorded.

~~Asset~~We ~~and~~are ~~liability~~a party to a number ~~balances~~of legal actions arising in the ordinary course of ~~rental~~business. ~~properties~~We ~~under~~cannot ~~contract~~predict with tocertainty bethe ~~sold~~final atoutcome ~~September~~of 30the proceedings. Where appropriate, ~~2004~~we have established reserves for potential liabilities related to legal actions or threatened legal actions. Environmental and ~~December~~legal ~~31,~~reserves ~~2003,~~are ~~consist~~established based on estimates and probabilities of the ~~following:~~occurrence of events and therefore are subject to revision from time to time. Should the circumstances affecting these estimates change significantly, a material expense may be recognized.

	September 30, 2004			December 31, 2003
	(In thousands)
Assets
Properties	$	9,337		$	5,806
Accumulated depreciation		(3,930	)		(3,589	)
Net		5,407			2,217
Other assets		1,371			135
Total assets		6,778			2,352
Liabilities
Mortgage and other debt		—			(2,071	)
Payables		(24	)		(108	)
Other liabilities		(48	)		(117	)
Total liabilities		(72	)		(2,296	)
Net assets	$	6,706		$	56

Stock-Based Compensation Plans

19During 2004, two performance-based executive award plans were established under our 2003 Performance Award Plan: the 2004 Transition Incentive Plan (“TIP”) and the 2004 Long-Term Incentive Plan (“LTIP”). Awards under the TIP were granted in 2004 and LTIP were granted in 2004 and 2005. The awards granted are non-voting units of measurement (“Performance Units”) that are deemed to represent one share of our common stock. Performance Units are entitled to dividend equivalents representing dividends on an equal number of shares of our common stock. Dividend equivalents are credited to participants’ accounts as additional Performance Units. The initial performance period under the LTIP and the performance period under the TIP are from January 1, 2004 through December 31, 2006. Subsequent awards under the LTIP were granted in 2005 with a performance period from January 1, 2005 to December 31, 2007. The earliest date TIP awards were eligible to begin vesting was December 31, 2004 if at least 50% of defined performance targets were achieved by that date and certain time vesting requirements as to certain participants were met. If any defined performance targets are not 100% achieved by December 31, 2006, the remaining unvested performance units will be forfeited. TIP awards are payable in our common stock. The initial and subsequent LTIP awards vest at December 31, 2006 and 2007, respectively, if our total stockholder return, relative to the total stockholder returns of a certain group of peer companies, meets certain performance targets. LTIP awards are payable 50% in our common stock and 50% in cash.

~~Table~~At June 30, 2005, 312,278 Performance Units, representing the aggregate number initially awarded under both plans, less vested TIP Performance Units distributed in common stock, plus additional Performance Units from dividend equivalents on previously existing Performance Units, have been credited to participants’ accounts, subject to the vesting requirements discussed in the preceding paragraph. As required by APB 25, we have recognized $1.2 million and $1.3 million as compensation expense during the three months ended June 30, 2005 and 2004, respectively, and $2.1 million and $2.6 million during the six months ended June 30, 2005 and 2004, respectively, with the corresponding liability recorded in “Accounts payable and accrued expenses” in the accompanying Condensed Consolidated Balance Sheet. For purposes of ~~Contents~~recognizing compensation expense, TIP performance is based on our current estimate of the timing for achieving performance targets, and LTIP performance is measured on the basis of actual results as of June 30, 2005. We estimate that as of June 30, 2005, 95.7% of the TIP performance targets have been achieved. Actual performance under the LTIP is not determinable until the performance periods for the initial and subsequent awards end on December 31, 2006 and 2007, respectively. Certain TIP performance targets were 100% achieved as of December 31, 2004, and therefore were eligible for 100% vesting. However, for purposes of vesting under the TIP, since at least 50% but less than 100% of the other defined performance targets were met as of December 31, 2004, the Compensation and Benefits Committee could only certify the achievement of 50% of such targets as of December 31, 2004. In February 2005 and May 2005, the Compensation and Benefits Committee certified the achievement of the defined performance targets to an extent which resulted in the performance vesting of 85% of all TIP Performance Units, subject to the time vesting requirements as to certain participants, as discussed in the preceding paragraph.

~~CATELLUS~~During ~~DEVELOPMENT~~2005, ~~CORPORATION~~we granted to certain officers an aggregate of 169,845 shares of restricted stock with a fair market value of $4.8 million as of the grant date. Shares of restricted stock are entitled to dividends.

~~NOTES~~During TO2005, ~~CONDENSED~~we ~~CONSOLIDATED~~granted ~~FINANCIAL~~to ~~STATEMENTS—(Continued)~~non-employee directors an aggregate of 14,744 shares of Director Restricted Stock Units with a fair market value of $0.4 million as of the grant date. Director Restricted Stock Units are entitled to dividend equivalents.

~~Note 11. REIT Conversion~~ 26

OnWe ~~January~~expense 5,dividends ~~2004,~~paid ~~the~~on ~~Company~~unvested restricted ~~announced~~stock ~~that~~and itdividend ~~had~~equivalents ~~completed~~paid ~~the restructuring~~on ofrestricted ~~its~~stock ~~operations~~units, Director toRestricted ~~qualify~~Stock asUnits, ~~a REIT~~ and ~~began~~Director ~~operating~~Stock asUnits. For athe ~~REIT~~three asmonths ofended ~~January 1~~June 30, 2005 and 2004., ~~The~~such ~~REIT~~dividends ~~conversion~~and ~~had~~dividend ~~the~~equivalents ~~following~~paid ~~effects~~were on$0.4 ~~the~~million ~~financial~~and $0.3 ~~statements~~million, asrespectively, ofand or$0.9 ~~for~~million ~~the~~and ~~three~~$0.7 ~~and~~million ~~nine~~for the six months ended ~~September~~ June 30, ~~2004~~2005 and ~~2003:~~ 2004, respectively (see Note 2).

•If ~~cash~~the ~~dividends~~proposed ofmerger ~~$0.27~~under ~~per~~the ~~common~~definitive ~~share~~merger agreement ~~for~~between the ~~fourth~~Company ~~quarter~~and ~~2003,~~ProLogis ~~the~~(as ~~first~~announced ~~quarter~~on ~~2004~~June 6, ~~and~~2005) is ~~the~~completed, ~~second~~all ~~quarter~~outstanding ~~2004~~vested ~~were~~and ~~paid~~unvested onstock ~~January~~options ~~15,~~will ~~2004,~~be canceled ~~April~~as ~~15,~~of ~~2004,~~the ~~and~~effective ~~July~~time ~~15,~~of ~~2004,~~the ~~respectively,~~merger. Each ~~and~~holder of a ~~third~~canceled ~~quarter~~stock ~~2004~~option ~~cash~~will receive ~~dividend of~~ $033.2781 ~~per~~for ~~common~~each share ~~was~~of ~~declared~~Catellus oncommon ~~September~~stock 9,subject ~~2004~~to the canceled option, less the exercise price and ~~paid~~any onapplicable ~~October~~withholding 15taxes, ~~2004~~payable in tothe ~~stockholders~~form of ~~record~~65% atProLogis common shares and 35% cash. In addition, if the ~~close~~merger ofis ~~business~~completed, onthe outstanding ~~September~~TIP 27and LTIP Performance Units, ~~2004.~~restricted ~~The~~stock ~~actual~~units, ~~amount~~Director Restricted ofStock ~~the~~Units ~~dividends~~and ~~for~~Director ~~subsequent~~Stock ~~quarters~~Units will be canceled as ~~determined~~of ~~and~~the effective ~~declared~~time byof the ~~Company’s~~merger. The ~~Board~~ holder of ~~Directors~~each ~~and~~such canceled unit will ~~depend~~receive on$33.81 ~~the~~for ~~Company’s~~each ~~financial~~share ~~condition,~~subject ~~earnings~~to the canceled unit, ~~and~~less ~~other~~any ~~factors~~applicable withholding taxes, ~~many~~payable in the form of 65% ~~which~~ProLogis ~~are~~common ~~beyond~~shares ~~the~~and ~~Company’s~~35% ~~control;~~cash.

•Income conversion and related restructuring costs of $1.4 million were paid to third parties during the three months ended September 30, 2003, and $0.4 million and $4.8 million during the nine months ended September 30, 2004 and 2003, respectively. The Company does not expect to incur any additional conversion and related restructuring costs; andtaxes

•As ~~amortization~~part of ~~costs~~the process of preparing our Condensed Consolidated Financial Statements, ~~for~~significant management ~~the~~judgment ~~three~~is required to estimate our income taxes. Our estimates are based on interpretation of tax laws. We estimate our actual current tax due and assess ~~nine~~temporary ~~months~~differences ~~ended~~resulting ~~September~~from ~~30,~~differing ~~2004,~~treatment ~~associated~~of ~~with~~items ~~the~~for book ~~2003~~and ~~stock~~tax ~~option~~purposes. ~~exchange~~The ~~offer~~temporary differences result in deferred tax assets and liabilities, which ~~includes~~are ~~the~~included ~~costs~~within our Condensed Consolidated Balance Sheet. Where we have taken a deduction for ~~the~~a ~~restricted~~non-routine ~~stock~~transaction ~~and~~in ~~restricted~~which the ~~stock~~tax ~~units~~impact is uncertain, ~~was~~no ~~$2.5~~financial ~~million~~statement ~~and~~benefit ~~$7.5~~is ~~million,~~taken ~~respectively~~until (the impact ~~total~~is ofcertain. ~~such~~Adjustments ~~cost~~may ~~will~~ be ~~amortized~~required ~~over~~by ~~three~~a ~~years~~change ~~until~~in ~~December~~assessment ~~31,~~of ~~2006),~~our deferred tax assets and ~~compensation~~liabilities, ~~expenses~~changes in assessments of ~~$0.8~~the ~~million~~recognition of tax benefits for certain non routine transactions changes due to audit adjustments by federal and ~~$2.5~~state ~~million,~~tax ~~respectively~~authorities, ~~were~~our ~~recognized~~inability to qualify as a REIT, ~~result~~the ofpotential for built-in-gain recognition, changes in the ~~required~~assessment ~~variable~~of properties ~~accounting~~to ~~treatment~~be ~~for~~contributed ~~options~~to ~~that~~TRS, ~~remained~~and ~~outstanding~~changes ~~upon~~in tax laws. Adjustments required in any given period are included within the ~~expiration~~tax ofprovision in the statement ~~exchange~~of ~~offer~~operations ~~program~~and/or onbalance ~~October~~sheet. ~~29,~~Any ~~2003~~applicable ~~(the~~interest ~~total~~charges associated ofwith ~~such~~an ~~expenses~~audit ~~will~~settlement would be ~~amortized~~recorded ~~over~~as ~~the~~interest ~~remaining~~expense. These ~~vesting~~adjustments ~~period~~could materially impact our statement of ~~the~~operations ~~options)~~and liquidity.

20 General

~~Table~~Business ofSegment ~~Contents~~Descriptions:

Our reportable segments are ~~Item~~based 2on our method of internal reporting, which disaggregates our business between long-term operations and those which we intend to transition out of over time and before the adjustments for discontinued operations. ~~Management’s~~We ~~Discussion~~have two reportable segments: (1) Core Segment and ~~Analysis~~(2) Urban, Residential and Other Segment, or URO. Core segment includes (a) the management and leasing of ~~Financial~~our ~~Condition~~rental portfolio, (b) commercial development activities, which focuses on acquiring and ~~Results~~developing suburban commercial business parks for our own rental portfolio, and selling land and/or buildings that we have developed to users and other parties, and (c) select land development opportunities that may not always be industrial, especially projects that may not require significant capital investment on our part where we can utilize our land development skills. URO includes the remaining residential projects, urban development activities and desert land sales, of ~~Operations~~which a majority portion was sold during 2004, and REIT transition costs, including the matters prior to becoming a REIT.

~~The~~Consistent with ~~Company~~our previously announced strategy of monetizing our Non-Core assets, in November of 2004, we sold substantially all of the remaining land and entitlements at Mission Bay (excluding a 9.65-acre parcel currently subject to a lease option agreement with the University of California); West Bluffs, a 114-unit residential development in Westchester - Playa del Rey, California; Bayport, a 485-unit residential development in Alameda, California; and the remaining land at Santa Fe Depot, in San Diego, California to FOCIL. We plan to transition out of the URO Segment over time as the remaining assets are dissolved and the URO Segment will eventually be eliminated.

Catellus Development Corporation is a publicly traded real estate development company that began operating as a REIT effective January 1, 2004. We operated as a C-corporation through December 31, 2003. We focus on managing, acquiring, and developing predominantly industrial rental property in many of the country’s major distribution centers and transportation corridors. Catellus’ principal objective is sustainable, long-term growth in earnings, which we seek to achieve by applying our strategic resources: a lower-risk/higher-return rental portfolio, a focus on expanding that portfolio through development, and the deployment of our proven land development skills to select opportunities where we can generate profits to recycle back into our core industrial business. 27

~~Catellus~~Property was originally formed in 1984 to conduct the non-railroad real estate activities of the Santa Fe Pacific Corporation and was spun off to stockholders effective in 1990. Our railroad heritage gave us a diverse base of developable properties located near transportation corridors in major western United States markets. This land has proven suitable for the development of a variety of product types, including industrial, retail, office, and residential. Over time, we have expanded our business by acquiring land suitable for primarily industrial development in many of the same suburban locations where we have an established presence. Portfolio

~~Our~~Rental rental portfolio provides a relatively consistent source of earnings and our development activities provide cash flow through sales of land or the conversion of our developable land to property that is either added to our portfolio or sold to tenants, developers, investors, or other interested parties. We invest in new land to ensure our potential for growth. As of September 30, 2004, we owned 40.7 million square feet of commercial rental properties, of which approximately 90.0% is industrial space. Our industrial rental portfolio is geographically diverse, located in major transportation corridors and distribution centers such as Southern California, Chicago, Dallas, Atlanta, with planned expansion into New Jersey. The majority of our rental portfolio is of newer construction and leased to diverse, high quality tenants through long-term leases with staggered lease expirations. Portfolio

~~Critical~~Our ~~Accounting~~rental ~~Policies~~portfolio is comprised of commercial rental property, ground leases and other properties, and interests in several joint ventures. We own 41.1 million square feet of commercial rental property of which 89.7% is industrial, 7.6% is office, and 2.7% is retail.

~~Our~~Rental ~~discussion~~portfolio ~~and~~by analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of real estate assets, capitalization of costs, including job costing, allowances for doubtful accounts, environmental and legal reserves, and income taxes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. state:

WeSquare ~~believe~~Feet ~~the~~by ~~following~~State—As ~~critical accounting policies reflect our more significant judgments and estimates used in the preparation~~ of ~~the consolidated financial statements.~~ June 30, 2005

~~Revenue~~(in ~~and~~thousands, ~~profit~~except ~~recognition~~for %’s)

Our revenue is primarily derived from two sources: rental revenue from our rental portfolio and property sales.

	Industrial			Office			Retail			Total
	Square Feet	% of Total		Square Feet	% of Total		Square Feet	% of Total		Square Feet	% of Total

Southern California	14,214	34.6	%	524	1.3	%	216	0.5	%	14,954	36.4	%
Illinois	6,385	15.6	%	594	1.4	%	—	0.0	%	6,979	17.0	%
Northern California	5,023	12.2	%	807	2.0	%	689	1.7	%	6,519	15.9	%
Texas	3,401	8.3	%	871	2.1	%	—	0.0	%	4,272	10.4	%
Colorado	2,701	6.6	%	273	0.7	%	100	0.2	%	3,074	7.5	%
Arizona	1,123	2.7	%	—	0.0	%	75	0.2	%	1,198	2.9	%
Georgia	980	2.4	%	—	0.0	%	—	0.0	%	980	2.4	%
Ohio	966	2.3	%	—	0.0	%	—	0.0	%	966	2.3	%
Oregon	545	1.3	%	57	0.1	%	37	0.1	%	639	1.5	%
Kentucky	549	1.3	%	—	0.0	%	—	0.0	%	549	1.3	%
Maryland	471	1.1	%	—	0.0	%	—	0.0	%	471	1.1	%
Kansas	293	0.7	%	—	0.0	%	—	0.0	%	293	0.7	%
Virginia	252	0.6	%	—	0.0	%	—	0.0	%	252	0.6	%
Total	36,903	89.7	%	3,126	7.6	%	1,117	2.7	%	41,146	100.0	%

Rental revenue is recognized when due from tenants. Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease. The financial terms of leases are contractually defined. Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy. 28

~~Revenue from~~Rental ~~sales~~revenue of properties is recognized using the accrual method. If a sale does not qualify for the accrual method of recognition, other deferral methods are used as appropriate including the percentage-of-completion method. In certain instances, when we receive an inadequate cash down payment and ~~take a promissory note for the balance of the sale price, the sale is deferred until such time as sufficient cash is received to meet minimum down payment requirements. Also, in general, specific~~property ~~identification~~operating ~~and relative sales value methods are used to determine the cost of sales. A change in circumstances that causes the estimate of future~~ costs~~, such as carrying costs and construction costs, to increase or decrease significantly would affect the gain or loss recognized on future sales.~~ :

	Rental Revenue Three Months Ended June 30,						Rental Revenue Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Rental Revenue
Industrial	$	47,278		$	47,781		$	94,001		$	93,747
Office	15,837			16,992			32,481			34,350
Retail	5,692			3,742			11,073			7,581
Ground leases and other properties	9,907			9,496			19,559			19,498
Less: Discontinued operations	(3,989		)	(5,583		)	(8,190		)	(10,973		)
	74,725			72,428			148,924			144,203
Hotel operations-Embassy Suites Hotel	515			—			515			—
Equity in earnings of operating joint ventures, net	2,665			2,379			5,498			4,793
Total rental revenue, net	$	77,905		$	74,807		$	154,937		$	148,996

	Property Operating Cost Three Months Ended June 30,						Property Operating Cost Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Property Operating Costs
Industrial	$	(11,604	)	$	(10,551	)	$	(22,144	)	$	(20,922	)
Office	(6,666		)	(6,460		)	(13,220		)	(13,492		)
Retail	(1,932		)	(1,440		)	(3,822		)	(2,650		)
Ground leases and other properties	(2,628		)	(1,832		)	(5,944		)	(4,635		)
Less: Discontinued operations	2,048			2,191			4,073			4,767
	$	(20,782	)	$	(18,092	)	$	(41,057	)	$	(36,932	)

Impairment of real estate assets

	Rental Revenue Less Property Operating Costs Three Months Ended June 30,						Rental Revenue Less Property Operating Costs Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Rental Revenue Less Property Operating Costs
Industrial	$	35,674		$	37,230		$	71,857		$	72,825
Office	9,171			10,532			19,261			20,858
Retail	3,760			2,302			7,251			4,931
Ground leases and other properties	7,279			7,664			13,615			14,863
Less: Discontinued operations	(1,941		)	(3,392		)	(4,117		)	(6,206		)
	53,943			54,336			107,867			107,271
Hotel operations-Embassy Suites Hotel	515			—			515			—
Equity in earnings of operating joint ventures, net	2,665			2,379			5,498			4,793
Total rental revenue less property operating costs	$	57,123		$	56,715		$	113,880		$	112,064

WeOperating ~~assess~~Joint ~~the~~Venture impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators we consider important which could trigger an impairment review include the following: Portfolio

•We ~~significant~~had ~~negative~~direct ~~industry~~ or ~~economic~~indirect equity ~~trend;~~interests in three joint ventures that owned rental properties as of June 30, 2005. We acquired the remaining 50% interest in one of our joint ventures which, owned and operated an Embassy Suites Hotel in June 2005. The joint ventures provided us with cash distributions of $3.9 million and earnings of $5.5 million for the six months ended June 30, 2005. The joint venture agreements of these joint ventures contain provisions with certain safeguard features for our investments, such as voting rights in major decisions of the joint ventures, and venture partners’ consents on sales of a venture partner’s ownership interest.

•In aentering ~~significant~~into ~~underperformance~~joint venture ~~relative~~transactions, towe ~~historical~~evaluate the merits and risks of the joint venture assets and structure as well as the financial condition of other co-ownership entities in making our investment decision. We have no formal policies on structural issues such as voting control requirements, veto powers, or ~~projected~~purchase provisions, ~~future~~but ~~operating~~instead, ~~results;~~we evaluate the investment opportunity in its entirety when making such a decision.

~~• a significant change in the manner in which an asset is used; and~~29

•We anowned ~~accumulation~~joint ofventure interests ~~costs significantly~~ in ~~excess of~~ the ~~amount~~following ~~originally~~operating ~~expected~~properties tofor ~~construct~~the anperiods ~~asset~~presented.

Real estate is stated at cost and impairments are evaluated using the methodology described as follows: (a) for operating properties and properties held for development, a write-down to estimated fair value is recognized when a property’s estimated undiscounted future cash flow is less than its net book value; and (b) for properties held for sale, a write-down to estimated fair value is recorded when we determine that the net book value exceeds the estimated selling price, less cost to sell. These evaluations are made on a property-by-property basis. When we determine that the net book value of an asset may not be recoverable based upon the estimated undiscounted cash flow, we measure any impairment write-down based on projected discounted cash flows, using an estimated market discount rate; these discounted cash flows are also probability weighted. When performing the impairment review, we consider capitalized interest and other expenses as costs of development in cost projections; value from comparable property sales will also be considered. The evaluation of future cash flows, discount rates, and fair value of individual properties requires significant judgment and assumptions, including estimates of market value, lease terms, development absorption, development costs, lease up costs, and financings. Significant adverse changes in circumstances affecting these judgments and assumptions in future periods could cause a significant impairment adjustment to be recorded.

					Equity in Earnings				Equity in Earnings
	As of June 30, 2005				Three Months Ended				Six Months Ended
	No. of		Ownership		June 30,		June 30,		June 30,		June 30,
	Ventures	Size	Interest		2005		2004		2005		2004
					(In thousands)				(In thousands)
Hotel(1)	2	1,600 rooms	25-42	%	$	2,591	$	2,333	$	5,149	$	4,599
Office	1	202,000 sq. ft.	67	%	74		46		349		194
Total	3				$	2,665	$	2,379	$	5,498	$	4,793

~~Capitalization~~(1) Includes a hotel parking lot joint venture. We acquired the remaining interest in one of our ~~costs~~hotel joint ventures in June of 2005.

WeGround ~~capitalize~~Leases ~~direct construction~~ and ~~development~~Other costs, including predevelopment costs, property taxes, insurance, and certain indirect project costs, including a portion of our general and administrative costs that are associated with the acquisition, development, or construction of a project. Interest is capitalized in accordance with FAS 34 (i.e., interest costs incurred during construction/development periods to get the assets ready for their intended use.) Costs previously capitalized related to any abandoned sales or acquisitions opportunities are written off. Should development activity decrease, a portion of interest, property taxes, insurance, and certain general and administrative costs would no longer be eligible for capitalization and would be expensed as incurred. Properties:

~~Allowance for doubtful accounts~~ Ground Leases

We ~~make~~own ~~estimates~~approximately ~~with respect to the collectability of our receivables and provide for doubtful accounts based on several factors~~5, ~~including our estimate~~600 ofacres ~~collectability and the age~~ of ~~the~~ground ~~outstanding~~leases ~~balances.~~that Our estimate of collectability is based on our contacts with the debtors, collection agencies, our knowledge of the debtors’ credit and financial condition, debtors’ payment terms, and current economic trends. If a debtor becomes insolvent or files for bankruptcy, we ~~provide~~intend anto ~~allowance~~hold ~~for~~but ~~the~~do ~~entire~~not ~~outstanding~~consider ~~amount~~part of ~~the debtors’ receivable. Significant judgments and estimates must be made and used in connection~~our ~~with~~rental ~~establishing~~portfolio ~~allowances~~square infootage ~~any accounting period~~presentation. ~~Material differences may result in the amount and timing of our allowances for any period if adverse general economic conditions cause widespread financial difficulties among our tenants.~~

~~Environmental~~The ~~and~~following ~~legal~~table summarizes ~~reserves~~our ground leases for the periods presented:

We incur ongoing environmental remediation costs, including cleanup costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We maintain a reserve for estimated costs of environmental remediation to be incurred in connection with operating properties and properties previously sold. These reserves, when established, are expensed. Costs relating to undeveloped land are capitalized as part of development costs, and costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold. It is anticipated that these costs may be incurred over a period of twenty years. Our estimates are developed based on reviews that took place over many years based upon then-prevailing law and identified site conditions. Because of the breadth of our portfolio, and past sales, we are unable to review each property extensively on a regular basis. Such estimates are not precise and are always subject to the availability of further information about the prevailing conditions at the site, the future requirements of regulatory agencies, and the availability and ability of other parties to pay some or all of such costs. Should a previously undetected, substantial environmental hazard be found on our properties, significant liquidity could be consumed by the resulting cleanup requirements, and a material expense may be recorded.

	Revenues		Property Operating Costs			Rental Revenue Less Property Operating Costs
	(In thousands)
Three Months Ended June 30, 2005
Northern California	$	5,755	$	(1,623	)	$

Filing Compare · CATELLUS DEVELOPMENT CORP