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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE

ACT OF 1934



For the fiscal quarter ended March 31, 2005



Commission file number 1-31908



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CATELLUS DEVELOPMENT CORPORATION

(Exact name of Registrant as specified in its charter)



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



201 Mission Street

San Francisco, California 94105

(Address of principal executive offices and zip code)



Registrants telephone number, including area code:

(415) 974-4500



Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  x    No ̈



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



As of May 2, 2005 there were
103,883,347 issued and outstanding shares of the Registrants Common Stock.



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



INDEX



|                              |  |                                                                                                    |  |        
|----------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -------
|                              |  |                                                                                                    |  | Page No
|PART I. FINANCIAL INFORMATION |  |                                                                                                   
|Item 1.                       |  | Financial Statements (Unaudited)                                                                   |  |        
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                   |  | 3      
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 |  | 4      
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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              |  | 19     
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                         |  | 42     
|Item 4.                       |  | Controls and Procedures                                                                            |  | 42     
|PART II. OTHER INFORMATION    |  | 43                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                                  |  | 43     
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 43     
|Item 3.                       |  | Defaults Upon Senior Securities                                                                    |  | 43     
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                |  | 43     
|Item 5.                       |  | Other Information                                                                                  |  | 43     
|Item 6.                       |  | Exhibits                                                                                           |  | 43     
|SIGNATURES                    |  | 44                                                                                                





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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements (Unaudited)
|------- | --------------------------------



CATELLUS DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                   |  | March 31,2005 |           |   | December 31, 2004 |  
|                                                                                                                                                                   |  | (Unaudited)   |          
|Assets                                                                                                                                                             |  |               |           |   |                   |   |           |  
|Properties                                                                                                                                                         |  | $             | 2,370,210 |   |                   | $ | 2,316,289 |  
|Less accumulated depreciation                                                                                                                                      |  |               | (507,639  | ) |                   |   | (490,409  | )
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|                                                                                                                                                                   |  |               | 1,862,571 |   |                   |   | 1,825,880 |  
|Other assets and deferred charges, net                                                                                                                             |  |               | 215,727   |   |                   |   | 224,932   |  
|Notes receivable, less allowance                                                                                                                                   |  |               | 296,150   |   |                   |   | 329,758   |  
|Accounts receivable, less allowance                                                                                                                                |  |               | 30,720    |   |                   |   | 35,800    |  
|Assets held for sale                                                                                                                                               |  |               |          |   |                   |   | 10,336    |  
|Restricted cash and investments                                                                                                                                    |  |               | 12,867    |   |                   |   | 29,569    |  
|Cash and cash equivalents                                                                                                                                          |  |               | 54,138    |   |                   |   | 252,069   |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Total                                                                                                                                                              |  | $             | 2,472,173 |   |                   | $ | 2,708,344 |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Liabilities and stockholders equity                                                                                                                               |  |               |           |   |                   |   |           |  
|Mortgage and other debt                                                                                                                                            |  | $             | 1,255,104 |   |                   | $ | 1,440,528 |  
|Accounts payable and accrued expenses                                                                                                                              |  |               | 125,392   |   |                   |   | 201,238   |  
|Deferred credits and other liabilities                                                                                                                             |  |               | 299,431   |   |                   |   | 286,780   |  
|Liabilities associated with assets held for sale                                                                                                                   |  |               |          |   |                   |   | 88        |  
|Deferred income taxes                                                                                                                                              |  |               | 37,896    |   |                   |   | 36,119    |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                  |  |               | 1,717,823 |   |                   |   | 1,964,753 |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Commitments and contingencies (Note 8)                                                                                                                             |  |               |           |   |                   |   |           |  
|Stockholders equity                                                                                                                                               |  |               |           |   |                   |   |           |  
|Common stock, $0.01 par value, 105,027 and 104,720 shares issued, and 103,875 and 103,317 shares outstanding at March 31, 2005 and December
31, 2004, respectively |  |               | 1,050     |   |                   |   | 1,047     |  
|Paid-in capital                                                                                                                                                    |  |               | 515,787   |   |                   |   | 509,407   |  
|Unearned value of restricted stock and restricted stock unit grants (1,152 and 1,403 shares at March 31, 2005 and December 31, 2004,
respectively)                 |  |               | (24,018   | ) |                   |   | (23,049   | )
|Accumulated earnings                                                                                                                                               |  |               | 261,531   |   |                   |   | 256,186   |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                         |  |               | 754,350   |   |                   |   | 743,591   |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  
|Total                                                                                                                                                              |  | $             | 2,472,173 |   |                   | $ | 2,708,344 |  
|                                                                                                                                                                   |  |               |           |   |                   |   |           |  



See notes to Condensed
Consolidated Financial Statements.



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CATELLUS DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                       |  |                              |         |   |      |   |         |  
|------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                       |  | Three Months Ended March 31, |        
|                                                       |  | 2005                         |         |   | 2004 |  
|                                                       |  | (Unaudited)                  |        
|Revenues                                               |  |                              |         |   |      |   |         |  
|Rental revenue                                         |  | $                            | 78,357  |   |      | $ | 76,037  |  
|Sales revenue                                          |  |                              | 33,144  |   |      |   | 37,691  |  
|Management, development and other fees                 |  |                              | 7,544   |   |      |   | 1,699   |  
|                                                       |  |                              |         |   |      |   |         |  
|                                                       |  |                              | 119,045 |   |      |   | 115,427 |  
|                                                       |  |                              |         |   |      |   |         |  
|Costs and expenses                                     |  |                              |         |   |      |   |         |  
|Property operating costs                               |  |                              | (22,256 | ) |      |   | (20,966 | )
|Cost of sales                                          |  |                              | (22,898 | ) |      |   | (23,090 | )
|Selling, general and administrative expenses           |  |                              | (12,290 | ) |      |   | (12,951 | )
|Depreciation and amortization                          |  |                              | (18,691 | ) |      |   | (17,716 | )
|                                                       |  |                              |         |   |      |   |         |  
|                                                       |  |                              | (76,135 | ) |      |   | (74,723 | )
|                                                       |  |                              |         |   |      |   |         |  
|Operating income                                       |  |                              | 42,910  |   |      |   | 40,704  |  
|                                                       |  |                              |         |   |      |   |         |  
|Other income                                           |  |                              |         |   |      |   |         |  
|Equity in earnings of operating joint ventures, net    |  |                              | 2,833   |   |      |   | 2,414   |  
|Equity in earnings of development joint ventures, net  |  |                              | 5,086   |   |      |   | 1,227   |  
|Gain on non-strategic asset sales                      |  |                              | 20      |   |      |   | 61      |  
|Interest income                                        |  |                              | 8,895   |   |      |   | 2,777   |  
|Other                                                  |  |                              | 89      |   |      |   | 301     |  
|                                                       |  |                              |         |   |      |   |         |  
|                                                       |  |                              | 16,923  |   |      |   | 6,780   |  
|                                                       |  |                              |         |   |      |   |         |  
|Other expenses                                         |  |                              |         |   |      |   |         |  
|Interest expense                                       |  |                              | (17,573 | ) |      |   | (15,503 | )
|REIT transition costs                                  |  |                              |        |   |      |   | (212    | )
|Other                                                  |  |                              | (1,498  | ) |      |   | (430    | )
|                                                       |  |                              |         |   |      |   |         |  
|                                                       |  |                              | (19,071 | ) |      |   | (16,145 | )
|                                                       |  |                              |         |   |      |   |         |  
|Income before income taxes and discontinued operations |  |                              | 40,762  |   |      |   | 31,339  |  
|Income tax expense                                     |  |                              | (8,148  | ) |      |   | (931    | )
|                                                       |  |                              |         |   |      |   |         |  
|Income from continuing operations                      |  |                              | 32,614  |   |      |   | 30,408  |  
|                                                       |  |                              |         |   |      |   |         |  
|Discontinued operations, net of income tax:            |  |                              |         |   |      |   |         |  
|Gain from disposal of discontinued operations          |  |                              | 736     |   |      |   | 1,616   |  
|(Loss) income from discontinued operations             |  |                              | (32     | ) |      |   | 67      |  
|                                                       |  |                              |         |   |      |   |         |  
|Net gain from discontinued operations                  |  |                              | 704     |   |      |   | 1,683   |  
|                                                       |  |                              |         |   |      |   |         |  
|Net income                                             |  | $                            | 33,318  |   |      | $ | 32,091  |  
|                                                       |  |                              |         |   |      |   |         |  
|Income per share from continuing operations            |  |                              |         |   |      |   |         |  
|Basic                                                  |  | $                            | 0.31    |   |      | $ | 0.30    |  
|                                                       |  |                              |         |   |      |   |         |  
|Assuming dilution                                      |  | $                            | 0.31    |   |      | $ | 0.29    |  
|                                                       |  |                              |         |   |      |   |         |  
|Income per share from discontinued operations          |  |                              |         |   |      |   |         |  
|Basic                                                  |  | $                            | 0.01    |   |      | $ | 0.01    |  
|                                                       |  |                              |         |   |      |   |         |  
|Assuming dilution                                      |  | $                            | 0.01    |   |      | $ | 0.02    |  
|Net income per share                                   |  |                              |         |   |      |   |         |  
|Basic                                                  |  | $                            | 0.32    |   |      | $ | 0.31    |  
|                                                       |  |                              |         |   |      |   |         |  
|Assuming dilution                                      |  | $                            | 0.32    |   |      | $ | 0.31    |  
|                                                       |  |                              |         |   |      |   |         |  
|Average number of common shares outstandingbasic      |  |                              | 103,750 |   |      |   | 102,844 |  
|                                                       |  |                              |         |   |      |   |         |  
|Average number of common shares outstandingdiluted    |  |                              | 105,301 |   |      |   | 104,031 |  
|                                                       |  |                              |         |   |      |   |         |  
|Dividends declared per share                           |  | $                            | 0.27    |   |      | $ | 0.27    |  
|                                                       |  |                              |         |   |      |   |         |  



See notes to Condensed
Consolidated Financial Statements.



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CATELLUS DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                  |  |                              |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months Ended March 31, |         
|                                                                                  |  | 2005                         |          |   | 2004 |  
|                                                                                  |  | (Unaudited)                  |         
|Cash flows from operating activities:                                             |  |                              |          |   |      |   |          |  
|Net income                                                                        |  | $                            | 33,318   |   |      | $ | 32,091   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                              | 18,691   |   |      |   | 17,716   |  
|Deferred income tax (benefit) provision                                           |  |                              | 1,777    |   |      |   | (4,099   | )
|Deferred gain recognized                                                          |  |                              | (58      | ) |      |   | (7,990   | )
|Amortization of deferred loan fees and other costs                                |  |                              | 1,409    |   |      |   | 1,372    |  
|Equity in earnings of joint ventures                                              |  |                              | (7,919   | ) |      |   | (3,641   | )
|Gain on sales of investment property                                              |  |                              | (489     | ) |      |   | (1,616   | )
|Operating distributions from joint ventures                                       |  |                              | 1,857    |   |      |   | 4,399    |  
|Cost of development property and non-strategic assets sold                        |  |                              | 22,912   |   |      |   | 43,216   |  
|Capital expenditures for development property                                     |  |                              | (17,438  | ) |      |   | (19,299  | )
|Other, net                                                                        |  |                              | 1,686    |   |      |   | 2,159    |  
|Change in notes receivable                                                        |  |                              | 33,608   |   |      |   | 15,772   |  
|Change in deferred credits and other liabilities                                  |  |                              | 13,845   |   |      |   | 19,263   |  
|Change in other operating assets and liabilities                                  |  |                              | (9,112   | ) |      |   | (33,224  | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                              | 94,087   |   |      |   | 66,119   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Cash flows from investing activities:                                             |  |                              |          |   |      |   |          |  
|Property acquisitions                                                             |  |                              | (16,388  | ) |      |   | (1,214   | )
|Capital expenditures for investment property                                      |  |                              | (37,832  | ) |      |   | (55,935  | )
|Tenant improvements                                                               |  |                              | (911     | ) |      |   | (1,784   | )
|Reimbursable construction costs                                                   |  |                              |         |   |      |   | (3,579   | )
|Net proceeds from sale of investment property                                     |  |                              | 2,853    |   |      |   | 3,454    |  
|Contributions to joint ventures                                                   |  |                              | (42      | ) |      |   | (259     | )
|Decrease in restricted cash and investments                                       |  |                              | 16,702   |   |      |   | 35,327   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                              | (35,618  | ) |      |   | (23,990  | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Cash flows from financing activities:                                             |  |                              |          |   |      |   |          |  
|Borrowings                                                                        |  |                              |         |   |      |   | 91,351   |  
|Repayment of borrowings                                                           |  |                              | (184,247 | ) |      |   | (110,427 | )
|Dividends                                                                         |  |                              | (74,291  | ) |      |   | (27,729  | )
|Proceeds from issuance of common stock                                            |  |                              | 2,138    |   |      |   | 3,368    |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                              | (256,400 | ) |      |   | (43,437  | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net decrease in cash and cash equivalents                                         |  |                              | (197,931 | ) |      |   | (1,308   | )
|Cash and cash equivalents at beginning of period                                  |  |                              | 252,069  |   |      |   | 45,931   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                            | 54,138   |   |      | $ | 44,623   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Supplemental disclosures of cash flow information:                                |  |                              |          |   |      |   |          |  
|Cash paid during the year for:                                                    |  |                              |          |   |      |   |          |  
|Interest (net of amount capitalized)                                              |  | $                            | 16,253   |   |      | $ | 14,318   |  
|Income taxes                                                                      |  | $                            | 247      |   |      | $ | 5,357    |  
|Non-cash financing activities:                                                    |  |                              |          |   |      |   |          |  
|Debt forgivenessproperty reconveyance/reduction                                  |  | $                            | (1,177   | ) |      | $ | (8,862   | )



See notes to Condensed
Consolidated Financial Statements.



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##### Table of Contents



CATELLUS DEVELOPMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

(Unaudited)



Note 1. Description of Business



Catellus 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 operate as a real estate investment trust (REIT) commencing January 1, 2004 (see Note 11). All references to
Catellus or the Company mean the current Catellus or its predecessor, as the context requires.



Note 2. Interim Financial Data



The accompanying Condensed Consolidated Financial 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. Certain prior period financial data have
been reclassified to conform to the current period presentation.



Partnership accounting



At March 31, 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:



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SAMS Venture, LLC 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 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A Company subsidiary entered into a master development agreement with the City of Austin, Texas in December 2004 to redevelop and market the property formerly known as the Robert
Mueller Municipal Airport. The Companys exposure will increase should public financing and sales revenues be insufficient to meet current or projected financial requirements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys maximum exposure in the current financial statements as a
result of its involvement with these variable interest entities is $11.9 million as of March 31, 2005.



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CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Accounting for stock-based compensation



At March 31, 2005, the Company has six stock-based employee compensation plans. The Company accounts for those plans under
the recognition and measurement principles of APB Opinion 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. As a result of a stock option exchange offer related to the REIT conversion, the Company is required to recognize compensation expense related to the outstanding grants of
$(0.3) million and $1.2 million for three months ended March 31, 2005 and 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.



|                                                                                                                |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                |  | Three Months Ended March 31, |       
|                                                                                                                |  | 2005                         |        |   | 2004 |  
|                                                                                                                |  | (In thousands)               |       
|Net income, as reported                                                                                         |  | $                            | 33,318 |   |      | $ | 32,091 |  
|Add: Stock-based employee compensation (credit) expense included in reported net income                         |  |                              | (291   | ) |      |   | 1,190  |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                              | (138   | ) |      |   | (1,995 | )
|                                                                                                                |  |                              |        |   |      |   |        |  
|Pro forma net income                                                                                            |  | $                            | 32,889 |   |      | $ | 31,286 |  
|                                                                                                                |  |                              |        |   |      |   |        |  
|Earnings per share:                                                                                             |  |                              |        |   |      |   |        |  
|Basicas reported                                                                                               |  | $                            | 0.32   |   |      | $ | 0.31   |  
|                                                                                                                |  |                              |        |   |      |   |        |  
|Basicpro forma                                                                                                 |  | $                            | 0.32   |   |      | $ | 0.30   |  
|                                                                                                                |  |                              |        |   |      |   |        |  
|Dilutedas reported                                                                                             |  | $                            | 0.32   |   |      | $ | 0.31   |  
|                                                                                                                |  |                              |        |   |      |   |        |  
|Diluted pro forma                                                                                              |  | $                            | 0.31   |   |      | $ | 0.30   |  
|                                                                                                                |  |                              |        |   |      |   |        |  



During 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). Awards under the TIP and LTIP were granted in 2004. 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. 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 the Companys common stock. LTIP awards for the initial and subsequent award
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.



At March 31,
2005, 322,014 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, the Company has recognized $0.9 million and $1.3 million as compensation expense
during the three months ended March 31, 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 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 March 31, 2005. The Company estimates that
as of March 31, 2005, 93.4% 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, the Compensation and Benefits Committee certified the achievement of the
defined performance targets to an extent which resulted in the performance vesting of 75% of all TIP Performance Units, subject to the time vesting requirements as to certain participants, as discussed in the preceding paragraph.



7



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During the first quarter of 2005, the Company granted to certain officers an aggregate of 154,845
shares of restricted stock with a fair market value of $4.4 million as of the grant date. Shares of restricted stock are entitled to dividends.



The Company 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 March 31, 2005 and 2004, such dividends and dividend equivalents paid were $0.5 million and $0.3 million, respectively.



New accounting standards



In December 2004, the FASB issued Statement of Accounting Standards No. 123R, Share-Based 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 year that begins 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.



Income Taxes



The Company was 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 of its assets and the sources of its revenues) is not subject to federal income taxation to the extent it distributes its
taxable income. The Company began operating so as to qualify as a REIT beginning January 1, 2004, and paid at least 90% of REIT taxable income to stockholders in 2004. Based on these considerations, the Company believes that it will not be liable
for taxes (except with respect to the items discussed below) and, in 2003, reversed approximately $232 million of deferred tax liabilities.



In 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 $124 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.



To initially qualify as a REIT, among other
things, the Company distributed all of 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.



Income tax expense for the three months ended March 31, 2005 was generated at both the REIT level and the TRS. The TRS income before income taxes was
$19.1 million with an effective overall rate of 41.19%. The Company has accrued $0.3 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. Income tax (expense) benefit for the three months ended March 31, 2004 was generated only at the TRS level. The TRS income before income taxes for the three months ended
March 31, 2004 was $2.3 million with an effective overall rate of 40.08%.



8



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CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income tax (expense) benefit on consolidated income from continuing operations is as follows:



|         |  |                             |        |   |      |   |        |  
|-------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|         |  | Three Months EndedMarch 31, |       
|         |  | 2005                        |        |   | 2004 |  
|         |  | (In thousands)              |       
|Current  |  | $                           | (6,370 | ) |      | $ | (5,030 | )
|Deferred |  |                             | (1,778 | ) |      |   | 4,099  |  
|         |  |                             |        |   |      |   |        |  
|Total    |  | $                           | (8,148 | ) |      | $ | (931   | )
|         |  |                             |        |   |      |   |        |  



Note 3. Restricted Cash and
Investments



Of the total restricted cash and investments
of $12.9 million at March 31, 2005, and $29.6 million at December 31, 2004, $0.4 million and $18.9 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 $11.8 million and $10.0 million at March 31, 2005 and December 31, 2004, respectively, represents funds in escrow for environmental work related to a land
acquisition. Approximately $0.7 million at March 31, 2005 and December 31, 2004, represent funds held in pledge accounts at a bank until certain loan collateral pool requirements are met.



Note 4. Income Per Share



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).



|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|------------------------------------------------------- |  | ------------------------------------- | ------ | ------ | ------- | ---------------- | - | ------ |  | ------ | ------ | ---------------- | ------- |  | - | ----
|                                                        |  | Three months Ended March 31,         
|                                                        |  | 2005                                  |        | 2004  
|                                                        |  | Income                                |        | Shares |         | Per Share Amount |   | Income |  | Shares |        | Per Share Amount
|                                                        |  | (In thousands, except per share data)
|Income from continuing operations                       |  | $                                     | 32,614 |        | 103,750 |                  | $ | 0.31   |  | $      | 30,408 |                  | 102,844 |  | $ | 0.30
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Effect of dilutive securities:                          |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Stock options                                           |  |                                       |       |        | 629     |                  |   |        |  |        |       |                  | 857     |  |   |     
|Restricted stock and restricted stock units             |  |                                       |       |        | 686     |                  |   |        |  |        |       |                  | 326     |  |   |     
|Other compensation incentive plans                      |  |                                       |       |        | 236     |                  |   |        |  |        |       |                  | 4       |  |   |     
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Income from continuing operations assuming dilution     |  | $                                     | 32,614 |        | 105,301 |                  | $ | 0.31   |  | $      | 30,408 |                  | 104,031 |  | $ | 0.29
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Net gain from discontinued operations                   |  | $                                     | 704    |        | 103,750 |                  | $ | 0.01   |  | $      | 1,683  |                  | 102,844 |  | $ | 0.01
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Effect of dilutive securities:                          |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Stock options                                           |  |                                       |       |        | 629     |                  |   |        |  |        |       |                  | 857     |  |   |     
|Restricted stock and restricted stock units             |  |                                       |       |        | 686     |                  |   |        |  |        |       |                  | 326     |  |   |     
|Other compensation incentive plans                      |  |                                       |       |        | 236     |                  |   |        |  |        |       |                  | 4       |  |   |     
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Net gain from discontinued operations assuming dilution |  | $                                     | 704    |        | 105,301 |                  | $ | 0.01   |  | $      | 1,683  |                  | 104,031 |  | $ | 0.02
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Net income                                              |  | $                                     | 33,318 |        | 103,750 |                  | $ | 0.32   |  | $      | 32,091 |                  | 102,844 |  | $ | 0.31
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Effect of dilutive securities:                          |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Stock options                                           |  |                                       |       |        | 629     |                  |   |        |  |        |       |                  | 857     |  |   |     
|Restricted stock and restricted stock units             |  |                                       |       |        | 686     |                  |   |        |  |        |       |                  | 326     |  |   |     
|Other compensation incentive plans                      |  |                                       |       |        | 236     |                  |   |        |  |        |       |                  | 4       |  |   |     
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     
|Net income assuming dilution                            |  | $                                     | 33,318 |        | 105,301 |                  | $ | 0.32   |  | $      | 32,091 |                  | 104,031 |  | $ | 0.31
|                                                        |  |                                       |        |        |         |                  |   |        |  |        |        |                  |         |  |   |     



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 5. Mortgage and Other Debt



Mortgage and other debt at March 31, 2005 and December 31, 2004, are summarized as follows:



|                             |  |                |           |                   |   |          
|---------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|                             |  | March 31, 2005 |           | December 31, 2004
|                             |  | (In thousands)
|Fixed rate mortgage loans    |  | $              | 1,079,021 |                   | $ | 1,084,259
|Floating rate mortgage loans |  |                | 113,922   |                   |   | 114,689  
|Assessment district bonds    |  |                | 61,792    |                   |   | 63,210   
|Construction loans           |  |                |          |                   |   | 30,000   
|Revolving credit facility    |  |                |          |                   |   | 148,000  
|Other loans                  |  |                | 369       |                   |   | 370      
|                             |  |                |           |                   |   |          
|Mortgage and other debt      |  | $              | 1,255,104 |                   | $ | 1,440,528
|                             |  |                |           |                   |   |          
|Due within one year          |  | $              | 112,196   |                   | $ | 142,429  
|                             |  |                |           |                   |   |          



Interest costs
relating to mortgage and other debt for the three months ended March 31, 2005 and 2004, are summarized as follows:



|                                            |  |                              |        |   |      |   |        |  
|------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                            |  | Three Months Ended March 31, |       
|                                            |  | 2005                         |        |   | 2004 |  
|                                            |  | (In thousands)               |       
|Total interest incurred                     |  | $                            | 21,252 |   |      | $ | 21,574 |  
|Interest capitalized                        |  |                              | (3,671 | ) |      |   | (5,821 | )
|                                            |  |                              |        |   |      |   |        |  
|Interest expensed                           |  |                              | 17,581 |   |      |   | 15,753 |  
|Less discontinued operations                |  |                              | (8     | ) |      |   | (250   | )
|                                            |  |                              |        |   |      |   |        |  
|Interest expense from continuing operations |  | $                            | 17,573 |   |      | $ | 15,503 |  
|                                            |  |                              |        |   |      |   |        |  



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 6. Property



Book value by property type consists of the following:



|                                         |  |                |           |   |                  |   |           |  
|---------------------------------------- |  | -------------- | --------- | - | ---------------- | - | --------- | -
|                                         |  | March 31,2005  |           |   | December 31,2004 |  
|                                         |  | (In thousands) |          
|Rental properties:                       |  |                |           |   |                  |   |           |  
|Industrial buildings                     |  | $              | 1,281,410 |   |                  | $ | 1,278,227 |  
|Office buildings                         |  |                | 385,626   |   |                  |   | 383,763   |  
|Retail buildings                         |  |                | 133,673   |   |                  |   | 105,066   |  
|Ground leases and other                  |  |                | 204,538   |   |                  |   | 178,007   |  
|Investment in operating joint ventures   |  |                | (20,217   | ) |                  |   | (21,184   | )
|                                         |  |                |           |   |                  |   |           |  
|                                         |  |                | 1,985,030 |   |                  |   | 1,923,879 |  
|                                         |  |                |           |   |                  |   |           |  
|Developable properties:                  |  |                |           |   |                  |   |           |  
|Commercial                               |  |                | 195,360   |   |                  |   | 173,305   |  
|Urban                                    |  |                | 54,323    |   |                  |   | 80,959    |  
|Investment in development joint ventures |  |                | 19,156    |   |                  |   | 13,852    |  
|                                         |  |                |           |   |                  |   |           |  
|                                         |  |                | 268,839   |   |                  |   | 268,116   |  
|                                         |  |                |           |   |                  |   |           |  
|Work-in-process:                         |  |                |           |   |                  |   |           |  
|Commercial                               |  |                | 97,990    |   |                  |   | 97,624    |  
|Urban                                    |  |                |          |   |                  |   | 8,380     |  
|                                         |  |                |           |   |                  |   |           |  
|                                         |  |                | 97,990    |   |                  |   | 106,004   |  
|                                         |  |                |           |   |                  |   |           |  
|Furniture, fixtures and equipment        |  |                | 17,645    |   |                  |   | 17,584    |  
|Other                                    |  |                | 706       |   |                  |   | 706       |  
|                                         |  |                |           |   |                  |   |           |  
|Gross book value                         |  |                | 2,370,210 |   |                  |   | 2,316,289 |  
|Accumulated depreciation                 |  |                | (507,639  | ) |                  |   | (490,409  | )
|                                         |  |                |           |   |                  |   |           |  
|Net book value                           |  | $              | 1,862,571 |   |                  | $ | 1,825,880 |  
|                                         |  |                |           |   |                  |   |           |  



Note 7. Segment Reporting



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, and REIT transition costs.



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



11



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Financial data by reportable segment is as follows:



|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|------------------------------------------------------ |  | -------------- | ------- | - | --- | - | ------- | -------- |  | - | ----------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                       |  | Core           |         |   | URO |   |         | Subtotal |  |   | Discontinued Operations |   |  | Total |       
|                                                       |  | (In thousands) |        
|Three Months Ended March 31, 2005                      |  |                |         |  
|Revenue                                                |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Rental revenue                                         |  | $              | 78,400  |   |     | $ |        |          |  | $ | 78,400                  |   |  | $     | (43    | ) |  | $ | 78,357  |  
|Sales revenue                                          |  |                | 22,316  |   |     |   | 13,714  |          |  |   | 36,030                  |   |  |       | (2,886 | ) |  |   | 33,144  |  
|Management, development and other fees                 |  |                | 3,710   |   |     |   | 3,834   |          |  |   | 7,544                   |   |  |       |       |   |  |   | 7,544   |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|                                                       |  |                | 104,426 |   |     |   | 17,548  |          |  |   | 121,974                 |   |  |       | (2,929 | ) |  |   | 119,045 |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Costs and expenses                                     |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Property operating costs                               |  |                | (22,300 | ) |     |   |        |          |  |   | (22,300                 | ) |  |       | 44     |   |  |   | (22,256 | )
|Cost of sales                                          |  |                | (13,947 | ) |     |   | (11,101 | )        |  |   | (25,048                 | ) |  |       | 2,150  |   |  |   | (22,898 | )
|Selling, general and administrative expenses           |  |                | (9,721  | ) |     |   | (2,569  | )        |  |   | (12,290                 | ) |  |       |       |   |  |   | (12,290 | )
|Depreciation and amortization                          |  |                | (18,603 | ) |     |   | (111    | )        |  |   | (18,714                 | ) |  |       | 23     |   |  |   | (18,691 | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|                                                       |  |                | (64,571 | ) |     |   | (13,781 | )        |  |   | (78,352                 | ) |  |       | 2,217  |   |  |   | (76,135 | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Operating income                                       |  |                | 39,855  |   |     |   | 3,767   |          |  |   | 43,622                  |   |  |       | (712   | ) |  |   | 42,910  |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Other income                                           |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Equity in earnings of operating joint ventures, net    |  |                | 2,833   |   |     |   |        |          |  |   | 2,833                   |   |  |       |       |   |  |   | 2,833   |  
|Equity in earnings of development joint ventures, net  |  |                | 1,534   |   |     |   | 3,552   |          |  |   | 5,086                   |   |  |       |       |   |  |   | 5,086   |  
|Gain on non-strategic asset sales                      |  |                |        |   |     |   | 20      |          |  |   | 20                      |   |  |       |       |   |  |   | 20      |  
|Interest income                                        |  |                | 7,983   |   |     |   | 912     |          |  |   | 8,895                   |   |  |       |       |   |  |   | 8,895   |  
|Other                                                  |  |                | 17      |   |     |   | 72      |          |  |   | 89                      |   |  |       |       |   |  |   | 89      |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|                                                       |  |                | 12,367  |   |     |   | 4,556   |          |  |   | 16,923                  |   |  |       |       |   |  |   | 16,923  |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Other expenses                                         |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Interest expense                                       |  |                | (17,581 | ) |     |   |        |          |  |   | (17,581                 | ) |  |       | 8      |   |  |   | (17,573 | )
|Other                                                  |  |                | (1,555  | ) |     |   | 57      |          |  |   | (1,498                  | ) |  |       |       |   |  |   | (1,498  | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|                                                       |  |                | (19,136 | ) |     |   | 57      |          |  |   | (19,079                 | ) |  |       | 8      |   |  |   | (19,071 | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Income before income taxes and discontinued operations |  |                | 33,086  |   |     |   | 8,380   |          |  |   | 41,466                  |   |  |       | (704   | ) |  |   | 40,762  |  
|Income tax expense                                     |  |                | (3,236  | ) |     |   | (4,912  | )        |  |   | (8,148                  | ) |  |       |       |   |  |   | (8,148  | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Income from continuing operations                      |  |                | 29,850  |   |     |   | 3,468   |          |  |   | 33,318                  |   |  |       | (704   | ) |  |   | 32,614  |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Discontinued operations, net of tax:                   |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Gain from disposal of discontinued operations          |  |                |        |   |     |   |        |          |  |   |                        |   |  |       | 736    |   |  |   | 736     |  
|Loss from discontinued operations                      |  |                |        |   |     |   |        |          |  |   |                        |   |  |       | (32    | ) |  |   | (32     | )
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Net gain from discontinued operations                  |  |                |        |   |     |   |        |          |  |   |                        |   |  |       | 704    |   |  |   | 704     |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  
|Net income                                             |  | $              | 29,850  |   |     | $ | 3,468   |          |  | $ | 33,318                  |   |  | $     |       |   |  | $ | 33,318  |  
|                                                       |  |                |         |   |     |   |         |          |  |   |                         |   |  |       |        |   |  |   |         |  



12



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Financial data by reportable segment is as follows:



|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | -------------- | ------- | - | --- | - | ------- | -------- |  | - | ---------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                              |  | Core           |         |   | URO |   |         | Subtotal |  |   | DiscontinuedOperations |   |  | Total |       
|                                                              |  | (In thousands) |        
|Three Months Ended March 31, 2004                             |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Revenue                                                       |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Rental revenue                                                |  | $              | 77,165  |   |     | $ |        |          |  | $ | 77,165                 |   |  | $     | (1,128 | ) |  | $ | 76,037  |  
|Sales revenue                                                 |  |                | 30,584  |   |     |   | 10,657  |          |  |   | 41,241                 |   |  |       | (3,550 | ) |  |   | 37,691  |  
|Management, development and other fees                        |  |                | 984     |   |     |   | 715     |          |  |   | 1,699                  |   |  |       |       |   |  |   | 1,699   |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|                                                              |  |                | 108,733 |   |     |   | 11,372  |          |  |   | 120,105                |   |  |       | (4,678 | ) |  |   | 115,427 |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Costs and expenses                                            |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Property operating costs                                      |  |                | (21,416 | ) |     |   |        |          |  |   | (21,416                | ) |  |       | 450    |   |  |   | (20,966 | )
|Cost of sales                                                 |  |                | (14,856 | ) |     |   | (10,168 | )        |  |   | (25,024                | ) |  |       | 1,934  |   |  |   | (23,090 | )
|Selling, general and administrative expenses                  |  |                | (6,640  | ) |     |   | (6,311  | )        |  |   | (12,951                | ) |  |       |       |   |  |   | (12,951 | )
|Depreciation and amortization                                 |  |                | (17,777 | ) |     |   | (300    | )        |  |   | (18,077                | ) |  |       | 361    |   |  |   | (17,716 | )
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|                                                              |  |                | (60,689 | ) |     |   | (16,779 | )        |  |   | (77,468                | ) |  |       | 2,745  |   |  |   | (74,723 | )
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Operating income (loss)                                       |  |                | 48,044  |   |     |   | (5,407  | )        |  |   | 42,637                 |   |  |       | (1,933 | ) |  |   | 40,704  |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Other income                                                  |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Equity in earnings of operating joint ventures, net           |  |                | 2,414   |   |     |   |        |          |  |   | 2,414                  |   |  |       |       |   |  |   | 2,414   |  
|Equity in earnings of development joint ventures, net         |  |                |        |   |     |   | 1,227   |          |  |   | 1,227                  |   |  |       |       |   |  |   | 1,227   |  
|Gain on non-strategic asset sales                             |  |                |        |   |     |   | 61      |          |  |   | 61                     |   |  |       |       |   |  |   | 61      |  
|Interest income                                               |  |                | 2,375   |   |     |   | 402     |          |  |   | 2,777                  |   |  |       |       |   |  |   | 2,777   |  
|Other                                                         |  |                | 284     |   |     |   | 17      |          |  |   | 301                    |   |  |       |       |   |  |   | 301     |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|                                                              |  |                | 5,073   |   |     |   | 1,707   |          |  |   | 6,780                  |   |  |       |       |   |  |   | 6,780   |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Other expenses                                                |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Interest expense                                              |  |                | (15,753 | ) |     |   |        |          |  |   | (15,753                | ) |  |       | 250    |   |  |   | (15,503 | )
|REIT transition costs                                         |  |                |        |   |     |   | (212    | )        |  |   | (212                   | ) |  |       |       |   |  |   | (212    | )
|Other                                                         |  |                | (18     | ) |     |   | (412    | )        |  |   | (430                   | ) |  |       |       |   |  |   | (430    | )
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|                                                              |  |                | (15,771 | ) |     |   | (624    | )        |  |   | (16,395                | ) |  |       | 250    |   |  |   | (16,145 | )
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Income (loss) before income taxes and discontinued operations |  |                | 37,346  |   |     |   | (4,324  | )        |  |   | 33,022                 |   |  |       | (1,683 | ) |  |   | 31,339  |  
|Income taxes                                                  |  |                | (5,332  | ) |     |   | 4,401   |          |  |   | (931                   | ) |  |       |       |   |  |   | (931    | )
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Income from continuing operations                             |  |                | 32,014  |   |     |   | 77      |          |  |   | 32,091                 |   |  |       | (1,683 | ) |  |   | 30,408  |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Discontinued operations, net of tax:                          |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Gain from disposal of discontinued operations                 |  |                |        |   |     |   |        |          |  |   |                       |   |  |       | 1,616  |   |  |   | 1,616   |  
|Income from discontinued operations                           |  |                |        |   |     |   |        |          |  |   |                       |   |  |       | 67     |   |  |   | 67      |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Net gain from discontinued operations                         |  |                |        |   |     |   |        |          |  |   |                       |   |  |       | 1,683  |   |  |   | 1,683   |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  
|Net income                                                    |  | $              | 32,014  |   |     | $ | 77      |          |  | $ | 32,091                 |   |  | $     |       |   |  | $ | 32,091  |  
|                                                              |  |                |         |   |     |   |         |          |  |   |                        |   |  |       |        |   |  |   |         |  



13



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 8. Commitments and Contingencies



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 March 31, 2005, are summarized in the following categories (in
thousands):



|                                       |  |   |       
|-------------------------------------- |  | - | ------
|Off-balance sheet liabilities:         |  |   |       
|Standby letters of credit              |  | $ | 51,952
|Debt service guarantees                |  |   | 285   
|Contribution requirements              |  |   | 7,100 
|                                       |  |   |       
|Sub-total                              |  |   | 59,337
|Liabilities included in balance sheet: |  |   |       
|Standby letters of credit              |  |   | 10,836
|                                       |  |   |       
|Total                                  |  | $ | 70,173
|                                       |  |   |       



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 March 31, 2005, the Company has a total of $62.8 million in these standby letters of credit, which are scheduled to expire
between August 2005 and June 2006. Of this total, $52.0 million is off-balance sheet ($46.5 million in financial letters of credit and $5.5 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 $52.0 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 March 31, 2005, the Company has not been required to satisfy any of these standby letters of credit.



The Company has made debt service guarantees for one of its unconsolidated
joint ventures. At March 31, 2005, based on the joint ventures outstanding balance, these debt guarantees totaled $0.3 million and are scheduled to expire between April 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 March 31, 2005, the Company has not been required to satisfy any amounts under these debt service
guarantees.



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company is required to make 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 March 31, 2005, the Company cumulatively contributed $20.0 million to Serrano Associates, LLC as additional contributions and $2.0 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 (see chart below).
As of March 31, 2005, the Company does not expect to fund any significant capital contributions beyond the maximum capital requirements.



|                       |  |                       |        |                                 |   |      
|---------------------- |  | --------------------- | ------ | ------------------------------- | - | -----
|                       |  | ContributionCommitted |        | RemainingContributionCommitment
|                       |  | (In thousands)       
|Talega Village, LLC(1) |  | $                     | 14,000 |                                 | $ | 4,570
|Parkway Company, LLC   |  |                       | 38,000 |                                 |   | 2,530
|                       |  |                       |        |                                 |   |      
|                       |  | $                     | 52,000 |                                 | $ | 7,100
|                       |  |                       |        |                                 |   |      

---

|(1) | Talega Village, LLC has substantially wound up operations and the Company does not expect to
make any future capital contributions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



Generally, any funding of off-balance sheet guarantees would result in the increase of Catellus ownership interest in
a project or entity similar to the treatment of a unilateral additional capital contribution to an investee.



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



Prior to the November 2004 sales of 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. (seeNote 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, with a substantial portion of the money required to fund the $164 million financing coming from the paydowns under the loans to FOCIL. 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 March 31,
2005, the Company has financed $26.2 million on one of these sales. Subsequent to March 31, 2005, an additional sale was consummated; however, approximately $15 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 $123 million.



As of March 31, 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 March 31, 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.



The Company is a party 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.



Inherent 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 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.



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At March 31, 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 $11.8 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 three months ended March 31, 2005, and 2004 totaled $0.1 million and $1.5 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.



The Company owns an interest in a limited liability company of a residential
project near Sacramento, California. At March 31, 2005, the book value of our investment is approximately $13.2 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.



Note 9. Related Party Transactions



The entities below are 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.



The
Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $0.2 million for the three months ended March 31, 2005, primarily from SAMS Venture, LLC. Fees earned were
$0.9 million for the three months ended March 31, 2004, primarily from Third and King Investors, LLC, with the remainder primarily from SAMS Venture, LLC. Deferred fees of $0.6 million primarily from Serrano Associates, LLC and Bergstrom Partners,
L.P. at March 31, 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.



In 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 $1.2 million were received and recognized as rental income during the three months ended March 31, 2004. This joint venture investment was sold in 2004.



The Company has a $4.5 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 the three-month periods ended March 31, 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 March 31, 2005 and 2004, and has recorded a $2.7 million receivable and a $1.2 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.



In January 2004, 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.



16



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 10. Discontinued Operations



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 March 31, 2005. Additionally, all periods presented will likely require further
reclassification in future periods as additional sales of rental properties occur.



Discontinued operations activities for the three months ended March 31, 2005 and 2004, are summarized as follows:



|                                              |  |                             |        |   |      |   |        |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                              |  | Three Months EndedMarch 31, |       
|                                              |  | 2005                        |        |   | 2004 |  
|                                              |  | (In thousands)              |       
|Gain from disposal of discontinued operations |  |                             |        |   |      |   |        |  
|Sales revenue                                 |  | $                           | 2,886  |   |      | $ | 3,550  |  
|Cost of sales                                 |  |                             | (2,150 | ) |      |   | (1,934 | )
|                                              |  |                             |        |   |      |   |        |  
|                                              |  |                             | 736    |   |      |   | 1,616  |  
|Income tax expense                            |  |                             |       |   |      |   |       |  
|                                              |  |                             |        |   |      |   |        |  
|Net gain                                      |  | $                           | 736    |   |      | $ | 1,616  |  
|                                              |  |                             |        |   |      |   |        |  
|Rental Revenue                                |  | $                           | 43     |   |      | $ | 1,128  |  
|                                              |  |                             |        |   |      |   |        |  
|(Loss) income from discontinued operations    |  | $                           | (32    | ) |      | $ | 67     |  
|Income tax expense                            |  |                             |       |   |      |   |       |  
|                                              |  |                             |        |   |      |   |        |  
|Net (loss) gain from discontinued operations  |  | $                           | (32    | ) |      | $ | 67     |  
|                                              |  |                             |        |   |      |   |        |  



Asset and liability
balances of rental properties under contract to be sold at December 31, 2004, consist of the following (there were no properties under contract to be sold at March 31, 2005):



|                         |  |                  |        |  
|------------------------ |  | ---------------- | ------ | -
|                         |  | December 31,2004 |       
|                         |  | (In thousands)   |       
|Assets                   |  |                  |        |  
|Properties               |  | $                | 10,949 |  
|Accumulated depreciation |  |                  | (894   | )
|                         |  |                  |        |  
|Net                      |  |                  | 10,055 |  
|Other assets             |  |                  | 281    |  
|                         |  |                  |        |  
|Total assets             |  |                  | 10,336 |  
|                         |  |                  |        |  
|Liabilities              |  |                  |        |  
|Mortgage and other debt  |  |                  |       |  
|Payables                 |  |                  | (27    | )
|Other liabilities        |  |                  | (61    | )
|                         |  |                  |        |  
|Total liabilities        |  |                  | (88    | )
|                         |  |                  |        |  
|Net assets               |  | $                | 10,248 |  
|                         |  |                  |        |  



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##### Table of Contents

CATELLUS DEVELOPMENT CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 11. REIT Conversion



On January 5, 2004, the Company announced 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 March 31, 2005 and 2004:



| |  |  | on February 16, 2005, the Companys Board declared a regular cash dividend for the quarter ended March 31, 2005, of $0.27 per share of common stock, or $28.0 million, that was
paid on April 15, 2005 to stockholders of record at the close of business on March 29, 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 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
were paid on January 15, 2004, April 15, 2004, July 15, 2004, and October 15, 2004, 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | conversion and related restructuring costs of $0.2 million were paid to third parties for the three months ended March 31, 2004;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 March 31, 2005 and 2004 associated with the 2003 stock
option exchange offer, which includes the costs for the restricted stock and restricted stock units, were $2.4 million and $2.5 million, respectively, and compensation expenses of $(0.3) million and $1.2 million, respectively, were recognized as a
result of the required variable accounting treatment for options.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 12. Sale of Non-Core Assets



In November
2004, the Company sold a significant portion of its remaining urban and residential development assets, with a book value of $295.9 million, to FOCIL for $343.3 million. A sales gain of $7.5 million has been deferred until certain future
requirements are met. The purchase price consists of $68.7 million in cash and $274.6 million in debt financed by the Company that is collateralized by the assets sold. The financings provided to FOCIL and the additional agreed-upon financings as
disclosed at Note 8 were considered in determining initial and continuing involvement for purposes of ensuring the appropriate revenue recognition method. FOCIL has engaged the Company to act as development manager for the assets. For the three
months ended March 31, 2005, the Company has earned $6.7 million in interest and $6.6 million in development and other fees, and at March 31, 2005 has deferred the recognition of an additional $10.0 million of development fees until certain future
requirements are met.



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##### Table of Contents



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The Company



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.



Catellus 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 as well as additional locations with recent expansion into northern New Jersey.



Our 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 March 31, 2005 we owned 40.6
million square feet of commercial rental properties, of which approximately 89.6% 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.



Critical Accounting Policies



Our discussion and 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, stock-based compensation plans, 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.



We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the Condensed
Consolidated Financial Statements.



Revenue and profit
recognition



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



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. 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.



Revenue from sales 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. 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.



Management, development, and other fees are recognized as earned. Fees earned
from our unconsolidated joint ventures are recognized to the extent of outside ownership with our share deferred. These deferred fees will be recognized when the assets or venture is either sold or liquidated, as appropriate.



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##### Table of Contents

We may receive fees from tenants as consideration for early termination of their lease agreement. These
lease 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.



Impairment of real estate assets



We assess
the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable, as well as on a quarterly basis. Indicators we consider important which could trigger an impairment review include
the following:



| |  |  | significant negative industry or economic trend;
| | - |  | ------------------------------------------------



| |  |  | a significant underperformance relative to historical or projected future operating results;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | a significant change in the manner in which an asset is used; and
| | - |  | -----------------------------------------------------------------



| |  |  | an accumulation of costs significantly in excess of the amount originally expected to construct an asset.
| | - |  | ---------------------------------------------------------------------------------------------------------



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 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.



Capitalization of
costs



We capitalize 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.



Allowance for doubtful accounts



We make 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. 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 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.



Environmental and legal reserves



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.



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We are a party to a number of legal actions arising in the ordinary course of business. We cannot predict
with certainty the final outcome of the proceedings. Where appropriate, we have established reserves for potential liabilities related to legal actions or threatened legal actions. Environmental and legal reserves are established based on estimates
and probabilities of the 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.



Stock-Based Compensation Plans



During 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 and LTIP were granted in 2004. 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. LTIP awards for the initial and subsequent award 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.



At March 31, 2005, 322,014 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 $0.9 million and
$1.3 million as compensation expense during the three months ended March 31, 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 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 March 31, 2005.
We estimate that as of March 31, 2005, 93.4% 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, the Compensation and Benefits Committee certified the
achievement of the defined performance targets to an extent which resulted in the performance vesting of 75% of all TIP Performance Units, subject to the time vesting requirements as to certain participants, as discussed in the preceding
paragraph.



During the first quarter of 2005, we granted
to certain officers an aggregate of 154,845 shares of restricted stock with a fair market value of $4.4 million as of the grant date. Shares of restricted stock are entitled to dividends.



We expense 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 March 31, 2005 and 2004, such dividends and dividend equivalents paid were $0.5 million and $0.3 million, respectively (seeNote 2).



Income taxes



As part of the process of preparing our Condensed Consolidated Financial
Statements, significant management judgment 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 temporary differences resulting from differing treatment
of items for book and tax purposes. The temporary differences result in deferred tax assets and liabilities, which are included within our Condensed Consolidated Balance Sheet. Where we have taken a deduction for a non-routine transaction in which
the tax impact is uncertain, no financial statement benefit is taken until the impact is certain. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes in assessments of the recognition of tax
benefits for certain non routine transactions changes due to audit adjustments by federal and state tax authorities, our inability to qualify as a REIT, the potential for built-in-gain recognition, changes in the assessment of properties to be
contributed to TRS, and changes in tax laws. Adjustments required in any given period are included within the tax provision in the statement of operations and/or balance sheet. Any applicable interest charges associated with an audit settlement
would be recorded as interest expense. These adjustments could materially impact our statement of operations and liquidity.



21



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##### Table of Contents

General



Business Segment Descriptions:



Our reportable segments are based on 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. We have two reportable segments: (1) Core Segment and (2) Urban, Residential and Other Segment. Core Segment includes (a) the management and leasing of our
rental portfolio, (b) commercial development activities, which focuses on acquiring and 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 which a majority portion was sold during 2004, and REIT transition costs.



Consistent with 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 URO Segment over time as the remaining assets are dissolved, and URO Segment will
eventually be eliminated, accordingly.



Property Portfolio



Rental Portfolio



Our rental portfolio is comprised of commercial rental property, ground leases and other properties, and interests in
several joint ventures. We own 40.6 million square feet of commercial rental property of which 89.6% is industrial, 7.7% is office, and 2.7% is retail.



Rental portfolio by state:



Square Feet by StateAs of March 31, 2005

(in thousands, except
for %s)



|                    |  |            |  |            |        |  |             |        |            |   |       |             |  |            |   |  |             |  |            |  
|------------------- |  | ---------- |  | ---------- | ------ |  | ----------- | ------ | ---------- | - | ----- | ----------- |  | ---------- | - |  | ----------- |  | ---------- | -
|                    |  | Industrial |  |            | Office |  |             | Retail |            |   | Total |            
|                    |  | SquareFeet |  | % of Total |        |  | Square Feet |        | % of Total |   |       | Square Feet |  | % of Total |   |  | Square Feet |  | % of Total |  
|Southern California |  | 14,208     |  | 35.0       | %      |  | 524         |        | 1.3        | % |       | 216         |  | 0.5        | % |  | 14,948      |  | 36.8       | %
|Illinois            |  | 6,385      |  | 15.7       | %      |  | 594         |        | 1.5        | % |       |            |  | 0.0        | % |  | 6,979       |  | 17.2       | %
|Northern California |  | 5,023      |  | 12.3       | %      |  | 807         |        | 2.0        | % |       | 677         |  | 1.7        | % |  | 6,507       |  | 16.0       | %
|Texas               |  | 3,264      |  | 8.0        | %      |  | 871         |        | 2.1        | % |       |            |  | 0.0        | % |  | 4,135       |  | 10.1       | %
|Colorado            |  | 2,353      |  | 5.8        | %      |  | 273         |        | 0.7        | % |       | 100         |  | 0.2        | % |  | 2,726       |  | 6.7        | %
|Arizona             |  | 1,123      |  | 2.8        | %      |  |            |        | 0.0        | % |       | 74          |  | 0.2        | % |  | 1,197       |  | 3.0        | %
|Georgia             |  | 980        |  | 2.4        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 980         |  | 2.4        | %
|Ohio                |  | 966        |  | 2.4        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 966         |  | 2.4        | %
|Oregon              |  | 545        |  | 1.3        | %      |  | 57          |        | 0.1        | % |       | 37          |  | 0.1        | % |  | 639         |  | 1.5        | %
|Kentucky            |  | 549        |  | 1.4        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 549         |  | 1.4        | %
|Maryland            |  | 471        |  | 1.2        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 471         |  | 1.2        | %
|Kansas              |  | 293        |  | 0.7        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 293         |  | 0.7        | %
|Virginia            |  | 252        |  | 0.6        | %      |  |            |        | 0.0        | % |       |            |  | 0.0        | % |  | 252         |  | 0.6        | %
|                    |  |            |  |            |        |  |             |        |            |   |       |             |  |            |   |  |             |  |            |  
|Total               |  | 36,412     |  | 89.6       | %      |  | 3,126       |        | 7.7        | % |       | 1,104       |  | 2.7        | % |  | 40,642      |  | 100.0      | %
|                    |  |            |  |            |        |  |             |        |            |   |       |             |  |            |   |  |             |  |            |  



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Rental revenue and property operating costs:



|                                                    |  |                                            |        |   |      |   |        |  
|--------------------------------------------------- |  | ------------------------------------------ | ------ | - | ---- | - | ------ | -
|                                                    |  | Rental Revenue Three Months EndedMarch 31, |       
|                                                    |  | 2005                                       |        |   | 2004 |  
|Rental Revenue                                      |  |                                            |        |   |      |   |        |  
|Industrial                                          |  | $                                          | 46,723 |   |      | $ | 45,966 |  
|Office                                              |  |                                            | 16,644 |   |      |   | 17,358 |  
|Retail                                              |  |                                            | 5,381  |   |      |   | 3,839  |  
|Ground leases and other properties                  |  |                                            | 9,652  |   |      |   | 10,002 |  
|Less: Discontinued operations                       |  |                                            | (43    | ) |      |   | (1,128 | )
|                                                    |  |                                            |        |   |      |   |        |  
|                                                    |  |                                            | 78,357 |   |      |   | 76,037 |  
|Equity in earnings of operating joint ventures, net |  |                                            | 2,833  |   |      |   | 2,414  |  
|                                                    |  |                                            |        |   |      |   |        |  
|Total rental revenue, net                           |  | $                                          | 81,190 |   |      | $ | 78,451 |  
|                                                    |  |                                            |        |   |      |   |        |  



|                                   |  |                                                      |         |   |      |   |         |  
|---------------------------------- |  | ---------------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                   |  | Property Operating Costs Three Months EndedMarch 31, |        
|                                   |  | 2005                                                 |         |   | 2004 |  
|Property Operating Costs           |  |                                                      |         |   |      |   |         |  
|Industrial                         |  | $                                                    | (10,540 | ) |      | $ | (10,371 | )
|Office                             |  |                                                      | (6,554  | ) |      |   | (7,045  | )
|Retail                             |  |                                                      | (1,890  | ) |      |   | (1,210  | )
|Ground leases and other properties |  |                                                      | (3,316  | ) |      |   | (2,790  | )
|Less: Discontinued operations      |  |                                                      | 44      |   |      |   | 450     |  
|                                   |  |                                                      |         |   |      |   |         |  
|Total property operating costs     |  | $                                                    | (22,256 | ) |      | $ | (20,966 | )
|                                   |  |                                                      |         |   |      |   |         |  



|                                                    |  |                                                                          |        |      |   |        |  
|--------------------------------------------------- |  | ------------------------------------------------------------------------ | ------ | ---- | - | ------ | -
|                                                    |  | Rental Revenue Less Property Operating Costs Three Months EndedMarch 31, |       
|                                                    |  | 2005                                                                     |        | 2004 |  
|Rental Revenue Less Property Operating Costs        |  |                                                                          |        |      |   |        |  
|Industrial                                          |  | $                                                                        | 36,183 |      | $ | 35,595 |  
|Office                                              |  |                                                                          | 10,090 |      |   | 10,313 |  
|Retail                                              |  |                                                                          | 3,491  |      |   | 2,629  |  
|Ground leases and other properties                  |  |                                                                          | 6,336  |      |   | 7,212  |  
|Less: Discontinued operations                       |  |                                                                          | 1      |      |   | (678   | )
|                                                    |  |                                                                          |        |      |   |        |  
|                                                    |  |                                                                          | 56,101 |      |   | 55,071 |  
|Equity in earnings of operating joint ventures, net |  |                                                                          | 2,833  |      |   | 2,414  |  
|                                                    |  |                                                                          |        |      |   |        |  
|Total rental revenue less property operating costs  |  | $                                                                        | 58,934 |      | $ | 57,485 |  
|                                                    |  |                                                                          |        |      |   |        |  



Operating Joint Venture Portfolio



Catellus had direct or indirect equity interests in four
joint ventures that owned rental properties during the year. The joint ventures provided us with cash distributions of $1.9 million and earnings of $2.8 million for the three months ended March 31, 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 entering into joint venture transactions, we 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
purchase provisions, but instead, we evaluate the investment opportunity in its entirety when making such a decision.



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We owned joint venture interests in the following operating properties for the periods presented.



|         |  |                 |  |                 |               |                    |               |  |                                       |       |  |   |      
|-------- |  | --------------- |  | --------------- | ------------- | ------------------ | ------------- |  | ------------------------------------- | ----- |  | - | -----
|         |  | No. of Ventures |  | Size            |               | Ownership Interest |               |  | Equity in Earnings Three Months Ended
|         |  |                 |  |                 | March 31,2005 |                    | March 31,2004
|         |  |                 |  |                 |               |                    |               |  | (In thousands)                       
|Hotel(1) |  | 3               |  | 1,937 rooms     |               | 25-50              | %             |  | $                                     | 2,558 |  | $ | 2,266
|Office   |  | 1               |  | 202,000 sq. ft. |               | 67                 | %             |  |                                       | 275   |  |   | 148  
|         |  |                 |  |                 |               |                    |               |  |                                       |       |  |   |      
|Total    |  | 4               |  |                 |               |                    |               |  | $                                     | 2,833 |  | $ | 2,414
|         |  |                 |  |                 |               |                    |               |  |                                       |       |  |   |      

---

|(1) | Includes a hotel parking lot joint venture. Additionally, we are likely to acquire the remaining interest in one of our hotel joint ventures in 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



Ground Leases and Other Properties:



Ground Leases



We own approximately 5,600 acres of ground leases that we intend to hold but
do not consider part of our rental portfolio square footage presentation. We expect that the level of income generated from this category will remain relatively constant over the next several years.



The following table summarizes our ground leases for the three months ended
March 31, 2005:



|                    |  |                |       |                          |   |        |                                              |  |   |      
|------------------- |  | -------------- | ----- | ------------------------ | - | ------ | -------------------------------------------- |  | - | -----
|                    |  | Revenues       |       | Property Operating Costs |   |        | Rental Revenue Less Property Operating Costs
|                    |  | (In thousands)
|Northern California |  | $              | 5,320 |                          | $ | (1,870 | )                                            |  | $ | 3,450
|Southern California |  |                | 2,419 |                          |   | 7      |                                              |  |   | 2,426
|Other states        |  |                | 736   |                          |   | (68    | )                                            |  |   | 668  
|                    |  |                |       |                          |   |        |                                              |  |   |      
|Totals              |  | $              | 8,475 |                          | $ | (1,931 | )                                            |  | $ | 6,544
|                    |  |                |       |                          |   |        |                                              |  |   |      



Other Properties



As of March 31, 2005, in addition to 40.6 million square
feet of buildings in our rental portfolio, we also own two train stations aggregating approximately 121,000 square feet and 10 acres of ground leases that are being marketed for sale (Other Property).



The following table summarizes our Other Property portfolio as of, and for,
the three months ended March 31, 2005:



|                    |  |                                                |  |                |  |             |       |                             |   |        |                                                 |  |   |      |  
|------------------- |  | ---------------------------------------------- |  | -------------- |  | ----------- | ----- | --------------------------- | - | ------ | ----------------------------------------------- |  | - | ---- | -
|                    |  | Number of Buildings                            |  | Square Feet(1) |  | Revenues(2) |       | Property Operating Costs(2) |   |        | Rental Revenue Less Property Operating Costs(2) | 
|                    |  | (In thousands, except for number of buildings) | 
|Northern California |  |                                               |  |               |  | $           | 91    |                             | $ | (383   | )                                               |  | $ | (292 | )
|Southern California |  | 2                                              |  | 121            |  |             | 1,075 |                             |   | (990   | )                                               |  |   | 85   |  
|Other states        |  |                                               |  |               |  |             | 11    |                             |   | (12    | )                                               |  |   | (1   | )
|                    |  |                                                |  |                |  |             |       |                             |   |        |                                                 |  |   |      |  
|Totals              |  | 2                                              |  | 121            |  | $           | 1,177 |                             | $ | (1,385 | )                                               |  | $ | (208 | )
|                    |  |                                                |  |                |  |             |       |                             |   |        |                                                 |  |   |      |  

---

|(1) | Other Property is not included in the total square feet of rental portfolio.
|--- | ----------------------------------------------------------------------------



|(2) | These amounts do not consider the effect of discontinued operations; seeNote 7 to Condensed Consolidated Financial Statements for reconciliation to Statement
of Operations Format.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

Core Segment Developable Land Inventory



Our existing Core segment developable land can support an estimated 34.0 million square feet of new commercial development
based upon current entitlements.



For the three months ended
March 31, 2005, we invested approximately $15.9 million in the acquisition of land capable of supporting approximately 1.1 million square feet of commercial development.



The following table summarizes our Core segment developable land inventory and corresponding book value as of March 31,
2005:



|                                |  |                           |  |                          
|------------------------------- |  | ------------------------- |  | -------------------------
|Project Name                    |  | City/Location             |  | March 31,2005            
|                                |  |                           |  | Square Feet(In thousands)
|Southern California             |  |                           |  |                          
|Kaiser Commerce Center          |  | San Bernardino County     |  | 245                      
|Crossroads Business Park        |  | Ontario                   |  | 2,058                    
|San Bernardino                  |  | San Bernardino            |  | 105                      
|Pacific Center                  |  | Anaheim                   |  | 44                       
|                                |  |                           |  |                          
|Subtotal Southern California    |  |                           |  | 2,452                    
|                                |  |                           |  |                          
|Northern California             |  |                           |  |                          
|Pacific Commons                 |  | Fremont                   |  | 1,546                    
|Duck Creek                      |  | Stockton                  |  | 2,100                    
|Spreckels Business Park         |  | Manteca                   |  | 350                      
|                                |  |                           |  |                          
|Subtotal Northern California    |  |                           |  | 3,996                    
|                                |  |                           |  |                          
|Subtotal California             |  |                           |  | 6,448                    
|                                |  |                           |  |                          
|Illinois                        |  |                           |  |                          
|Minooka                         |  | Minooka                   |  | 5,383                    
|Internationale Centre           |  | Woodridge                 |  | 605                      
|Prairie Glen Corporate Campus   |  | Glenview                  |  | 70                       
|Joliet                          |  | Joliet                    |  | 403                      
|                                |  |                           |  |                          
|Subtotal Illinois               |  |                           |  | 6,461                    
|                                |  |                           |  |                          
|Texas                           |  |                           |  |                          
|Hobby Business Park             |  | Houston                   |  | 1,529                    
|Gateway Corporate Center        |  | Coppell                   |  | 1,178                    
|Stellar Way Business Park       |  | Grand Prairie             |  | 635                      
|Gateway East Business Park      |  | Garland                   |  | 690                      
|Plano                           |  | Plano                     |  | 450                      
|                                |  |                           |  |                          
|Subtotal Texas                  |  |                           |  | 4,482                    
|                                |  |                           |  |                          
|Other                           |  |                           |  |                          
|Eastgate                        |  | Aurora, CO                |  | 4,300                    
|Stapleton Business Park         |  | Denver, CO                |  | 150                      
|South Shore Corp. Park          |  | Portland / Gresham, OR    |  | 617                      
|Circle Point Corporate Center   |  | Westminster, CO           |  | 280                      
|Cedar Grove Business Park       |  | Louisville, KY            |  | 530                      
|Douglas Hill Business Park      |  | Atlanta, GA               |  | 356                      
|Quakertown, PA                  |  | Milford, Bucks County, PA |  | 1,150                    
|Port Reading Business Park      |  | Carteret & Woodbridge, NJ |  | 3,278                    
|Elizabeth Seaport Business Park |  | City of Elizabeth, NJ     |  | 1,082                    
|                                |  |                           |  |                          
|Subtotal Other                  |  |                           |  | 11,743                   
|                                |  |                           |  |                          
|Subtotal Outside of California  |  |                           |  | 22,686                   
|                                |  |                           |  |                          
|Total Owned Land                |  |                           |  | 29,134                   
|                                |  |                           |  |                          
|Option/Controlled Land          |  |                           |  |                          
|Alameda (FISC)                  |  | Alameda, CA               |  | 1,300                    
|Prairie Glen Corporate Campus   |  | Glenview, IL              |  | 298                      
|RMMA                            |  | Austin, TX                |  | 3,230                    
|                                |  |                           |  |                          
|Total Inventory                 |  |                           |  | 33,962                   
|                                |  |                           |  |                          



25



---

##### Table of Contents

Summary of Remaining Non-Core Assets as of March 31, 2005



| |  |  | The remaining development land at Los Angeles Union Station (36.5 acres and 5.3 million square feet). The book value for the development land at LAUS is $51.2 million as of March
31, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Parkway, a residential community development in Sacramento, California, which will be substantially complete by the end of 2005. The book value for Parkway is $1.6 million as of
March 31, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Serrano, a residential community development in Sacramento, California, with a book value of $13.2 million as of March 31, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash flow from tax increment at Victoria-by-the-Bay, a completed residential development in Hercules, California, is expected to total $3.5 million annually by 2008, at full
build-out, and grow annually through 2044, as property assessments increase. In addition, we anticipate receiving profit participation from homebuilders of approximately $3.0 million. The total expected cash flow from tax increment at
Victoria-by-the-Bay is $164.7 million as of March 31, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial Condition and Results of Operations



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q.



Net Income



Our net income for the three months ended March 31, 2005 and 2004, were
$33.3 million and $32.1 million, respectively. The discussion and analysis of our net income should be read in conjunction with the Funds from Operations appearing in the following pages of this Form 10-Q (seeNote 7 to Condensed Consolidated
Financial Statements for Reconciliation to Statement of Operations.)



Funds
From Operations



As a REIT, we provide Funds From
Operations (FFO) as a supplemental measure of performance calculated in accordance with the definition adopted by the National Association of Real Estate Investment Trusts (NAREIT). FFO, as defined by NAREIT, represents net
income (loss) (computed in accordance with GAAP), excluding sales of income-producing assets, and cumulative effects of changes in accounting principles, plus depreciation and amortization (excluding depreciation on personal property) and after
adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. Our management generally believes that FFO, as defined by NAREIT, is a meaningful supplemental measure of operating performance
because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with
market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental
measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the
understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We generally consider FFO to be a useful measure for reviewing our comparative operating and financial
performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding
real estate asset depreciation and amortization, FFO can help one compare the operating performance of a companys real estate between periods or to the operating performance of different companies. Our computation of FFO does include gains
(losses) on sales of land and build-to-suit development projects.



26



---

##### Table of Contents

Below is a summary of net income by segment and FFO for the three months ended March 31, 2005:



|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|----------------------------------------------------- |  | -------------- | ------- | - | --- | - | ------- | -------- |  | - | ------- | -
|                                                      |  | Core           |         |   | URO |   |         | Total(a) | 
|                                                      |  | (In thousands) |        
|Revenue                                               |  |                |         |   |     |   |         |          |  |   |         |  
|Rental revenue                                        |  | $              | 78,400  |   |     | $ |        |          |  | $ | 78,400  |  
|Sales revenue                                         |  |                | 22,316  |   |     |   | 13,714  |          |  |   | 36,030  |  
|Management, development and other fees                |  |                | 3,710   |   |     |   | 3,834   |          |  |   | 7,544   |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | 104,426 |   |     |   | 17,548  |          |  |   | 121,974 |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Costs and expenses                                    |  |                |         |   |     |   |         |          |  |   |         |  
|Property operating costs                              |  |                | (22,300 | ) |     |   |        |          |  |   | (22,300 | )
|Cost of sales                                         |  |                | (13,947 | ) |     |   | (11,101 | )        |  |   | (25,048 | )
|Selling, general and administrative expenses          |  |                | (9,721  | ) |     |   | (2,569  | )        |  |   | (12,290 | )
|Depreciation and amortization                         |  |                | (18,603 | ) |     |   | (111    | )        |  |   | (18,714 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | (64,571 | ) |     |   | (13,781 | )        |  |   | (78,352 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Operating income                                      |  |                | 39,855  |   |     |   | 3,767   |          |  |   | 43,622  |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Other income                                          |  |                |         |   |     |   |         |          |  |   |         |  
|Equity in earnings of operating joint ventures, net   |  |                | 2,833   |   |     |   |        |          |  |   | 2,833   |  
|Equity in earnings of development joint ventures, net |  |                | 1,534   |   |     |   | 3,552   |          |  |   | 5,086   |  
|Gain on non-strategic asset sales                     |  |                |        |   |     |   | 20      |          |  |   | 20      |  
|Interest income                                       |  |                | 7,983   |   |     |   | 912     |          |  |   | 8,895   |  
|Other                                                 |  |                | 17      |   |     |   | 72      |          |  |   | 89      |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | 12,367  |   |     |   | 4,556   |          |  |   | 16,923  |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Other expenses                                        |  |                |         |   |     |   |         |          |  |   |         |  
|Interest expense                                      |  |                | (17,581 | ) |     |   |        |          |  |   | (17,581 | )
|Other                                                 |  |                | (1,555  | ) |     |   | 57      |          |  |   | (1,498  | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | (19,136 | ) |     |   | 57      |          |  |   | (19,079 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Income before income taxes                            |  |                | 33,086  |   |     |   | 8,380   |          |  |   | 41,466  |  
|Income taxes expense                                  |  |                | (3,236  | ) |     |   | (4,912  | )        |  |   | (8,148  | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Net income                                            |  |                | 29,850  |   |     |   | 3,468   |          |  |   | 33,318  |  
|Depreciation(b)                                       |  |                | 19,359  |   |     |   | 107     |          |  |   | 19,466  |  
|Less gain on rental property sales                    |  |                | (489    | ) |     |   |        |          |  |   | (489    | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|NAREIT defined funds from operations (FFO)            |  | $              | 48,720  |   |     | $ | 3,575   |          |  | $ | 52,295  |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  

---

|(a) | As discussed in the Business Segment Description section of this MD&A, these amounts do
not consider the effect of discontinued operations. See Note 7 to the Condensed Consolidated Financial Statements for reconciliation to Statement of Operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Depreciation, for FFO purposes, excludes depreciation on personal property of $0.2 million
and includes depreciation from unconsolidated joint ventures of $1.0 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



---

##### Table of Contents

Below is a summary of net income by segment and FFO for the three months ended March 31, 2004:



|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|----------------------------------------------------- |  | -------------- | ------- | - | --- | - | ------- | -------- |  | - | ------- | -
|                                                      |  | Core           |         |   | URO |   |         | Total(a) | 
|                                                      |  | (In thousands) |        
|Revenue                                               |  |                |         |   |     |   |         |          |  |   |         |  
|Rental revenue                                        |  | $              | 77,165  |   |     | $ |        |          |  | $ | 77,165  |  
|Sales revenue                                         |  |                | 30,584  |   |     |   | 10,657  |          |  |   | 41,241  |  
|Management, development and other fees                |  |                | 984     |   |     |   | 715     |          |  |   | 1,699   |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | 108,733 |   |     |   | 11,372  |          |  |   | 120,105 |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Costs and expenses                                    |  |                |         |   |     |   |         |          |  |   |         |  
|Property operating costs                              |  |                | (21,416 | ) |     |   |        |          |  |   | (21,416 | )
|Cost of sales                                         |  |                | (14,856 | ) |     |   | (10,168 | )        |  |   | (25,024 | )
|Selling, general and administrative expenses          |  |                | (6,640  | ) |     |   | (6,311  | )        |  |   | (12,951 | )
|Depreciation and amortization                         |  |                | (17,777 | ) |     |   | (300    | )        |  |   | (18,077 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | (60,689 | ) |     |   | (16,779 | )        |  |   | (77,468 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Operating income (loss)                               |  |                | 48,044  |   |     |   | (5,407  | )        |  |   | 42,637  |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Other income                                          |  |                |         |   |     |   |         |          |  |   |         |  
|Equity in earnings of operating joint ventures, net   |  |                | 2,414   |   |     |   |        |          |  |   | 2,414   |  
|Equity in earnings of development joint ventures, net |  |                |        |   |     |   | 1,227   |          |  |   | 1,227   |  
|Gain on non-strategic asset sales                     |  |                |        |   |     |   | 61      |          |  |   | 61      |  
|Interest income                                       |  |                | 2,375   |   |     |   | 402     |          |  |   | 2,777   |  
|Other                                                 |  |                | 284     |   |     |   | 17      |          |  |   | 301     |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | 5,073   |   |     |   | 1,707   |          |  |   | 6,780   |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Other expenses                                        |  |                |         |   |     |   |         |          |  |   |         |  
|Interest expense                                      |  |                | (15,753 | ) |     |   |        |          |  |   | (15,753 | )
|REIT transition costs                                 |  |                |        |   |     |   | (212    | )        |  |   | (212    | )
|Other                                                 |  |                | (18     | ) |     |   | (412    | )        |  |   | (430    | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|                                                      |  |                | (15,771 | ) |     |   | (624    | )        |  |   | (16,395 | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Income (loss) before income taxes                     |  |                | 37,346  |   |     |   | (4,324  | )        |  |   | 33,022  |  
|Income taxes expense                                  |  |                | (5,332  | ) |     |   | 4,401   |          |  |   | (931    | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|Net income                                            |  |                | 32,014  |   |     |   | 77      |          |  |   | 32,091  |  
|Depreciation(b)                                       |  |                | 18,250  |   |     |   | 184     |          |  |   | 18,434  |  
|Less gain on rental property sales                    |  |                | (3,972  | ) |     |   |        |          |  |   | (3,972  | )
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  
|NAREIT defined funds from operations (FFO)            |  | $              | 46,292  |   |     | $ | 261     |          |  | $ | 46,553  |  
|                                                      |  |                |         |   |     |   |         |          |  |   |         |  

---

|(a) | As discussed in the Business Segment Description section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 7 to
the Condensed Consolidated Financial Statements for reconciliation to Statement of Operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Depreciation, for FFO purposes, excludes depreciation on personal property of $0.6 million and includes depreciation from unconsolidated joint ventures of $1.0
million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

Rental Revenue



Rental revenue has increased primarily because of building additions. The increase was partially offset by the decrease in ground leases due to Mission
Bay properties sold and lower rental from same space because of lower occupancy rate. From April 2004 to March 2005, we added a net 0.7 million square feet to our rental portfolio. Rental revenue for three months ended March 31, 2005 and 2004, are
summarized as follows:



|                               |  |                             |        |                     |   |        |  |   |        |  
|------------------------------ |  | --------------------------- | ------ | ------------------- | - | ------ |  | - | ------ | -
|                               |  | Three Months EndedMarch 31, |        | Difference2005/2004 |  
|                               |  | 2005                        |        | 2004                |  
|                               |  | (In thousands)              |        |                     |  
|Rental revenue:                |  |                             |        |                     |   |        |  |   |        |  
|Same space(1)                  |  | $                           | 63,805 |                     | $ | 64,926 |  | $ | (1,121 | )
|Properties added to portfolio  |  |                             | 6,176  |                     |   | 933    |  |   | 5,243  |  
|Properties sold from portfolio |  |                             | 156    |                     |   | 1,116  |  |   | (960   | )
|Ground leases                  |  |                             | 8,263  |                     |   | 10,190 |  |   | (1,927 | )
|                               |  |                             |        |                     |   |        |  |   |        |  
|Total(2)                       |  | $                           | 78,400 |                     | $ | 77,165 |  | $ | 1,235  |  
|                               |  |                             |        |                     |   |        |  |   |        |  



---

|(1) | Same space properties were owned and operated for the entire current year and the entire immediately preceding year.
|--- | --------------------------------------------------------------------------------------------------------------------



|(2) | These amounts do not consider the effect of discontinued operations. See Note 7 to the Condensed Consolidated Financial Statements for reconciliation to
Statement of Operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We do not expect
substantial changes in rental revenue from our same space rental portfolio; rather, we expect that growth in overall portfolio rental revenue will result primarily from new properties we will add to our rental portfolio over time.



Ten Largest Tenants



The following is a schedule of the largest ten tenants of our rental portfolio, based on GAAP rents:



|                        |  |                    |  |                        |  |                                         
|----------------------- |  | ------------------ |  | ---------------------- |  | ----------------------------------------
|Customer Name           |  | State              |  | Type of Product Leased |  | % of Total Base Rent as ofMarch 31, 2005
|The Gap(1)              |  | CA                 |  | Office/Retail          |  | 6.6%                                    
|APL Logistics, Inc.     |  | CA, IL, GA, KY, TX |  | Industrial             |  | 5.7%                                    
|Ford Motor Company      |  | CA, CO, TX, KS, VA |  | Industrial             |  | 2.9%                                    
|Exel Corporation        |  | CA                 |  | Industrial             |  | 1.9%                                    
|J.C. Penney Company     |  | TX                 |  | Office                 |  | 1.9%                                    
|Kelloggs USA, Inc.(2)  |  | CA, IL, CO         |  | Industrial             |  | 1.9%                                    
|Office Depot, Inc.      |  | CA                 |  | Industrial/Retail      |  | 1.6%                                    
|Home Depot USA, Inc.(3) |  | CA                 |  | Industrial/Retail      |  | 1.6%                                    
|Mission Place, LLC      |  | CA                 |  | Ground Lease           |  | 1.5%                                    
|Gillette Company        |  | CA, IL             |  | Industrial             |  | 1.4%                                    

---

|(1) | Includes a 17,000 square foot lease doing business as Old Navy.
|--- | ---------------------------------------------------------------



|(2) | Includes a 450,000 square foot lease and 81,000 square foot lease doing business as Kellogg Sales Company.
|--- | ----------------------------------------------------------------------------------------------------------



|(3) | Includes a 117,000 square foot lease doing business as Home Expo.
|--- | -----------------------------------------------------------------



Property Operating Costs



Property operating costs have increased primarily because of buildings additions. Property operating costs for three months ended March 31, 2005 and 2004,
are summarized as follows:



|                               |  |                             |         |   |                     |   |         |   |  |   |        |  
|------------------------------ |  | --------------------------- | ------- | - | ------------------- | - | ------- | - |  | - | ------ | -
|                               |  | Three Months EndedMarch 31, |         |   | Difference2005/2004 |  
|                               |  | 2005                        |         |   | 2004                |   |        
|                               |  | (In thousands)              |         |   |                     |  
|Property operating costs:      |  |                             |         |   |                     |   |         |   |  |   |        |  
|Same space                     |  | $                           | (17,645 | ) |                     | $ | (17,833 | ) |  | $ | 188    |  
|Properties added to portfolio  |  |                             | (1,470  | ) |                     |   | (214    | ) |  |   | (1,256 | )
|Properties sold from portfolio |  |                             | (63     | ) |                     |   | (421    | ) |  |   | 358    |  
|Ground leases                  |  |                             | (3,122  | ) |                     |   | (2,948  | ) |  |   | (174   | )
|                               |  |                             |         |   |                     |   |         |   |  |   |        |  
|Total                          |  | $                           | (22,300 | ) |                     | $ | (21,416 | ) |  | $ | (884   | )
|                               |  |                             |         |   |                     |   |         |   |  |   |        |  



29



---

##### Table of Contents

Gain on Property Sales:



|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|--------------------------------- |  | -------------- | ------- | - | --- | - | ------- | ----- |  | - | ------- | -
|                                  |  | Core           |         |   | URO |   |         | Total | 
|                                  |  | (In thousands) |        
|Three Months Ended March 31, 2005 |  |                |         |  
|Building Sales                    |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  | $              | 6,925   |   |     | $ | 10,491  |       |  | $ | 17,416  |  
|Cost of Sales                     |  |                | (5,527  | ) |     |   | (9,985  | )     |  |   | (15,512 | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | 1,398   |   |     |   | 506     |       |  |   | 1,904   |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Land/Lot Sales                    |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  |                | 15,391  |   |     |   | 3,223   |       |  |   | 18,614  |  
|Cost of Sales                     |  |                | (8,119  | ) |     |   | (1,116  | )     |  |   | (9,235  | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | 7,272   |   |     |   | 2,107   |       |  |   | 9,379   |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Ground Lease and Other Sales      |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  |                |        |   |     |   |        |       |  |   |        |  
|Cost of Sales                     |  |                | (301    | ) |     |   |        |       |  |   | (301    | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | (301    | ) |     |   |        |       |  |   | (301    | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Total sales proceeds              |  |                | 22,316  |   |     |   | 13,714  |       |  |   | 36,030  |  
|Total cost of sales               |  |                | (13,947 | ) |     |   | (11,101 | )     |  |   | (25,048 | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Total gain on property sales      |  | $              | 8,369   |   |     | $ | 2,613   |       |  | $ | 10,982  |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|                                  |  |                |        
|                                  |  | Core           |         |   | URO |   |         | Total | 
|                                  |  | (In thousands) |        
|Three Months Ended March 31, 2004 |  |                |         |  
|Building Sales                    |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  | $              | 12,208  |   |     | $ | 6,064   |       |  | $ | 18,272  |  
|Cost of Sales                     |  |                | (8,344  | ) |     |   | (5,958  | )     |  |   | (14,302 | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | 3,864   |   |     |   | 106     |       |  |   | 3,970   |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Land/Lot Sales                    |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  |                | 11,845  |   |     |   | 4,581   |       |  |   | 16,426  |  
|Cost of Sales                     |  |                | (5,376  | ) |     |   | (4,360  | )     |  |   | (9,736  | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | 6,469   |   |     |   | 221     |       |  |   | 6,690   |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Ground Lease and Other Sales      |  |                |         |   |     |   |         |       |  |   |         |  
|Sales Proceeds                    |  |                | 6,531   |   |     |   | 12      |       |  |   | 6,543   |  
|Cost of Sales                     |  |                | (1,136  | ) |     |   | 150     |       |  |   | (986    | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Gain                              |  |                | 5,395   |   |     |   | 162     |       |  |   | 5,557   |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Total sales proceeds              |  |                | 30,584  |   |     |   | 10,657  |       |  |   | 41,241  |  
|Total cost of sales               |  |                | (14,856 | ) |     |   | (10,168 | )     |  |   | (25,024 | )
|                                  |  |                |         |   |     |   |         |       |  |   |         |  
|Total gain on property sales      |  | $              | 15,728  |   |     | $ | 489     |       |  | $ | 16,217  |  
|                                  |  |                |         |   |     |   |         |       |  |   |         |  



Core Segment property
sales are generated from the following sources: (1) purchase options exercised by existing tenants for rental properties; (2) sale of older rental properties and ground leases to improve the overall quality of our rental portfolio, (3) select land
parcels within our development projects, and (4) build-to-suit building sales.



URO Segment sales include, all residential and urban projects remaining at the time of REIT conversion, and desert land sales.



Sales revenue less cost of sales decreased $7.4 million in our Core Segment for the three months ended March 31, 2005 because of lower ground lease and
other sales gains of $5.7 million due primarily to the recognition of $5.3 million of deferred gains from selling our interest in one of our joint ventures, lower build-to-suit buildings gains of $1.6 million, and lower rental buildings gains of
$0.9 million, partially offset by higher land sale gains of $0.8 million. During the three months ended March 31, 2005, we sold a 105,000 square foot build-to-suit building, a 8,000 square foot rental building, and closed on the sale of improved
land capable of supporting 0.3 million square feet of commercial development. During the three months ended March 31, 2004, we sold a 52,000 square foot rental building and two build-to-suit buildings totaling 58,000 square feet and closed on the
sale of improved land capable of supporting 2.9 million square feet of commercial development.



Sales revenue less cost of sales increased $2.1 million in our URO Segment for the three months ended March 31, 2005 due primarily to higher land and lot gains. During the three months ended March 31, 2005, we sold a
48,000 square foot building. In addition, we recognized deferred gain of $0.1 million from the 2004 sale of 2.8 acres of land at our LA Union Station project and recognized $2.0 million from profit participation related to the sale of residential
lots. We sold 7 condominiums at our Mission Bay project and 2.8 acres of land from the LA Union Station project during the three months ended March 31, 2004. We sold all of our remaining desert land in 2004 and we plan to transition out of the
residential and historic urban development activities over time. As of March 31, 2005, we have 23 residential lots under contract to be sold.



30



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##### Table of Contents

Management, Development and Other Fees



Management, development and other fees primarily consist of fees earned related to development and construction management
services provided to third parties as well as our joint venture projects and loan guarantee fees. Management, development and other fees in our Core Segment increased $2.7 million, primarily because of development fees from management activities
related to properties sold to FOCIL in November 2004 and development fees from the City of Alameda. Management, development and other fees in our URO Segment increased $3.1 million for the three months ended March 31, 2005, primarily because of an
earn-out fee recognized in 2005 related to the sale of Mission Bay assets on behalf of FOCIL of $3.8 million. This was partially offset by a decrease of $0.7 million in loan guarantee and management fees from the joint venture development at the
Mission Bay project for the three months ended March 31, 2005. We sold our interest in this joint venture in December 2004.



Selling, General and Administrative Expenses



Selling, general and administrative expenses increased $3.1 million in our Core Segment because of increased employee-related expenses. Selling, general
and administrative expenses decreased $3.7 million in our URO Segment for the three months ended March 31, 2005, primarily because of lower charges related to the exchange of options into restricted stock in conjunction with the REIT conversion.



Depreciation and Amortization Expense



The increase in depreciation and amortization expense of $0.8 million in our
Core Segment for the three months ended March 31, 2005 was primarily attributable to the addition of 0.7 million net square feet of building space to our portfolio between April 2004 and March 2005.



Other Income



Equity in Earnings of Development Joint Ventures, Net



Our equity in earnings of development joint ventures, net is generally
related to land development and residential activities. The tables below summarize our share of the activities of joint ventures for the three months ended March 31, 2005 and 2004. The increase in our earnings was primarily because of higher sales
volumes from Serrano and income from Sams Venture, LLC. Although our preference is generally to own property directly, we may participate with other entities in property ownership through joint ventures or other types of co-ownership.



|                  |  |                                   |  |            |        |   |             |   |         |            |  |   |       |  
|----------------- |  | --------------------------------- |  | ---------- | ------ | - | ----------- | - | ------- | ---------- |  | - | ----- | -
|                  |  | Three months ended March 31, 2005 | 
|Projects          |  | Lots/HomesSold                    |  | Sales/Loss |        |   | CostofSales |   |         | Gain(loss) | 
|                  |  | (In thousands, except lots/homes) | 
|Talega Village(1) |  |                                  |  | $          |       |   |             | $ |        |            |  | $ |      |  
|Serrano           |  | 33                                |  |            | 13,696 |   |             |   | (10,197 | )          |  |   | 3,499 |  
|Parkway           |  |                                  |  |            | 63     |   |             |   | (11     | )          |  |   | 52    |  
|Sams Venture      |  |                                  |  |            | 1,577  |   |             |   |        |            |  |   | 1,577 |  
|Other             |  |                                  |  |            | (42    | ) |             |   |        |            |  |   | (42   | )
|                  |  |                                   |  |            |        |   |             |   |         |            |  |   |       |  
|Total             |  | 33                                |  | $          | 15,294 |   |             | $ | (10,208 | )          |  | $ | 5,086 |  
|                  |  |                                   |  |            |        |   |             |   |         |            |  |   |       |  
|                  | 
|                  |  | Three months ended March 31, 2004 | 
|Projects          |  | Lots/HomesSold                    |  | Sales      |        |   | CostofSales |   |         | Gain(loss) | 
|                  |  | (In thousands, except lots/homes) | 
|Talega Village(1) |  |                                  |  | $          |       |   |             | $ | 588     |            |  | $ | 588   |  
|Serrano           |  | 8                                 |  |            | 4,518  |   |             |   | (3,773  | )          |  |   | 745   |  
|Parkway           |  |                                  |  |            | 32     |   |             |   | (138    | )          |  |   | (106  | )
|Sams Venture      |  |                                  |  |            |       |   |             |   |        |            |  |   |      |  
|Other             |  |                                  |  |            |       |   |             |   |        |            |  |   |      |  
|                  |  |                                   |  |            |        |   |             |   |         |            |  |   |       |  
|Total             |  | 8                                 |  | $          | 4,550  |   |             | $ | (3,323  | )          |  | $ | 1,227 |  
|                  |  |                                   |  |            |        |   |             |   |         |            |  |   |       |  



|(1) | We sold our interest in this joint venture in 2003.
|--- | ---------------------------------------------------



Interest Income



Interest income increased $5.6 million in our Core Segment for the three months ended March 31, 2005 because of higher average note balances which is
attributable to the additional notes receivable of approximately $274.6 million from the sale of the majority of our Non-Core assets in November of 2004. Interest income increased $0.5 million in our URO Segment for the three months ended March 31,
2005 because of higher average cash balances.



31



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##### Table of Contents

Other Expenses



Interest Expense



Following is a summary of interest expense:



|                        |  |                             |        |   |                     |   |        |   |  |   |       |  
|----------------------- |  | --------------------------- | ------ | - | ------------------- | - | ------ | - |  | - | ----- | -
|                        |  | Three Months EndedMarch 31, |        |   | Difference2005/2004 |  
|                        |  | 2005                        |        |   | 2004                |   |       
|                        |  | (In thousands)              |        |   |                     |  
|Total interest incurred |  | $                           | 21,252 |   |                     | $ | 21,574 |   |  | $ | (322  | )
|Interest capitalized    |  |                             | (3,671 | ) |                     |   | (5,821 | ) |  |   | 2,150 |  
|                        |  |                             |        |   |                     |   |        |   |  |   |       |  
|Interest expensed       |  | $                           | 17,581 |   |                     | $ | 15,753 |   |  | $ | 1,828 |  
|                        |  |                             |        |   |                     |   |        |   |  |   |       |  



Interest expensed
increased $1.8 million for the three months ended March 31, 2005, primarily because of lower capitalized interest as a result of decreased development activities. We expect capitalized interest to continue to decline due to the sale of a substantial
portion of our URO Segment assets in the fourth quarter of 2004, which accounted for $0.8 million of capitalized interest in the first quarter of 2004.



Real Estate Investment Trust (REIT) transition costs



In 2003, we restructured our business operations in order to qualify as a REIT, effective January 1, 2004. We have incurred
conversion and related restructuring costs payable to third parties. REIT transition costs are reflected in our URO Segment because of its non-recurring nature. We incurred REIT transition costs of $0.2 million for the three months ended March 31,
2004 primarily for consulting, legal, and tax services. We did not incur any additional costs after the second quarter of 2004.



Other



Other expenses consist primarily of expenses related to previously capitalized costs, impairment charges, and other miscellaneous expenses. Other expenses
for the three months ended March 31, 2005 in our Core Segment increased $1.5 million, primarily because of higher community facility district taxes and net real estate property taxes of $0.8 million, the other expenses included a $0.7 million
impairment charges related to certain tenant improvements. 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.



Other expenses in our URO Segment decreased $0.5 million in 2005 primarily
because of lower community facility district taxes and net real estate property taxes.



Income Taxes



Currently, our projected annual
current tax rate is 15.36% and deferred tax rate is 4.29% as compared to the actual tax rates of 15.23% and (12.41)%, respectively, in 2004. Both our deferred and overall tax rates increased in the first quarter 2005 compared to the first quarter of
2004. The deferred tax rate increased primarily due to lower sales under the completed contract method for one of our development joint ventures. The overall tax rate was higher in the first quarter of 2005 compared to the first quarter of 2004
primarily due to increased income in our TRS in 2005.



The
calculation of current taxes due involves the use of many estimates that are not finalized and adjusted until our final tax returns are filed, usually in September of the following year. Consequently, actual taxes paid in regard to any given year
will differ from the amounts shown above; however, the differences have historically not been material, and are not expected to be material in the future.



Variability in Results



Although our rental properties provide relatively stable operating results, our earnings from period to period will be affected by the nature and timing
of acquisitions and sales of property. Sales of assets are difficult to predict given fluctuating economic conditions and are generally subject to lengthy negotiations and contingencies that need to be resolved before closing. These factors may tend
to bunch income in particular periods rather than producing a more even pattern throughout the year or from year to year. In addition, gross margins may vary significantly as the mix of property varies. The cost basis of the properties
sold varies because (i) properties have been owned for varying periods of time; (ii) properties are owned in various geographical locations; and (iii) development projects have varying infrastructure costs and build-out periods.



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##### Table of Contents

Liquidity and Capital Resources



Off-balance sheet arrangements, contractual obligations, and commitments



We have the following off-balance sheet arrangements, contractual
obligations, and commitments, which are discussed in various sections of the Condensed Consolidated Financial Statements, Notes to Condensed Consolidated Financial Statements, and elsewhere in Managements Discussion and Analysis of Financial
Condition and Results of Operations. These arrangements exist in the following areas:



| |  |  | Unconsolidated real estate joint ventures:
| | - |  | ------------------------------------------



| |  |  | Capital contribution requirements
| | - |  | ---------------------------------



| |  |  | Debt and debt service guarantees
| | - |  | --------------------------------



| |  |  | Surety bonds, standby letters of credit and commitments
| | - |  | -------------------------------------------------------



| |  |  | Executed contracts for construction and development activity
| | - |  | ------------------------------------------------------------



Generally any funding of off-balance sheet guarantees would result in the increase of our ownership interest in a project or entity, similar to the
treatment of a unilateral additional capital contribution to an investee.



Unconsolidated real estate joint ventures- capital contribution requirements



We have investments in ten unconsolidated real estate joint ventures, of which six joint ventures are in our Core Segment and the other four joint
ventures are in our URO Segment. Four of the joint ventures are involved in the operation of rental real estate properties and the remaining six are involved in real estate development for investment or sale. We use the equity method of accounting
for nine of our investments in unconsolidated joint ventures and the cost method of accounting for one unconsolidated joint venture.



We are required to make additional capital contributions to four of our unconsolidated joint ventures should additional contributions be necessary to fund
development costs or operating shortfalls.



| |  |  | We are required to make additional capital contributions to two of the unconsolidated joint ventures should additional capital contributions be necessary to fund excess costs. Based
upon the joint venture agreements, we are required to fund up to a maximum contribution of $52 million, of which we have cumulatively contributed $44.9 million. One of the joint ventures has substantially wound up operations and we do not expect to
make any future capital contributions. As of March 31, 2005, we do not expect to fund any additional capital contributions beyond our maximum capital requirements to the other joint venture.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We agreed with two other unconsolidated joint ventures to make additional contributions should there be insufficient funds to meet their current or projected financial requirements.
As of March 31, 2005, we have cumulatively contributed $53.3 million to these unconsolidated joint ventures, including $22.0 million as additional contributions. As of March 31, 2005, we are expecting to make additional contributions to SAMS
Venture, LLC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additional contributions made to
our development joint ventures would be reflected as investment in development joint ventures. (see Note 8 of the accompanying Condensed Consolidated Financial Statements).



Unconsolidated real estate joint ventures- debt and debt service guarantees



We have made certain debt service guarantees for one of our unconsolidated
URO Segment development joint ventures. At March 31, 2005, based on the joint ventures outstanding debt balance, these debt service guarantees totaled $0.3 million. Debt service guarantees are typical business arrangements commonly required in
real estate development. Examples of events that would require us to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service the debt when due, or non-compliance of
the primary borrower with financial covenants and inadequacy of asset collateral. Our guarantee exposure is generally limited to situations in which the value of the collateral is not sufficient to satisfy the outstanding indebtedness. At March 31,
2005, we have not been required to satisfy any amounts pursuant to these debt and debt service guarantees.



33



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##### Table of Contents

Standby letters of credit and commitments



As of March 31, 2005, we have $213.5 million in outstanding standby letters
of credit in favor of local municipalities or financial institutions, commitments to guarantee leases, and the construction of real property improvements or financial obligations. The standby letters of credit are renewable and expire upon
completion of the required improvements, and are a form of credit enhancement commonly required in real estate development when bonds are issued to finance public improvements.



Executed contracts for construction and development activity



At March 31, 2005, we have open construction and development contracts with
vendors totaling $84.4 million related to our various projects, as compared to $108.3 million at December 31, 2004.



The following table summarizes our outstanding contractual obligations as of March 31, 2005, and the effect such obligations are expected to have on
liquidity and cash flow in future periods:



|                              |  |                        |           |     |                |   |                 |  |                 |         |               |   |         |  |   |        
|----------------------------- |  | ---------------------- | --------- | --- | -------------- | - | --------------- |  | --------------- | ------- | ------------- | - | ------- |  | - | -------
|                              |  | Payments Due by Period
|Contractual Obligations       |  | Total                  |           |     | Due within2005 |   | Due in2006-2008 |  | Due in2009-2010 |         | DueThereafter
|                              |  | (In thousands)        
|Mortgage and Other Debt       |  | $                      | 1,679,419 | (1) |                | $ | 165,246         |  | $               | 833,604 |               | $ | 125,525 |  | $ | 555,044
|Operating Leases              |  |                        | 2,791     |     |                |   | 2,071           |  |                 | 510     |               |   | 30      |  |   | 180    
|Contracts                     |  |                        | 84,405    | (2) |                |   | 80,933          |  |                 | 3,472   |               |   |        |  |   |       
|                              |  |                        |           |     |                |   |                 |  |                 |         |               |   |         |  |   |        
|Total Contractual Obligations |  | $                      | 1,766,615 |     |                | $ | 248,250         |  | $               | 837,586 |               | $ | 125,555 |  | $ | 555,224
|                              |  |                        |           |     |                |   |                 |  |                 |         |               |   |         |  |   |        

---

|(1) | Includes approximately $424.3 million of future interest payable.
|--- | -----------------------------------------------------------------



|(2) | A portion of these obligations is expected to be reimbursed by bond proceeds and various
third parties.
|--- | -------------------------------------------------------------------------------------------------------



Prior to the November 2004 sales
of a significant portion of our remaining urban and residential development assets to FOCIL Holdings LLC (FOCIL), an affiliate of Farallon Capital Management, L.L.C., (seeNote 12) we had already negotiated on certain land asset
sales and agreed to provide acquisition financings, up to $164 million, to these third party purchasers, with a substantial portion of the money required to fund the $164 million financing coming from the paydowns under the loans to FOCIL. 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, we will provide the financing to these third party purchasers, as previously agreed. As of March 31,
2005, we have financed $26.2 million on one of these sales. Subsequent to March 31, 2005, an additional sale was consummated; however, approximately $15 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 $123 million.



The following table summarizes our outstanding commitments as of March 31, 2005, and the effect such commitments may have on liquidity and cash flow in
future periods:



|                                          |  |                        |                  |     |                                            |   |                    |  |                  |        |  |   |       |  |   |      
|----------------------------------------- |  | ---------------------- | ---------------- | --- | ------------------------------------------ | - | ------------------ |  | ---------------- | ------ |  | - | ----- |  | - | -----
|                                          |  | Total AmountsCommitted |                  |     | Amount of Commitment Expiration Per Period
|Commitments                               |  |                        | Expirewithin2005 |     | Expire in2006-2008                         |   | Expire in2009-2010 |  | ExpireThereafter
|                                          |  | (In thousands)        
|Standby Letters of Credit and Commitments |  | $                      | 213,455          | (1) |                                            | $ | 144,274            |  | $                | 64,245 |  | $ | 2,013 |  | $ | 2,923
|Debt Guarantees of Unconsolidated JVs     |  |                        | 285              |     |                                            |   | 285                |  |                  |       |  |   |      |  |   |     
|                                          |  |                        |                  |     |                                            |   |                    |  |                  |        |  |   |       |  |   |      
|Total Commitments                         |  | $                      | 213,740          |     |                                            | $ | 144,559            |  | $                | 64,245 |  | $ | 2,013 |  | $ | 2,923
|                                          |  |                        |                  |     |                                            |   |                    |  |                  |        |  |   |       |  |   |      

---

|(1) | Includes approximately $34.3 million of commitments that have no specific expiration dates, which we have assumed to expire within one year for purposes of this
table. Excludes approximately $203.6 million of surety bonds for our own work, of which approximately $85 million have been indemnified by third parties.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Cash Flows from Operating Activities



Cash provided by operating activities reflected in the statement of cash flows for the three months ended March 31, 2005,
and 2004, were $94.1 million and $66.1 million, respectively. The increase of $28 million was primarily attributed to the following: (1) an increase of $48 million due to higher payments received from our notes receivable; (2) an increase of $5.1
million due to lower income tax paid; (3) and an increase of $1.5 million due to lower capital expenditures on our development properties partially offset by (4) a decrease of $19.7 million due to lower cash proceeds from development sales of which
our cost of sales was approximately $22.9 million; (5) a decrease of $2.5 million due to lower distributions from our joint ventures; (6) and a decrease of $1.9 million due to higher interest paid.



Cash Flows from Investing Activities



Net cash used in investing activities reflected in the statement of cash
flows for the three months ended March 31, 2005 and 2004, were $35.6 million and $24 million, respectively. The increase of $11.6 million in net cash used was attributed to the following: (1) $18.6 million from lower investment in short-term
investments and restricted cash; (2) $15.2 million due to higher property acquisitions primarily from the acquisition of a 72.8 acres of developable land in New Jersey; (3) $0.6 million due to lower proceeds from the sale of investment properties
partially offset by (4) $18.1 million due to lower capital expenditures for investment properties; (5) $3.6 million lower in reimbursable predevelopment and infrastructure costs incurred; (6) $0.9 million due to lower costs incurred for tenants; and
(7) $0.2 million due to lower capital contributions made to our unconsolidated joint ventures.



Capital Expenditures



Capital expenditures reflected in the statement of cash flows include the following:



|                                                   |  |                             |        |      |   |       
|-------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                   |  | Three Months EndedMarch 31,
|                                                   |  | 2005                        |        | 2004
|                                                   |  | (In thousands)             
|Capital Expenditures from Operating Activities(1)  |  |                             |        |      |   |       
|Capital expenditures for development properties    |  | $                           | 8,887  |      | $ | 2,893 
|Infrastructure and other                           |  |                             | 2,045  |      |   | 4,424 
|Other property acquisitions                        |  |                             | 6,064  |      |   | 10,523
|Capitalized interest and property tax              |  |                             | 442    |      |   | 1,459 
|                                                   |  |                             |        |      |   |       
|Total capital expenditures in operating activities |  |                             | 17,438 |      |   | 19,299
|                                                   |  |                             |        |      |   |       
|Capital Expenditures from Investing Activities(2)  |  |                             |        |      |   |       
|Capital expenditures for investment properties     |  |                             | 24,603 |      |   | 24,716
|Rental propertiesbuilding improvements            |  |                             | 1,080  |      |   | 667   
|Predevelopment                                     |  |                             | 729    |      |   | 1,075 
|Infrastructure and other                           |  |                             | 7,430  |      |   | 23,893
|Commercial property acquisitions                   |  |                             | 16,388 |      |   | 1,214 
|Other property acquisitions                        |  |                             | 105    |      |   | 17    
|Tenant improvements                                |  |                             | 911    |      |   | 1,784 
|Capitalized interest and property tax              |  |                             | 3,885  |      |   | 5,567 
|                                                   |  |                             |        |      |   |       
|Capital expenditures for investment properties     |  |                             | 55,131 |      |   | 58,933
|Contribution to joint ventures                     |  |                             | 42     |      |   | 259   
|                                                   |  |                             |        |      |   |       
|Total capital expenditures in investing activities |  |                             | 55,173 |      |   | 59,192
|                                                   |  |                             |        |      |   |       
|Total capital expenditures(3)                      |  | $                           | 72,611 |      | $ | 78,491
|                                                   |  |                             |        |      |   |       

---

|(1) | This category includes capital expenditures for properties we intend to build and sell.
|--- | ---------------------------------------------------------------------------------------



|(2) | This category includes capital expenditures for properties we intend to hold for our own account.
|--- | -------------------------------------------------------------------------------------------------



|(3) | Total capital expenditures include capitalized general and administrative expenses of $2.6 million and $3.0 million for the three months ended March 31, 2005 and
2004, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Capital expenditures for development propertiesThis item relates to the development of our
for-sale development properties. The increase was primarily due to higher construction activity of build to sell projects in Minooka, Illinois, Fontana, California and Manteca, California.



Capital expenditures for investment propertiesThis item relates
primarily to development of new properties held for lease. This development activity is summarized below (in square feet):



|                                           |  |                             |   |  |        |  
|------------------------------------------ |  | --------------------------- | - |  | ------ | -
|                                           |  | Three Months EndedMarch 31, |  
|                                           |  | 2005                        |   |  | 2004   |  
|                                           |  | (In thousands)              |  
|Development                                |  |                             |   |  |        |  
|Wholly owned:                              |  |                             |   |  |        |  
|Under construction, beginning of period    |  | 3,791                       |   |  | 4,404  |  
|Construction starts                        |  |                            |   |  | 406    |  
|Completedretained in portfolio            |  | (103                        | ) |  | (1,763 | )
|Completeddesign/build or sold             |  | (152                        | ) |  | (68    | )
|                                           |  |                             |   |  |        |  
|Subtotal under construction, end of period |  | 3,536                       |   |  | 2,979  |  
|                                           |  |                             |   |  |        |  
|Joint Venture Projects:                    |  |                             |   |  |        |  
|Under construction, beginning of period    |  | 527                         |   |  | 695    |  
|Construction starts                        |  |                            |   |  |       |  
|Completed                                  |  |                            |   |  |       |  
|                                           |  |                             |   |  |        |  
|Subtotal under construction, end of period |  | 527                         |   |  | 695    |  
|                                           |  |                             |   |  |        |  
|Total under construction, end of period    |  | 4,063                       |   |  | 3,674  |  
|                                           |  |                             |   |  |        |  



PredevelopmentPredevelopment costs from our operating and investing activities relate to amounts incurred for our development projects, primarily the Pacific Commons project in Fremont, California; the Alameda project in
Alameda, California; the Robert Mueller Airport project in Austin, Texas; and various other projects in the predevelopment stage. Our predevelopment costs for 2005 were lower because in the fourth quarter of 2004, we sold a majority of our Mission
Bay project in San Francisco, California; Alameda project in Alameda, California; and West Bluffs project in Playa Del Rey, California to FOCIL.



Infrastructure and otherInfrastructure and other costs from our operating and investing activities primarily relate to the projects at
Pacific Commons in Fremont, California; Alameda, California; Los Angeles Union Station in Los Angeles, California; Santa Fe Depot in San Diego, California; Carteret, New Jersey; Woodbridge, New Jersey; Fontana, California; Hercules, California; and
Minooka, Illinois. Our infrastructure and other costs for 2005 were lower because in the fourth quarter of 2004, we sold a majority of our Mission Bay project in San Francisco, California; Alameda project in Alameda, California; and West Bluffs
project in Playa Del Rey, California to FOCIL, and also because we did not start any construction in 2005.



Operating activity property acquisitionsFor the three months ended March 31, 2005, we invested approximately $5.1 million for the acquisition
of 102.1 acres of land in Elizabeth, New Jersey that was subsequently sold during the three months ended March 31, 2005.



Investing activity property acquisitionsFor the three months ended March 31, 2005, we invested approximately $16.4 million in investing
activity property acquisitions: $15.9 million for the acquisition of commercial land, which added 1.1 million square feet of potential development.



Cash Flows from Financing Activities



Net cash used in financing activities reflected in the statement of cash flows for the three months ended March 31, 2005 and 2004, were $256.4 million and
$43.4 million, respectively. The increase of $213 million in net cash used was attributed to the following: (1) $165.2 million due to lower net borrowings during the three months ended March 31, 2005; (2) $46.6 million due to a special dividend
distribution as a result of the sale of a majority of our URO assets to FOCIL in November 2004; and (3) $1.2 million due to lower proceeds from the issuance of common stock primarily attributable to the exercise of stock options.



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##### Table of Contents

Reimbursable Predevelopment and Infrastructure Costs



For the three months ended March 31, 2005, we incurred approximately $3.2
million of reimbursable predevelopment and infrastructure costs.



REIT-related Distribution and Quarterly Dividends



On February 16, 2005, our Board of Directors declared a regular cash dividend for the quarter ending March 30, 2005, of $0.27 per share of common stock payable on April 15, 2005, to stockholders of record at the close of business on March
29, 2005. On December 1, 2004, our Board of Directors declared a regular cash dividend for the quarter ending December 31, 2004, of $0.27 per share of common stock that was paid on January 18, 2005, to stockholders of record at the close of business
on December 28, 2004. In addition to our regular cash dividend, our Board of Directors also declared a special cash dividend of $0.45 per share of common stock that was paid on January 18, 2005, to stockholders of record at the close of business on
December 28, 2004 in connection with the sale of Non-Core assets and other taxable REIT subsidiary activities.



On September 9, 2004, our Board of Directors declared a regular cash dividend for the quarter ending September 30, 2004, of $0.27 per share of common
stock that was paid on October 15, 2004, to stockholders of record at the close of business on September 27, 2004.



On May 5, 2004, our Board of Directors declared a regular cash dividend for the quarter ending June 30, 2004, of $0.27 per share of common stock that was
paid on July 15, 2004, to stockholders of record at the close of business on June 28, 2004.



On February 11, 2004, our Board of Directors declared a regular cash dividend for the quarter ending March 31, 2004, of $0.27 per share of common stock that was paid on April 15, 2004, to stockholders of record at the
close of business on March 29, 2004.



On December 3, 2003, our
Board of Directors declared a regular cash dividend for the quarter ending December 31, 2003, of $0.27 per share of common stock that was paid on January 15, 2004, to stockholders of record at the close of business on December 29, 2003.



Cash Balances, Available Borrowings, and Capital Resources



As of March 31, 2005, we had total cash of $67.0 million, of which $12.9
million was restricted cash. In addition to the $67.0 million cash balance, we had $189 million in borrowing capacity under our revolving credit facility, available upon satisfaction of certain conditions.



Our short-term and long-term liquidity and capital resources requirements are
derived primarily from five sources: (1) cash on hand, (2) ongoing income from our rental portfolio, (3) proceeds from sales of developed properties, land and non-strategic assets, (4) a revolving line of credit with a total capacity of $200
million, and (5) additional debt. As noted above, our existing revolving credit facility is available for meeting certain short-term liquidity requirements. Our ability to meet our mid- and long-term capital requirements is, in part, dependent upon
the ability to obtain additional financing for new construction, completed buildings, acquisitions, and currently unencumbered properties. There is no assurance that we can obtain this financing or obtain this financing on favorable terms.



Debt covenantsOur $200 million revolving credit
agreement and one other credit agreement, of $40.5 million, have corporate financial covenants including a minimum fixed charge coverage ratio of 1.30 to 1, a maximum leverage ratio of 0.65 to 1, a maximum secured indebtedness ratio of 0.50 to 1,
and a minimum tangible net worth of $452.8 million, all terms as defined in those agreements. As of or for the period ending March 31, 2005 the actual results were 1.95 to 1; 0.54 to 1; 0.37 to 1; and $754.3 million, respectively. Outstanding
borrowings under the revolving credit facility are subject to a borrowing base consisting of various categories of assets. At March 31, 2005, we had unused availability of $189 million under the line. Our performance against these covenants is
measured on a quarterly basis, with fixed charge and debt service coverage ratios being measured on a four-quarter trailing basis. In the event we were to breach any of these covenants and were unable to negotiate satisfactory waivers or amendments,
our lenders in these credit facilities could declare amounts outstanding due and payable.



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##### Table of Contents

Bonds



Assessment District BondsThese bonds were issued through local municipalities to fund the construction of
public infrastructure and improvements, which benefit our properties. Debt service on these bonds is collateralized by tax revenues, properties, or by letters of credit (see Note 8 of the accompanying Condensed Consolidated Financial
Statements). These bonds are recorded and presented as part of Mortgage and other debt in the accompanying Condensed Consolidated Balance Sheet at March 31, 2005 (see Note 5 of the accompanying Condensed Consolidated Financial
Statements). Certain infrastructure costs incurred are reimbursable from these bonds.



The following table presents a summary of assessment district bonds that are included in the accompanying Condensed Consolidated Balance Sheet at March 31, 2005 (in thousands except percentages):



|                     |  |        |        |              |           |   |              |   |                |  |   |       
|-------------------- |  | ------ | ------ | ------------ | --------- | - | ------------ | - | -------------- |  | - | ------
|                     |  | Amount |        | InterestRate |           |   | CostIncurred |   | CostReimbursed
|Development Projects |  |        |        |              |           |   |              |   |                |  |   |       
|Stapleton            |  | $      | 22,745 |              | 2.38      | % |              | $ | 19,809         |  | $ | 18,760
|Kaiser               |  |        | 11,603 |              | 5.83      | % |              |   | 19,157         |  |   | 19,157
|Westminster          |  |        | 9,140  |              | 2.38      | % |              |   | 4,758          |  |   | 4,758 
|Rancho Cucamonga     |  |        | 5,638  |              | 6.14      | % |              |   | 5,222          |  |   | 5,222 
|                     |  |        |        |              |           |   |              |   |                |  |   |       
|Subtotal             |  |        | 49,126 |              |           |   |              |   | 48,946         |  |   | 47,897
|                     |  |        |        |              |           |   |              |   |                |  |   |       
|Operating properties |  |        |        |              |           |   |              |   |                |  |   |       
|City of Industry     |  |        | 4,700  |              | 7.87      | % |              |   |               |  |   |      
|Emeryville           |  |        | 4,481  |              | 7.29      | % |              |   |               |  |   |      
|Various others       |  |        | 3,485  |              | 4.00-8.70 | % |              |   |               |  |   |      
|                     |  |        |        |              |           |   |              |   |                |  |   |       
|Subtotal             |  |        | 12,666 |              |           |   |              |   |               |  |   |      
|                     |  |        |        |              |           |   |              |   |                |  |   |       
|Total                |  | $      | 61,792 |              |           |   |              | $ | 48,946         |  | $ | 47,897
|                     |  |        |        |              |           |   |              |   |                |  |   |       



Community Facility
District BondsThese bonds were issued to finance public infrastructure improvements at Pacific Commons in Fremont, California and were not required to be recorded in our accompanying Condensed Consolidated Balance Sheet. These bonds have a
series of maturities up to thirty years. Upon completion of the infrastructure improvements, for which $30 million of bonds were issued, the improvements will be transferred to the City. Of the total cumulative reimbursable cost incurred,
approximately $11.7 million have been reimbursed as of March 31, 2005, no reimbursement was received in 2005. The remaining balance of $13.8 million is presented in Other assets and deferred charges, net in the accompanying Condensed
Consolidated Balance Sheet at March 31, 2005. The $13.8 million will not be requested for reimbursement until the facility components are completed, inspected, and approved by the City. Additional bonds are expected to be issued.



At Pacific Commons, developed and designated developed property is taxed
first, and any shortfall in annual debt service is paid by a tax on project vacant land.



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##### Table of Contents

Tax Audit



State Tax Audit



In 2002, the State of California Franchise Tax Board (FTB) began auditing a joint venture relating to our redemption in 1999 of our interest
in a real estate partnership formed by our predecessor railroad company.In March 2004 we were verbally notified that an audit adjustment was forthcoming. Under California law (which differs from federal tax law) the tax in question was only
deferred and was paid in 2003 as part of our REIT conversion. We made the FTB aware of that fact.



In late February of 2005, we received an Audit Issue Presentation Sheet (AIPS) which is a formal outline summarizing the FTBs position
with respect to this transaction including their intention to assess substantial penalties. Catellus will have the ability to respond to this AIPS prior to the FTB issuing a formal proposed adjustment. Based on the AIPS, if we were
unsuccessful the maximum current potential exposure could be up to approximately $10 million. Catellus intends to vigorously contest the FTBs position with respect to this transaction as well as the assessment of proposed penalties.



In 2002, the FTB notified CDC that it would audit the
corporate tax returns of CDC for the years 1999 and 2000. In June of 2004, the FTB notified us that they would also audit the 1999 and 2000 tax returns of a mortgage REIT subsidiary. Both audits are in process. No significant audit adjustments have
been proposed on either of these audits.



IRS Audit



In March 2003 we received notice that the Internal
Revenue Service (IRS) intended to audit the 1999 tax returns of Catellus and a mortgage REIT subsidiary. In the third quarter of 2003, the IRS informed us it would also audit the 2000 returns as well as the returns relating to the real
estate joint venture under audit by the FTB discussed above. In the third quarter of 2004, we were notified the IRS would audit the 2001 and 2002 returns. In December 2004, the IRS issued requests for information relating to our tax deferred
exchanges for the years 1999-2002. In February 2005, we were told of the IRS intention to request an extension of these open tax years from September 2005 to September 2006. We have granted that request.



No audit adjustments have been proposed. The IRS has asked for all documents
relating to the following issues:



|1. | Charitable contributions deductions for the transfer of certain properties where the appraised fair market value was in excess of the consideration received,
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | Tax treatment of the deductions of interest paid to a mortgage REIT subsidiary,
|-- | -------------------------------------------------------------------------------



|3. | A redemption of our interest in a real estate partnership (described above), and
|-- | --------------------------------------------------------------------------------



|4. | Tax deferred exchanges of real property.
|-- | ----------------------------------------



All but the first issue above resulted in a substantial portion of the deferred taxes created during the time we operated as a taxable C-corporation. At
the time of our REIT conversion, as we expected to no longer be taxed at the REIT level for REIT operations, we reversed approximately $232 million in deferred taxes into income at year end 2003. At the same time, in part because of the ongoing
audit described above, we took a charge to current taxes which totals $124 million of the $232 million. The $124 million charge to current taxes relates to the federal and state tax impact of certain of the above issues. The amounts above do not
include any provision for possible interest and penalties.



If
the audit results in an adjustment and if the Company exhausts all available remedies to contest the adjustment (or decides not to contest such adjustment), then our provision above may not be sufficient to cover the exposure and such adjustment
could negatively impact our liquidity, statement of operations, and/or balance sheet.



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##### Table of Contents

Related Party Transactions



The entities below are considered related parties because the listed transactions are with entities in which we have an
ownership interest. There are no affiliated persons involved with these entities.



We provide development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $0.2 million for the three months ended March 31, 2005, primarily from SAMS
Venture, LLC. Fees earned were $0.9 million for the three months ended March 31, 2004, primarily from Third and King Investors, LLC, with the remainder primarily from SAMS Venture, LLC. Deferred fees of $0.6 million primarily from Serrano
Associates, LLC and Bergstrom Partners, L.P. at March 31, 2005, will be earned as completed projects are sold or the venture is sold or liquidated. In 2004, we sold our investment in Third and King Investors, LLC.



In 2001, we entered into a 99-year ground lease with one of our
unconsolidated joint venture investments, Third and King Investors, LLC. Rent and reimbursable payments of $1.2 million were received and recognized as rental income during the three months ended March 31, 2004. This joint venture investment was
sold in 2004.



We have a $4.5 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. We have entered into various lease
agreements with this unconsolidated joint venture. As lessee, rent expense was $34,000 for each of the three-month periods ended March 31, 2005 and 2004. This lease will expire in November 2011. As lessor, We entered into a ground lease, which will
expire in August 2054. We earned rental income of $0.1 million for each of the three-month periods ended March 31, 2005 and 2004, and have recorded a $2.7 million receivable and a $1.2 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.



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



Partnership Accounting



At March 31, 2005, we
hold 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. Our significant variable interests are in the form of equity interests in two of our unconsolidated joint ventures and our participation in a master development agreement:



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SAMS Venture, LLC 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 land totaling 56 acres and other consideration, and finally either sell or develop for sale the three parcels. Our exposure will increase should this joint venture require additional contributions from our
joint venture partners.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A Catellus subsidiary entered into a master development agreement with the City of Austin, Texas in December 2004 to redevelop and market the property formerly known as the Robert
Mueller Municipal Airport. Our exposure will increase should public financing and sales revenues be insufficient to meet current or projected financial requirements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our maximum exposure in the current financial statements as a result of our involvement with these variable interest entities is $11.9 million as of March 31, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Environmental Matters



Many of our properties and our subsidiaries properties are in urban and industrial areas and may have been leased to or previously owned by
commercial and industrial companies that discharged hazardous materials. We and our subsidiaries incur ongoing environmental remediation and disposal costs and legal costs relating to clean up, defense of litigation, and the pursuit of responsible
third parties. Costs incurred by the consolidated group in connection with operating properties and with properties previously sold are expensed. Costs incurred for properties to be sold by us or our subsidiaries are capitalized and will be charged
to cost of sales when the properties are sold (see Note 8 of the accompanying Condensed Consolidated Financial Statements for further discussion).



In recent years, certain of our subsidiaries have acquired properties with known environmental problems for cleanup and redevelopment, and we expect that
we may continue to form subsidiaries to acquire such properties (or that existing subsidiaries will acquire such properties) when the potential benefits of development warrant. When our subsidiaries acquire such properties, they undertake due
diligence to determine the nature of the environmental problems and the likely cost of remediation, and they manage the risk with undertakings from third parties, including the sellers and their affiliates, remediation contractors, third party
sureties, or insurers. The costs associated with environmental remediation are included in the costs estimates for properties to be developed.



We own an interest in a limited liability company of a residential project near Sacramento, California. At March 31, 2005, the book value of our
investment is approximately $13.2 million and the terms of the investment require additional contributions from the members should there be insufficient operating funds (see Note 8, Commitments and Contingencies). 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 our project, and the EPA has concluded that its initial exposure study raises further concerns. At this time we do not know if the results of the studies will have any adverse impact on the project, and the ultimate impact to our
financial statements is undeterminable.



Forward-Looking Information and
Risk Factors



This report may contain or incorporate
statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements.



In some cases you can identify forward-looking statements by terms such as
anticipate, project, may, intend, might, will, could, would, expect, believe, estimate, potential, by the
negative of these terms, and by similar expressions. These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, many of which are beyond our ability
to control or predict. You should not put undue reliance on any forward-looking statements. These forward-looking statements present our estimates and assumptions only as of the date of this report.



Important factors that could cause actual results to differ materially and
adversely from those expressed or implied by the forward-looking statements include:



| |  |  | those identified in our annual report on Form 10-K for the fiscal year ended December 31, 2003 under the following headings: Risks Related to Real Estate Investments, Other Risks
Affecting Our Business and Operations, and Federal Income Tax Risks Relating to REIT Qualification;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general industry, economic and business conditions (which will, among other things, affect availability and creditworthiness of current and prospective tenants, tenant bankruptcies,
lease rates and terms, availability and cost of financing, interest rate fluctuations and operating expenses);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse changes in the real estate markets, including, among other things, competition with other companies and risks of real estate development, acquisitions and dispositions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | governmental actions and initiatives (including legislative and regulatory changes);
| | - |  | ------------------------------------------------------------------------------------



| |  |  | other risks inherent in the real estate business; and
| | - |  | -----------------------------------------------------



| |  |  | acts of war, other geopolitical events, and terrorist activities that could adversely affect any of the above factors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



The above list of factors that may affect future performance and the accuracy
of forward-looking statements is illustrative but by no means exhaustive. Therefore, all forward-looking statements should be evaluated with the understanding of their inherent risk and uncertainty. Except for our ongoing obligation to disclose
material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.



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##### Table of Contents



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------



Our primary market risk exposure is interest rate risk as our financial instruments are not subject to foreign exchange rate risk or commodity price risk.
We continuously and actively monitor and manage interest costs on our debt and may enter into interest rate-protection contracts based on changing market conditions. At March 31, 2005, we did not have any interest rate protection contracts
outstanding.



As of March 31, 2005, approximately 88.3% of our
debt bears interest at fixed rates and has a weighted average maturity of 5.4 years and a weighted average coupon rate of 6.68%. The interest rate risk for fixed rate debt does not have a significant impact on the Company until such debt matures and
may need to be refinanced. Our variable rate debt has a weighted average maturity of 4.3 years and a weighted average coupon rate of 4.09%. To the extent that we incur additional variable rate indebtedness, we increase our exposure to increases in
interest rates. If the coupon interest rate increased 100 basis points (1%), the annual short-term effect would be an increase in interest expense and capitalized interest cost, which would have an impact on our cash position of approximately $0.8
million, based on the outstanding balance of our floating rate debt net of cash investments and restricted cash at March 31, 2005. We believe that moderate increases in interest expense as a result of inflation will not materially affect our
financial position, results of operations, or cash flow.



As of
March 31, 2005, approximately $10.0 million of our $296.1 million of notes receivable carry interest at variable rates. If interest rates on these variable notes change 100 basis points (1%), the annual effect will be a change in our interest income
of approximately $0.1 million. We believe that the moderate change in interest income will not materially affect our financial position, results of operation, or cash flow.



|Item 4. | Controls and Procedures
|------- | -----------------------



The Companys management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934), and the principal executive officer and principal financial officer have concluded that the
Companys disclosure controls and procedures are effective as of March 31, 2005. No changes in the Companys internal control over financial reporting occurred during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents



PART II OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



The Company is subject to lawsuits, certain governmental proceedings (including environmental actions), and various environmental remediation orders of
local governmental agencies, in each case arising in the ordinary course of business. Although the outcome of these lawsuits or other proceedings against the Company and the cost of compliance with any governmental order cannot be predicted with
certainty, management does not expect any of these matters to have a material adverse effect on our business, future results of operation, financial condition, or liquidity.



Although the Company is a party to routine proceedings incidental to its business, the Company is not a party to, nor is its
property the subject of, any material pending legal proceeding, except as provided below.



On March 12, 2002, the Department of Toxics and Substance Control of the State of California (DTSC) notified the Company of an investigation of the Company, its general contractors, and subcontractors
working for such general contractors, concerning the Mission Bay project. The investigation was initiated primarily for purposes of determining whether individuals and companies hauling soil within and from Mission Bay satisfied certain hazardous
waste license/certification hauling requirements. The DTSC issued notices of violation, without fines or penalties, to the Company and one subcontractor on May 23, 2002, citing the subcontractors failure to qualify as a registered hazardous
waste hauler. The Company has not since received any communications from the DTSC regarding any change in the status of the investigation. The Company is working with the DTSC on a basis for concluding the investigation. In any event, the Company
does not anticipate that the investigation or any proceeding that may result from the investigation will have a material adverse impact on the Mission Bay project.



Also see Note 8, Commitments and Contingencies, of the accompanying Condensed Consolidated Financial
Statements.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



None.



|Item 5. | Other Information
|------- | -----------------



None.



|Item 6. | Exhibits
|------- | --------



See Exhibit Index.



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##### Table of Contents



SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, Catellus Development Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |  |  |                                  |  |                               |  |                               
|----------------- |  |  |  | -------------------------------- |  | ----------------------------- |  | ------------------------------
|                  |  |  |  | CATELLUS DEVELOPMENT CORPORATION
|                  |  |  | 
|Date: May 6, 2005 |  |  |  | By:                              |  | /s/ C. WILLIAM HOSLER        
|                  |  |  |  |                                  |  | C. William Hosler            
|                  |  |  |  |                                  |  | Senior Vice President and    
|                  |  |  |  |                                  |  | Chief Financial Officer      
|                  |  |  |  |                                  |  | (Principal Financial Officer)
|                  |  |  | 
|Date: May 6, 2005 |  |  |  | By:                              |  | /s/ EDWARD F. SHAM           
|                  |  |  |  |                                  |  |                               |  | Edward F. Sham                
|                  |  |  |  |                                  |  |                               |  | Vice President and Controller 
|                  |  |  |  |                                  |  |                               |  | (Principal Accounting Officer)



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                        
|31.1        |  | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|31.2        |  | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1        |  | Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.