<PAGE>

                                                                   EXHIBIT 10.17
                                                                  EXECUTION COPY


                             AMENDED AND RESTATED
                             EMPLOYMENT AGREEMENT
                                    BETWEEN
                       CATELLUS DEVELOPMENT CORPORATION
                                      AND
                               KATHLEEN SMALLEY
                                  DATED AS OF
                              SEPTEMBER 16, 1997
<PAGE>

                               TABLE OF CONTENTS
                                                             PAGE

ARTICLE I



                         EMPLOYMENT RELATIONSHIP.............   2

      1.1  Employment........................................   2
           ----------
      1.2  Term..............................................   4
           ----
      1.3  Base Salary.......................................   5
           -----------
      1.4  Bonuses...........................................   5
           -------
      1.5  Stock Option......................................   6
           ------------
      1.6  Places of Performance.............................   7
           ---------------------
      1.7  Termination of Employment.........................   7
           -------------------------
      1.8  Benefits Upon Termination.........................  11
           -------------------------
      1.9  Benefits..........................................  14
           --------
     1.10  Expenses..........................................  16
           --------
     1.11  Indemnity.........................................  16
           ---------
     1.12  Relocation Expenses...............................  17
           -------------------
     1.13  Housing Arrangement...............................  18
           -------------------


ARTICLE II
                                  COVENANTS..................  18

     2.1  Covenant Against Competition.......................  18
          ----------------------------
     2.2  Confidential Information...........................  19
          ------------------------

ARTICLE III
                              CHANGE OF CONTROL.............   20
     3.1  Change of Control Payments........................   20
          --------------------------

ARTICLE IV
           ADMINISTRATION, ENFORCEMENT AND OTHER MATTERS....   25
      4.1  Amendment........................................   25
           ---------
      4.2  Severability; Governing Law......................   25
           ---------------------------
      4.3  Title and Headings...............................   26
           ------------------
      4.4  Notices..........................................   26
           -------
      4.5  Nonassignability.................................   26
           ----------------
      4.6  Attorneys' Fees and Costs for Proceedings........   27
           -----------------------------------------
      4.7  Full Settlement..................................   27
           ---------------
      4.8  Waiver...........................................   27
           ------
      4.9  Arbitration of All Disputes......................   28
           ---------------------------
     4.10  Personnel Policies and Legal Compliance Manuals..   29
           -----------------------------------------------
     4.11  Expenses.........................................   30
           --------
     Signatures.............................................   33

                                       i
<PAGE>

EXHIBIT A    OPTION AGREEMENT

EXHIBIT B    TERMS AND CONDITIONS FOR PURCHASE OF NEW HOME IN SAN FRANCISCO AREA
             FOR EXECUTIVE

EXHIBIT C    CATELLUS DEVELOPMENT CORPORATION BENEFITS SUMMARY 1995

                                       ii
<PAGE>

                             AMENDED AND RESTATED
                             EMPLOYMENT AGREEMENT
                                    BETWEEN
                       CATELLUS DEVELOPMENT CORPORATION
                                      AND
                               KATHLEEN SMALLEY


          This Amended and Restated Employment Agreement (this "Agreement") is
made and entered into as of the 16th day of September, 1997 by and between
KATHLEEN SMALLEY ("Executive") and CATELLUS DEVELOPMENT CORPORATION, a Delaware
corporation, with its principal office located in San Francisco, California (the
"Company").

                                    RECITALS

          A.  The Executive and the Company entered into an Employment Agreement
on December 3, 1996 (the "Employment Agreement").

          B.  The Executive and the Company desire to amend the Employment
Agreement to provide for dual location service and certain other changes in the
terms and conditions of her employment with the Company.

          C.  The Executive and the Company desire to restate and amend the
Employment Agreement through this Agreement.

                                       1
<PAGE>

          The Company desires to continue to secure the services of Executive as
Senior Vice President and General Counsel of the Company and Executive desires
to perform such services for the Company on the amended terms and conditions
hereinafter set forth.

                              A G R E E M E N T:

          NOW, THEREFORE, Executive and the Company hereby agree as follows:

                                   ARTICLE I
                            EMPLOYMENT RELATIONSHIP

1.1  Employment.
     ----------

          (a) The Company hereby employs Executive as Senior Vice President and
General Counsel of the Company, with a term of service which commenced on
January 1, 1997 (the "Commencement Date").  Executive shall report directly to
the Chief Executive Officer of the Company and shall have such duties as may be
prescribed by the Chief Executive Officer and shall be part of the senior
management group of the Company.  The Company agrees that the duties which may
be assigned to Executive shall be the usual and customary duties of the offices
to which she may from time to time be elected or appointed and shall not be
inconsistent with the provisions of the charter documents of the Company or
applicable law (both as in effect from time to time).

                                       2
<PAGE>

          (b) During the term of this Agreement, Executive shall, except as
described in clause (c) below and subject to the other provisions hereof, devote
her full-time energy and talent to her employment and shall not engage in any
other business activities which would represent a material conflict with her
duties to the Company.  Executive may make and manage personal business
investments of her choice, provided that such activities and services do not
substantially interfere or conflict with the performance of duties hereunder or
create any conflict of interest with such duties.

          (c)  Notwithstanding the foregoing, Executive may devote reasonable
time to activities other than those required under this Agreement, including
supervision of personal investments and activities involving professional,
charitable, educational, political, religious and similar types of
organizations, speaking engagements, memberships of boards of directors of other
organizations and similar activities, provided that Executive shall not serve on
the board of directors of any other business or hold any other position with any
business without the consent of the Chief Executive Officer of the Company.
Company recognizes that Executive serves as a Lecturer at Harvard Law School and
as Chairman of the Visiting Committee of Harvard Law School and agrees that
Executive shall continue to serve in these capacities at her discretion.

          (d) Paid vacations of three weeks (subject to increase in accordance
with the Company's policy with regard to vacation for senior executives) every
12 months shall be permitted and Executive shall be entitled to take such
vacations at such time or times as she shall choose.

                                       3
<PAGE>

          (e) The Executive shall not be required to perform services under this
Agreement during any period that she is disabled.  The Executive shall be
considered "disabled" during any period in which she has a physical or mental
disability which renders her incapable, after reasonable accommodation, of
performing her duties under this Agreement and is eligible to receive income
replacement benefits during such period under a long-term disability plan or
disability insurance provided by the Company.  In the event of a dispute as to
whether Executive is disabled, the Company may refer the same to a licensed
practicing physician of the Company's choice, and the Executive agrees to submit
to such tests and examinations as such physician shall deem appropriate.

1.2  Term.
     ----

          This Agreement commenced on December 3, 1996, and shall continue in
effect through December 31, 1999 (as such date may be extended in accordance
with this Section 1.2, the "Expiration Date"), subject to the termination
provisions contained in Section 1.7 hereof; provided, however, that (i) unless
the Company gives notice of termination to Executive on or before the December
31 immediately preceding the Expiration Date, the Expiration Date shall be
automatically extended by an additional 12 months to the next succeeding
December 31 and (ii) the Company's obligations under Sections 1.8, 1.12 and 1.13
hereof and Executive's obligations under Section 2.2 hereof shall survive the
termination of this Agreement.

                                       4
<PAGE>

1.3  Base Salary.
     -----------

          Executive shall receive a minimum annual base salary (the "Base
Salary") payable in substantially equal installments no less than twice monthly,
with the first payment having been made on or about January 15, 1997 for
services commencing on the Commencement Date.  The Base Salary shall be reviewed
every 12 months by the Chief Executive Officer of the Company and, as a result
of that review, shall be subject to possible increase but not decrease based
upon the attainment of reasonable performance goals as mutually determined by
Executive and the Chief Executive Officer of the Company.  Any increase to Base
Salary which results from that review will be effective on each February 1st by
the amount which results from that review and such revised base salary shall
thereafter represent the minimum annual base salary.   Executive's initial
annual Base Salary under this Agreement shall be $231,000.

1.4  Bonuses.
     -------

          (a) Executive shall be eligible to receive an annual bonus (the "Base
Bonus") equal to up to 60% of Base Salary commencing with the year ended
December 31, 1997.  For all periods beginning on or after January 1, 1998,
Executive's Base Salary for purposes of this Section 1.4 shall be deemed to be
the Executive's Base Salary determined in accordance with Section 1.3.  The Base
Bonus each year shall be determined on the basis of the achievement of
performance goals negotiated in good faith annually in advance with

                                       5
<PAGE>

Executive by the Chief Executive Officer of the Company on or before February 28
of each year.  The Base Bonus shall be payable each year no later than March 31.

          (b) Executive shall be eligible to receive an additional bonus (the
"Additional Bonus") equal to up to 60% of Base Salary commencing with the year
ended December 31, 1997.  The Additional Bonus each year shall be determined on
the basis of the achievement of performance goals negotiated in good faith
annually in advance with Executive by the Chief Executive Officer of the Company
on or before February 28 of each year; provided that the Additional Bonus may
not exceed the Base Bonus in any year.  Such Additional Bonus will be payable
for outstanding service determined on the basis of reasonably attainable
performance goals.  The Additional Bonus shall be payable each year no later
than March 31.

          (c) All bonus payments shall be subject to appropriate withholding
payments deducted therefrom.

1.5  Stock Option.
     ------------

          As of January 1, 1997, Executive was granted non-qualified stock
options covering an aggregate of 75,000 shares of Common Stock of the Company in
accordance with the Company's existing Amended and Restated Executive Stock
Option Plan and as approved by the Compensation and Benefits Committee of the
Board of Directors of the Company, and the Option Agreement is in the form of
Exhibit A attached hereto.

                                       6
<PAGE>

          Additional option and other awards, if any, shall be made to Executive
in an equitable manner consistent with Executive's senior position and otherwise
in a manner consistent with the Company's executive compensation policies;

provided, however, the Company acknowledges that it is contemplated that options
for an additional 75,000 shares would be granted to Executive during the 1997
fiscal year if Executive's performance is of high quality.  The issuance of any
shares of Common Stock of the Company issuable upon exercise of such options
shall be registered under the Securities Act of 1933.

1.6  Places of Performance.
     ---------------------

          In connection with her employment hereunder, Executive shall be based
at the San Francisco and Dallas offices of the Company, except for required
business travel for the Company and for any leave of absence.

1.7  Termination of Employment.
     -------------------------

          (a) If at any time during the term of this Agreement, (i) Executive
involuntarily ceases to be an employee of the Company for any reason other than
(A) termination for Cause, (B) disability at a time when Executive is receiving
disability benefits under a long-term disability plan or disability insurance
provided by the Company, (C) death, or (D) normal retirement under the Company's
pension plan or a qualified retirement plan of the Company or (ii) Executive
terminates employment with the Company for Good Reason

                                       7
<PAGE>

(as defined below), then Executive shall be entitled to the benefits provided in
Section 1.8 hereof.

          (b) For purposes of this Agreement, the following definitions are set
forth below:

     (i)  Termination by the Company for "Cause" shall mean termination upon the
          willful and continued failure by Executive to substantially perform
          her material duties with the Company (other than any such failure
          resulting from her incapacity due to physical or mental illness) after
          a Notice of Termination as set forth in this Section 1.7(b)(i) is
          delivered to Executive by the Chief Executive Officer of the Company,
          which Notice specifically identifies the manner in which the Board of
          Directors believes that Executive has not substantially performed her
          duties.  For purposes of this Section, no act, or failure to act, on
          Executive's part shall be deemed "willful" unless done, or omitted to
          be done, by Executive not in good faith and without reasonable belief
          that Executive's action or omission was not inconsistent with the best
          interest of the Company.

               Notwithstanding the foregoing, Executive shall not be terminated
          for Cause pursuant to this Section 1.7(b)(i) unless and until
          Executive (A) has received notice of a proposed termination for cause
          with a written explanation of the grounds for such proposed
          termination, (B) Executive has had an

                                       8
<PAGE>

          opportunity to confer with the Chief Executive Officer of the Company,
          and (C) Executive has had 60 days after receipt of such notice to cure
          any alleged non-performance of her duties.  If at the end of such
          sixty-day period the nonperformance has not been cured to the
          satisfaction of the Chief Executive Officer, then the Company, upon
          the determination of the Compensation and Benefits Committee of the
          Board of Directors of the Company, may terminate this Agreement for
          Cause.

   (ii)   "Good Reason" shall exist if, without Executive's express written
          consent, any of the following occurs:

          (A) a reduction by the Company in Executive's Base Salary as in effect
     on the date hereof or as the same may be increased from time to time; or

          (B) a demotion from the position or title of Senior Vice President and
     General Counsel of the Company or an assigning of duties to Executive that
     are inconsistent in any substantial respect with or are a reduction in any
     substantial respect from the position, authority, or responsibilities
     associated with the position of Senior Vice President and General Counsel
     of the Company; or

          (C) the failure of the Company to fulfill its obligations under this
     Agreement; or

                                       9
<PAGE>

          (D) the intentional failure of the Company, without Executive's
     consent, to pay to Executive any portion of her salary, earned bonus, or
     other current compensation (if any), or to pay to Executive any portion of
     any installment of deferred compensation under any deferred compensation
     program of the Company within ten business days of the date such
     compensation is due or to issue shares of Common Stock of the Company in
     accordance with the terms of stock options granted to Executive upon valid
     exercise thereof; or

          (E) a relocation of the Company headquarters or requirement for
     Executive to be based anywhere other than within 25 miles from the site of
     the current headquarters of the Company; provided, however, that
                                              --------  -------
     Executive's service in Dallas shall not be deemed a "relocation" or
     "requirement" under this Section 1.7(b)(ii)(E).

     (iii)     For purposes of this Agreement, "Date of Termination" shall mean
               the effective date specified in the Notice of Termination as of
               which Executive's employment terminates (which shall not be less
               than 60 days after the date such Notice of Termination is given)
               or, in the event of termination of employment other than for
               Cause, the date as of which Executive's employment terminates.

          (c) Executive may terminate her employment hereunder at any time by
giving the Company prior written notice, which notice shall be effective not
less than 30 days after it is given to the Company.

                                       10
<PAGE>

1.8  Benefits Upon Termination.
     -------------------------

          (a) If, at any time during the term of this Agreement, (i) Executive
involuntarily ceases to be an employee of the Company for any reason other than
(A) termination for Cause, (B) disability at a time when Executive is receiving
disability benefits under a long-term disability plan or disability insurance
provided by the Company, (C) death, or (D) normal retirement under the Company's
pension plan or a qualified retirement plan of the Company or (ii) Executive
terminates employment with the Company for Good Reason (as defined below), then
the amount of benefits payable (as hereinafter described) on account of such
termination shall be equal to the sum of:

     (i)  unpaid salary with respect to any vacation days accrued but not taken
          as of the Date of Termination; and

     (ii) in the event that the termination of employment occurs prior to the
          first anniversary of the Commencement Date, the sum of (1) the number
          of full months remaining in this Agreement, but not to exceed 24,
          multiplied by Executive's monthly Base Salary (determined without
          regard to amounts payable under any bonus program, or other forms of
          extraordinary compensation) as of the Date of Termination; and (2) the
          number of full or partial months remaining in the period commencing on
          the first day following the most recent period in respect of which the
          Base Bonus has been paid and

                                       11
<PAGE>

          ending on the Expiration Date, but not to exceed 24, multiplied by
          $138,600 divided by 12; or

   (iii)  in the event that the termination of employment occurs after the
          first anniversary of the Commencement Date, the sum of (1) the number
          of full months remaining in this Agreement, but not to exceed 24,
          multiplied by the average monthly Base Salary (determined without
          regard to amounts payable under any bonus program, or other forms of
          extraordinary compensation) for the immediately preceding two-year
          period or, if Executive has not served the Company for 24 months, then
          the average monthly Base Salary (determined without regard to amounts
          payable under any bonus program, or other forms of extraordinary
          compensation) for such shorter period; and (2) the number of full or
          partial months remaining in the period commencing on the first day
          following the most recent period in respect of which the Base Bonus
          has been paid and ending on the Expiration Date, but not to exceed 24,
          multiplied by the average monthly Base Bonus and Additional Bonus for
          the immediately preceding two-year period or, if Executive has not
          served the Company for 24 months, then the average monthly Base Bonus
          and Additional Bonus for such shorter period,

provided, however, that the amount of such benefits shall be reduced by any
--------  -------
other benefits provided upon termination of employment to which Executive may be
entitled under any severance agreement with the Company.

                                       12
<PAGE>

          Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise.  The
Company shall not be entitled to set off against the amounts payable to
Executive under this Agreement any amounts owed to the Company by Executive, any
amounts earned by Executive in other employment after termination of her
employment with the Company, or any amounts which might have been earned by
Executive in other employment had she sought such other employment.

          The Company shall pay Executive, no later than the fifth day following
the Date of Termination, a lump sum payment, in cash, equal to the amount due
under Section 1.8(a) hereof; provided, however, Executive may elect any time
                             --------  -------
prior to the Date of Termination to receive the amounts due under Section 1.8(a)
hereof on an installment basis as may be mutually agreed by the Company and
Executive.

          (b) If, at any time during the term of this Agreement, Executive
ceases to be an employee for any reason described in Section 1.8(a) hereof,
during the remainder of the term of this Agreement, Executive shall continue to
be treated as an employee for purposes of the Company's group health and dental
programs, but not for purposes of life, dependent care reimbursement, business
travel accident insurance, or long- or short-term disability programs (except to
the extent Executive is drawing benefits at the time of termination), tax-
qualified retirement plans, or any other employee benefit plan or program of the
Company, and shall receive benefits substantially comparable to those in effect
on the

                                       13
<PAGE>

day before the Date of Termination subject to any reduction or termination of
such benefits similarly affecting all senior management personnel of the
Company.

          (c) If, at any time during the term of this Agreement, Executive
ceases to be an employee for any other reason, then Executive shall be entitled
to the sum of (i) unpaid accrued salary, (ii) unpaid salary with respect to any
vacation days accrued but not taken as of the Date of Termination and (iii) any
bonus or portion thereof to which Executive is entitled under any then effective
bonus plan or program.

1.9  Benefits.
     --------

          Executive shall be entitled to receive employee benefits (including,
but not limited to, pension, medical, insurance and disability benefits) and
perquisites no less favorable than those provided to other senior executives of
the Company (other than the Chief Executive Officer).

          With respect to medical coverage, Executive shall be entitled to
coverage for her family for the term of this Agreement unless Executive is
terminated for Cause in which case coverage shall terminate on the Date of
Termination except for any applicable COBRA coverage.  If, at any time during
the term of this Agreement, Executive involuntarily ceases to be employed by the
Company for any reason other than Termination for Cause or Executive terminates
employment with the Company for Good Reason, then Executive shall

                                       14
<PAGE>

be entitled to medical insurance for the full term of this Agreement as provided
in Section 1.8(b) hereof.

          Executive shall, to the extent available at a commercially reasonable
rate of premium, receive from the Company disability income replacement coverage
under the Company's enhanced disability program benefits which will provide for
replacement of 70% of Base Salary during any period in which Executive is
disabled if the disability arose during the term of this Agreement and prior to
the Date of Termination.  During any period while Executive is disabled, and is
otherwise entitled to receive salary under this Agreement, any salary payments
to Executive shall be reduced by the amount of any benefits paid for the same
period of time pursuant to such disability income replacement coverage.

          Executive also will be entitled to ample office space and appropriate
furniture and all other customary supplies and equipment to fulfill the
requirements of her corporate position as well as to a full-time secretary.

          In addition to the benefits described above, Executive shall be
entitled to participate in a retirement program under the Company's 401-K Plan.

          The Company's current benefit programs are described on Exhibit C
attached hereto and such benefits and the benefits described in this Section 1.9
shall not be materially altered except for across the board modifications
applicable to all Company executives.

                                       15
<PAGE>

1.10 Expenses.
     --------

          Executive shall be entitled to monthly reimbursement for all
reasonable business and business-related entertainment expenses, including an
automobile allowance in an amount not less than $981.05 per month as well as
reimbursement for cellular phone expenses.  The term "reasonable business and
business-related expense" as used in the preceding sentence shall, commencing on
the date hereof, be deemed to include travel expense for travel between Dallas
and San Francisco in an amount, for any 12-month period, up to $10,000 plus such
additional expense, if any, as shall be incurred by Executive in connection with
travel between Dallas and San Francisco at the Company's specific request.  The
Company and Executive agree that such travel expense may be funded for a 24-
month period through the purchase of a $20,000 24-month "Airpass."

1.11 Indemnity.
     ---------

          To the fullest extent permitted by applicable law and the Bylaws of
the Company, as the same now exist or may hereafter be amended, the Company
shall indemnify Executive and hold Executive harmless for any acts or decisions
made in good faith while performing services for the Company, and the Company
shall use its best efforts to obtain coverage for Executive under any liability
insurance policy or policies now in force or hereafter obtained during the term
of this Agreement that cover other officers of the Company having comparable or
lesser status and responsibility and to obtain professional malpractice
insurance coverage for Executive.  To the same extent, the Company will pay

                                       16
<PAGE>

and advance all expenses, including reasonable attorneys' fees and costs of
court approved settlements, actually incurred by Executive in connection with
the defense of or settlement of any action, suit or proceeding and in connection
with any appeal thereon, which has been brought against Executive by reason of
Executive's service as an officer or agent of the Company or as a director,
officer or agent of any subsidiary of the Company.

1.12 Relocation Expenses.
     -------------------

          (a) Executive has received a lump sum payment of $108,707 which is
designed to cover costs of moving personal property, including (i) the cost of
an interim move of personal property of Executive to temporary storage; (ii) the
cost of additional storage for personal property of Executive for up to seven
months following the Commencement Date; (iii) miscellaneous related expenses;
and (iv) federal and state taxes, if any, payable by reason of the income effect
of the items described in this Section 1.12(a).

          (b) In addition to the lump sum payment to Executive described in
clause (a) above, Executive also will receive, from time to time during fiscal
year 1997 and thereafter, the following:  (i) $4,000 per month until the earlier
of (A) the sale of Executive's condominium in Dallas and (B) ten months after
the Commencement Date (provided that amounts payable with respect to the tenth
month shall be payable on or before March 31, 1998); (ii) the cost of furniture
rental for the same period referenced in clause (b)(i) above; (iii) a lump sum
payment of $5,000 payable on or before April 15, 1998; (iv) closing costs
incurred in connection with the purchase of a new residence in the San

                                       17
<PAGE>

Francisco area for Executive; and (v) federal and state taxes, if any, payable
by reason of the income effect of the items described in this Section 1.12(b).
Such payments shall be payable promptly upon receipt by the Company of a
statement setting forth, in reasonable detail, the calculation of such amounts.

1.13 Housing Arrangement.
     -------------------

          Executive and the Company shall enter into arrangements for the
purchase of a new residence in the San Francisco area in accordance with the
terms and conditions set forth in Exhibit B attached hereto.

                                  ARTICLE II
                                   COVENANTS

          2.1  Covenant Against Competition.  Executive agrees that for the
               ----------------------------
period ending on the earlier of the expiration of the term of this Agreement or
when employment is terminated hereunder, Executive will not, except as provided
in Section 1.1(c) hereof, without the prior written approval of the Chair of the
Board of Directors of the Company, directly or indirectly, as owner, partner,
officer or employee, engage in any business which is substantially competitive
with any business then actively conducted by the Company or by any of its
subsidiaries or undertake to consult with or advise any such competitive
business, or otherwise, directly or indirectly, engage in any activity which is
substantially competitive with or in any way adversely and substantially
affecting any activity of the Company or any

                                       18
<PAGE>

of its subsidiaries; provided, however, that ownership by Executive of rental
                     --------  -------
homes, of not more than 5% of the outstanding shares of stock of any such
business listed on any national stock exchange or quoted on an automated
quotation system, or of not more than 15% of the stock of any such business not
so listed or quoted, shall not be deemed a violation of this covenant, and
provided further that Executive may, without further approval, perform services,
including but not limited to consulting, providing legal advice, conducting
negotiations, and directing outside counsel, to Trammell Crow Interests Company
d/b/a Crow Family Holdings ("CFH"), as appropriate to assist in transition as
her responsibilities at CFH are transferred to other persons.

          2.2  Confidential Information.  In further consideration of the
               ------------------------
payments to be made to Executive hereunder, Executive agrees that:

          (a) During the term of her employment under this Agreement and for a
period of five years thereafter, she will not divulge to anyone, other than to
persons designated by the Company in writing or as may be required by law, any
confidential information concerning the Company or its business as to which
Executive at any time during her employment shall become informed and which is
not then generally known to the public or recognized as standard practice and
shall use reasonable precautions to ensure that such information remains
confidential; and

          (b) During the employment period, upon termination of employment under
this Agreement or at any subsequent time upon request, Executive will return
promptly to the

                                       19
<PAGE>

Company as its property, all corporate documents and records in whatever form
they may exist, which are then in her custody, possession or control, including
those related to trade secrets or other confidential information, provided that
Executive may retain copies of any form files and any nonconfidential
information.


                                  ARTICLE III
                               CHANGE OF CONTROL

3.1  Change of Control Payments.
     --------------------------

          In the event that a Change of Control (as defined in Section 3.1(c)
hereof) occurs during the term of this Agreement while Executive is employed by
the Company, Executive shall be entitled to certain payments as follows:

          (a) If, following the execution of an agreement providing for a Change
of Control or within 12 months after the occurrence of the Change of Control,
Executive's employment by the Company or its successor is terminated by the
Company without Cause (as defined in Section 1.7(b)(i) hereof) or by Executive
pursuant to Section 1.7(b)(ii) hereof (relating to Termination for Good Reason),
then Executive shall be entitled to receive from the Company or such successor,
in lieu of, and not in addition to, the amounts otherwise payable to Executive
pursuant to Section 1.8 hereof, a lump sum payment in an amount which is equal
to three times the "base amount" in respect of Executive as defined in Section

                                       20
<PAGE>

280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any
successor to that provision.  In addition, the stock options described in
Section 1.5 hereof shall become fully vested in such event.

          (b) If any payments under this Agreement, after taking into account
all other payments to which Executive is entitled from the Company, or any
affiliate thereof, are more likely than not to result in a loss of a deduction
to the Company by reason of Section 280G of the Code or any successor provision
to that section, such payments shall be reduced to the extent required to avoid
such loss of deduction.  Executive shall be entitled to select the order in
which payments are to be reduced in accordance with the preceding sentence.

          If reasonably requested by the Company, Executive shall provide
complete compensation and tax data on a timely basis to the Company and to an
accounting or law firm designated by the Company in order to enable the Company
to determine the extent to which payments from the Company and its affiliates
may result in a loss of a deduction.  If Executive incurs fees or expenses in
accumulating such information, the Company shall reimburse Executive for any
reasonable fees and expenses so incurred.

          If Executive and the Company disagree as to whether a payment under
this Agreement is more likely than not to result in the loss of a deduction, the
matter shall be resolved by an opinion of independent tax counsel chosen by the
Company's independent auditors.  The Company shall pay the fees and expenses of
such counsel, and shall make

                                       21
<PAGE>

available such information as may be reasonably requested by such counsel to
prepare the opinion.

          If, by reason of the limitations of this Section 3.1(b), the maximum
amount payable to Executive cannot be determined prior to the due date for such
payment, the Company shall pay on the due date the minimum amount which it in
good faith determines to be payable and shall pay the remaining amount, with
interest at a rate compounded semi-annually, equal to 120% of the applicable
Federal rate determined under Section 1274(d) of the Code, as soon as such
remaining amount is determined in accordance with this Section 3.1(b).

          (c) A "Change of Control" of the Company shall be deemed to have
occurred upon the happening of any of the following events:

          (1) the acquisition or holding, other than in or as a result of a
     transaction approved by the Continuing Directors (as defined in clause (b)
     below) of the Company, by any individual, entity or group (within the
     meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
     1934) (an "Acquiror") of beneficial ownership (within the meaning of Rule
     13d-3 promulgated under the Securities Exchange Act of 1934) of 25% or more
     of the combined voting power of the then outstanding shares of Common Stock
     and other stock of the Company entitled to vote generally in the election
     of directors, but excluding for this purpose:

                                       22
<PAGE>

              (i)   any such acquisition (or holding) by California Public
          Employees' Retirement System ("CalPERS"), which as of the Effective
          Date holds approximately 40% of the issued and outstanding Common
          Stock of the Company, or while CalPERS is the beneficial owner of
          shares having a greater percentage of such combined voting power than
          the shares held by the Acquiror;

              (ii)  any such acquisition (or holding) by the Company or any of
          its Subsidiaries, or any employee benefit plan (or related trust) of
          the Company or such Subsidiaries; or

              (iii) any such acquisition (or holding) by any corporation with
          respect to which, following such acquisition, more than 50% of,
          respectively, the then outstanding shares of common stock of such
          corporation and the combined voting power of the then outstanding
          voting securities of such corporation entitled to vote generally in
          the election of directors is then beneficially owned, directly or
          indirectly, by all or substantially all of the individuals and
          entities who were the beneficial owners, respectively, of the Common
          Stock and other voting securities of the Company immediately prior to
          such acquisition in substantially the same proportion as their
          ownership, immediately prior to such acquisition, of the then
          outstanding shares of Common Stock of the Company and of the combined
          voting power of the then

                                       23
<PAGE>

          outstanding voting securities of the Company entitled to vote
          generally in the election of directors;

          (2) individuals who, as of the date hereof, constitute the Board of
     Directors (the "Continuing Directors") cease for any reason to constitute
     at least a majority of the Board, provided that any individual becoming a
     director subsequent to the date hereof whose election, or nomination for
     election by the stockholders of Company, was approved by a vote of at least
     a majority of the persons then comprising the Continuing Directors shall be
     considered a Continuing Director, but excluding, for this purpose, any such
     individual whose initial election as a member of the Board is in connection
     with an actual or threatened "election contest" relating to the election of
     the directors of the Company (as such term is used in Rule 14a-11 of
     Regulation 14A promulgated under the Securities Exchange Act of 1934); or

          (3) approval by the stockholders of the Company of (i) a
     reorganization, merger or consolidation of the Company, with respect to
     which in each case all or substantially all of the individuals and entities
     who were the respective beneficial owners of the Common Stock and voting
     securities of the Company immediately prior to such reorganization, merger
     or consolidation do not, following such reorganization, merger or
     consolidation, beneficially own, directly and indirectly, more than 50% of,
     respectively, the then outstanding shares of common stock and the combined
     voting power of the then outstanding voting securities entitled to vote
     generally in the election of directors of the corporation or other entity
     resulting from such

                                       24
<PAGE>

     reorganization, merger or consolidation, or (ii) a complete liquidation or
     dissolution of the Company, or (iii) the sale or other disposition of all
     or substantially all of the assets of the Company.


                                  ARTICLE IV
                 ADMINISTRATION, ENFORCEMENT AND OTHER MATTERS

4.1  Amendment.
     ---------

          No amendments to this Agreement may be made except by a writing signed
by both parties.

4.2  Severability; Governing Law.
     ---------------------------

          The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.  This Agreement shall be
interpreted under, and governed by, the laws of the State of California.

                                       25
<PAGE>

4.3  Title and Headings.
     ------------------

          Title and headings are for ease of reference and convenience only and
shall not be construed to affect the meaning of any provision of this Agreement.

4.4  Notices.
     -------

          Any notices to the Company required or permitted hereunder shall be
given in writing to the Company, either by personal service or by registered or
certified mail, postage prepaid, duly addressed to the secretary of the Company
at its then principal place of business.  Any such notice to Executive shall be
given in like manner, and if mailed shall be addressed to Executive at her home
address as recorded in the employment records of the Company.  For the purpose
of determining compliance with any time limit herein, a notice shall be deemed
given at the time of postmark date.

4.5  Nonassignability.
     ----------------

          This Agreement shall not be transferable or assignable by either
Executive or the Company, except to the successor of the Company in the event of
its reorganization, merger or consolidation, approved in writing by Executive.
The terms, covenants and conditions of this Agreement shall be binding upon the
Company and its successors in the event of dissolution, reorganization,
consolidation or merger of the Company, approved in writing by Executive.

                                       26
<PAGE>

4.6  Attorneys' Fees and Costs for Proceedings.
     -----------------------------------------

          If any action at law or in equity, or any proceeding pursuant to
Section 4.9 hereof, is commenced to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and necessary disbursements in addition to any other relief to which she
or it may be entitled.

4.7  Full Settlement.
     ---------------

          The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others.

4.8  Waiver.
     ------

          Either party's failure to enforce any provision or provisions of this
Agreement shall not in any way be construed as a waiver of any such provision,
or provisions, nor prevent that party thereafter from enforcing each and every
other provision of this Agreement.  The rights granted both parties herein are
cumulative and shall not constitute a waiver of either party's right to assert
all other legal remedies available to it under the circumstances.

                                       27
<PAGE>

4.9  Arbitration of All Disputes.
     ---------------------------

          Any controversy or claim arising out of or relating to this Agreement
(or the breach thereof) shall be settled by binding and non-appealable
arbitration in San Francisco, California by an arbitrator.  Executive and the
Company shall initially confer and attempt to reach agreement on the individual
to be appointed as such arbitrator.  If no agreement is reached, the parties
shall request from the San Francisco office of the Judicial Arbitration and
Mediation Services ("JAMS") a list of five retired judges affiliated with JAMS.
Executive and the Company shall each alternately strike names from such list
until only one name remains and such person shall thereby be selected as the
arbitrator.  Except as otherwise provided for herein, such arbitration shall be
conducted in conformity with the procedures specified in the California
Arbitration Act (Cal. C.C.P. (S)(S) 1280 et seq.).  The arbitrator shall not be
authorized to award punitive damages with respect to any claim, dispute or
controversy.  The parties intend that this Section 4.9 shall be valid, binding,
enforceable and irrevocable and shall survive the termination of this Agreement
and that any arbitration proceeding hereunder shall be concluded within 60 days
after the initiation thereof.  The Company and Executive shall jointly so
instruct the Arbitrator chosen to arbitrate any dispute arising hereunder and
agree that the criteria used by them to select such Arbitrator shall include his
or her availability to act expeditiously within not more than the 60-day period
referred to herein.  The parties hereto agree that the final decisions of the
Arbitrator so chosen may be enforced by a court of competent jurisdiction.

                                       28
<PAGE>

4.10 Personnel Policies and Legal Compliance Manuals.
     -----------------------------------------------

          Executive acknowledges that she has received a copy of the document
entitled Personnel Policies Manual, revised February 4, 1995, and the Legal
Compliance Manual dated February 16, 1996.  Executive understands and agrees
that it is her responsibility to read and familiarize herself with the
provisions contained in the Personnel Policies Manual and to abide by the rules,
policies and standards set forth in the Personnel Policies Manual.  All
policies, rules and regulations contained in the Personnel Policies Manual are
subject to change, with or without notice, at the Company's discretion.  In
addition, Executive acknowledges that she has reviewed and understands the
provisions of the Legal Compliance Manual and agrees to comply with the
Company's policies and guidelines contained therein and to strictly follow all
laws relating to the performance of her duties.  This Agreement will control in
the event there are any inconsistencies between this Agreement and such
policies.

4.11 Expenses.
     --------

          The Company shall be responsible for the fees payable to Francis &
Associates, CPAs, and to Vinson & Elkins L.L.P., for the tax and legal advice
provided to Executive in connection with the preparation and implementation of
this Agreement, so long as the aggregate expenses for both the Employment
Agreement and this Agreement do not exceed $10,000.  All fees in excess thereof
shall be paid by Executive.

                                       29
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by an authorized officer and Executive has executed this Agreement as
of the date first above written.

                              "COMPANY"

                              CATELLUS DEVELOPMENT CORPORATION



                              By _____________________________
                                    Nelson C. Rising
                                    Chief Executive Officer



                              "EXECUTIVE"



                              By _____________________________
                                    Kathleen Smalley

                                       30
<PAGE>

                                   EXHIBIT A

                       CATELLUS DEVELOPMENT CORPORATION
                          1996 PERFORMANCE AWARD PLAN
                  NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
                                  (Executive)


          This Award Agreement ("Agreement") is entered into as of
January 1, 1997 (the "Date of Grant") between Catellus Development Corporation,
a Delaware corporation ("Catellus"), and

                               Kathleen Smalley

an employee of Catellus (the "Executive").

          The Board of Directors (the "Board") of Catellus wishes to encourage
high levels of performance by individuals who contribute to the success of
Catellus and to further the identity of interests of the Executive with the
stockholders of Catellus by granting the Executive a non-qualified stock option
to acquire common stock of Catellus, par value $.01 per share ("Common Stock"),
pursuant to the 1996 Performance Award Plan (the "Plan").

          Catellus and the Executive hereby agree as follows:

          1.   NUMBER OF OPTION SHARES.  This Agreement evidences the grant by
Catellus to the Executive, on the terms, conditions and restrictions set forth
herein and in the Plan, of a non-qualified stock option (the "Option") to
purchase, from time to time, a total of

                                     75,000

shares of Common Stock (the "Option Shares").

          2.   OPTION PURCHASE PRICE.  Upon exercise, the Executive shall pay to
Catellus $11.05 per Option Share (the "Option Purchase Price").

          3.   OPTION EXPIRATION DATE.  Unless terminated sooner in accordance
with the provisions of the Plan or this Agreement, the right to exercise the
Option shall expire on January 1, 2007 (the "Expiration Date").

          4.   VESTING RESTRICTIONS.  The Option shall be exercisable in
accordance with the following provisions:

               a.        Except as otherwise provided herein, no portion of the
Option may be exercised for any reason until at least six months have elapsed
following the Date of Grant.

                                       31
<PAGE>

          b.   Subject to the provisions of Section 5 of this Agreement, the
Option shall become exercisable (i) as to the entire number of the Option Shares
on and after the eighth anniversary of the Date of Grant or (ii) if earlier, in
the amounts indicated on and after the dates set forth below (each, a "Vesting
Date") in accordance with the provisions of Section 4c of this Agreement:

               (A) The Option may be exercised as to up to 25% of the Option
     Shares on and after the first anniversary of the Date of Grant provided the
     conditions specified in Section 4c of this Agreement are met.

               (B) The Option may be exercised as to up to 50% of the Option
     Shares on and after the second anniversary of the Date of Grant provided
     the conditions specified in Section 4c of this Agreement are met.

               (C) The Option may be exercised as to up to 75% of the Option
     Shares on and after the third anniversary of the Date of Grant provided the
     conditions specified in Section 4c of this Agreement are met.

               (D) The Option may be exercised as to up to the entire number of
     the Option Shares on and after the fourth anniversary of the Date of Grant
     provided the conditions specified in Section 4c of this Agreement are met.

          c.   The Option may be exercised as to (i) 25% of the Option
Shares provided the average of the Closing Price (as defined below) of a Common
Share (as defined in the Plan) for any 30 consecutive trading days following the
Date of Grant is at least $13.26; (ii) 50% of the Option Shares provided the
average of the Closing Price of a Common Share for any 30 consecutive trading
days following the Date of Grant is at least $15.91; (iii) 75% of the Option
Shares provided the average of the Closing Price of a Common Share for any 30
consecutive trading days following the Date of Grant is at least $19.09; and
(iv) 100% of the Option Shares provided the average of the Closing Price of a
Common Share for any 30 consecutive trading days following the Date of Grant is
at least $22.90.

      For purposes of this Section 4c, the term "Closing Price" shall mean,
for any trading day, the closing price of a Common Share on such day (i) on the
New York Stock Exchange ("NYSE"), if the Common Shares are then listed on such
exchange, (ii) if the Common Shares are not listed on the NYSE, on the principal
national stock exchange on which the Common Shares are then listed, or (iii) if
not listed on any national stock exchange, as reported by NASDAQ.  If the Common
Shares are not then listed on any national stock exchange or reported by NASDAQ,
then the Closing Price shall be determined in any reasonable manner approved by
the Committee (as defined in the Plan).

                                       32
<PAGE>

          5.  EFFECT OF CERTAIN EVENTS ON VESTING AND EXERCISE.

          a.   TERMINATION OF EMPLOYMENT.

                    (i)   General.  In the event of the Executive's termination
                          -------
          of employment for any reason, any portion of the Option that (A) has
          not vested as of such termination, or (B) is vested as of such
          termination or becomes vested as a result of such termination in
          accordance with Section 5a(ii), 5a(iii), or 5b of this Agreement and
          is not exercised within the period specified in Section 5d of this
          Agreement, shall be forfeited.

                    (ii)  Termination as a Result of Retirement, Disability or
                          ----------------------------------------------------
          Death.  In the event of the Executive's termination of employment
          -----
          prior to the first anniversary of the Date of Grant by reason of (A)
          retirement at or after age 65, (B) disability (as defined in the
          Plan), or (C) death, a portion of the Option will vest equal to the
          number of Option Shares subject to the Option multiplied by a
          fraction, the numerator of which is the number of months elapsed from
          the Date of Grant and the denominator of which is the number of months
          from the Date of Grant to the final Vesting Date.

                    (iii) Termination Without Cause or for Good Reason.  In the
                          --------------------------------------------
          event the Executive terminates her employment with Catellus for Good
          Reason, or in the event the Executive involuntarily ceases to be an
          employee of Catellus for any reason other than as a result of
          retirement, disability, death or for Cause, the Option will vest as to
          the entire number of Option Shares (and will be exercisable as to such
          entire number of Option Shares without regard to the conditions of
          Section 4a, 4b or 4c of this Agreement).  "Good Reason" and "Cause"
          shall have the meaning set forth in the Employment Agreement, dated as
          of December 3, 1996, between the Executive and Catellus (the
          "Employment Agreement").

                    (iv)  Termination for Cause.  Notwithstanding any other
                          ---------------------
          provision herein, in the event of the Executive's termination of
          employment for Cause (as defined in the Employment Agreement), any
          unexercised portion of the Option, whether vested or unvested, shall
          be immediately forfeited.

          b.   CHANGE OF CONTROL.  If, following the execution of an agreement
providing for a Change of Control or within 12 months after the occurrence of a
Change of Control, the Executive's employment by Catellus or its successor is
terminated by Catellus without Cause (as defined in the Employment Agreement) or
by the Executive for Good Reason (as defined in the Employment Agreement), the
Option shall vest immediately as to the entire number of Option Shares (and will
be exercisable as to such entire number of Option Shares without regard to the
conditions of Section 4a, 4b or 4c of this Agreement).  For purposes of this
Agreement, a "Change of Control" of Catellus shall be deemed to have occurred
upon the happening of any of the following events:

                                       33
<PAGE>

               (i) the acquisition or holding, other than in or as a result of a
          transaction approved by the Continuing Directors (as defined in clause
          (ii) below) of Catellus, by any individual, entity or group (within
          the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
          Act of 1934) (an "Acquiror") of beneficial ownership (within the
          meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
          1934) of 25% or more of the combined voting power of the then
          outstanding shares of Common Stock and other stock of Catellus
          entitled to vote generally in the election of directors, but excluding
          for this purpose:

                    (A) any such acquisition (or holding) by the California
          Public Employees' Retirement System ("CalPERS"), which as of the date
          hereof holds approximately 40% of the issued and outstanding Common
          Stock of Catellus, or while CalPERS is the beneficial owner of shares
          having a greater percentage of such combined voting power than the
          shares held by the Acquiror;

                    (B) any such acquisition (or holding) by Catellus or any of
          its subsidiaries, or any employee benefit plan (or related trust) of
          Catellus or such subsidiaries; or

                    (C) any such acquisition (or holding) by any corporation
          with respect to which, following such acquisition, more than 50% of,
          respectively, the then outstanding shares of common stock of such
          corporation and the combined voting power of the then outstanding
          voting securities of such corporation entitled to vote generally in
          the election of directors is then beneficially owned, directly or
          indirectly, by all or substantially all of the individuals and
          entities who were the beneficial owners, respectively, of the Common
          Stock and other voting securities of Catellus immediately prior to
          such acquisition in substantially the same proportion as their
          ownership, immediately prior to such acquisition, of the then
          outstanding shares of Common Stock of Catellus and of the combined
          voting power of the then outstanding voting securities of Catellus
          entitled to vote generally in the election of directors;

                        (ii) individuals who, as of the date hereof, constitute
          the Board of Directors (the "Continuing Directors") cease for any
          reason to constitute at least a majority of the Board, provided that
          any individual becoming a director subsequent to the date hereof whose
          election, or nomination for election by the stockholders of Catellus,
          was approved by a vote of at least a majority of the persons then
          comprising the Continuing Directors shall be considered a Continuing
          Director, but excluding, for this purpose, any such individual whose
          initial election as a member of the Board is in connection with an
          actual or threatened "election contest" relating to the

                                       34
<PAGE>

          election of the directors of Catellus (as such term is used in Rule
          14a-11 of Regulation 14A promulgated under the Securities Exchange Act
          of 1934); or

                    (iii)     approval by the stockholders of Catellus of (A) a
          reorganization, merger or consolidation of Catellus, with respect to
          which in each case all or substantially all of the individuals and
          entities who were the respective beneficial owners of the Common Stock
          or voting securities of Catellus immediately prior to such
          reorganization, merger or consolidation do not, immediately following
          such reorganization, merger or consolidation, beneficially own,
          directly and indirectly, more than 50% of, respectively, the then
          outstanding shares of common stock and the combined voting power of
          the then outstanding voting securities entitled to vote generally in
          the election of directors of the corporation or other entity resulting
          from such reorganization, merger or consolidation, or (B) a complete
          liquidation or dissolution of Catellus, or (C) the sale or other
          disposition of all or substantially all of the assets of Catellus.

          c.   FORFEITURE.  Notwithstanding any other provision herein, any
unexercised portion of the Option, whether vested or unvested, shall be
immediately forfeited if the Executive (i) is employed by a competitor of, or
engaged in any activity in competition with, Catellus without Catellus' consent,
(ii) divulges without Catellus'
consent any secret or confidential information belonging to Catellus, or (iii)
is engaged in any other activities which would constitute grounds for
termination "for cause" (as defined in the Plan).

          d.   EXERCISE PERIOD FOLLOWING TERMINATION OF EMPLOYMENT.

               (i)  In the event of the Executive's termination of employment by
          reason of death, any unexercised portion of the Option that is or
          becomes vested upon her death in accordance with Section 5a(ii) of
          this Agreement may be exercised by the Executive's personal
          representative or by the person or persons to whom the Option shall
          have been transferred by will or the laws of descent and distribution
          at any time within one year following her death, but in no event after
          the Expiration Date.

               (ii) In the event of the Executive's termination of employment
          (A) for any reason (1) other than death or (2) other than for Cause
          (as defined in the Employment Agreement) or (B) by reason of the
          resignation of the Executive, any unexercised portion of the Option
          that is or becomes vested upon such termination in accordance with
          Section 5a(ii), 5a(iii), or 5b of this Agreement (unless such
          unexercised portion is forfeited in accordance with Section 5a(iv) or
          5c of this Agreement) may be exercised by the Executive at any time
          within three months following such termination of employment, but in
          no event after the Expiration Date.

                                       35
<PAGE>

          6.  EXERCISE OF OPTION.

               a.   All or a portion of the Option may be exercised in
accordance with procedures (including requisite holding periods) established
from time to time by the Committee.  If shares of Common Stock are tendered as
payment, such shares of Common Stock shall be valued at their Fair Market Value
(as defined in the Plan) on the date of exercise of the Option.

               b.   No fractional shares, or cash in lieu thereof, shall be
issued under the Option.

               c.   As a condition to the grant of the Option, the Executive
agrees (i) that Catellus may deduct from any payments of any kind otherwise due
to the Executive from Catellus the aggregate amount of any federal, state or
local taxes of any kind required by law to be withheld with respect thereto or,
if no such payments are due or to become due to the Executive, that the
Executive shall pay to Catellus, or make arrangements satisfactory to Catellus
regarding the payment to it of, such taxes and (ii) that Catellus or its
subsidiaries may withhold from the shares of Common Stock to be issued upon
exercise of the Option that number of shares of Common Stock that is equivalent
(valuing such shares of Common Stock at their Fair Market Value on the date of
exercise of the Option) to the amount of any federal, state or local withholding
or other taxes due upon the exercise of the Option.  The Committee has approved
without further condition the offset of shares of Common Stock for such purposes
(subject to any applicable legal limitations) and the Executive irrevocably
elects this means of payment of such taxes.  If any such taxes should become due
after the date of exercise, the Executive must pay, or arrange (to the
satisfaction of Catellus) to pay, the amount due.

               d.   No shares of Common Stock shall be issued or transferred
upon exercise of the Option unless and until all legal requirements applicable
to the issuance or transfer of such Common Stock have been complied with to the
satisfaction of the Committee.

          7.   CHANGE IN CAPITALIZATION.  In the event of a change in the
capitalization of Catellus due to a stock split, stock dividend,
recapitalization, merger, consolidation, combination or similar event, an
appropriate adjustment shall be made in the number of Common Shares subject to
the Plan and the terms of the Option may be adjusted by the Committee to reflect
such change.  Any adjustments pursuant to this Section shall be determined by
the Committee in its sole discretion.

          8.   NO ASSIGNABILITY.  The Option is not assignable or transferable
by the Executive, other than by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order (as defined by the Internal
Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income
Security Act of 1974, or the rules thereunder), and may be exercised during the
lifetime of the Executive only by the Executive or, if the Executive becomes
disabled, by her legal representative.

                                       36
<PAGE>

          9. OTHER PROVISIONS.

          a.        Nothing in this Agreement or in the Plan shall confer any
right to continue employment with Catellus nor restrict Catellus from
termination of the employment relationship of the Executive at any time in
accordance with the Employment Agreement.

          b.        Nothing in this Agreement or in the Plan shall confer any
rights as a stockholder upon the Executive or any other person entitled to
exercise the Option with respect to any Option Shares covered by the Option
until such time as the Executive or such other person shall have become the
holder of record of such Option Shares.

          c.        The Executive acknowledges receipt of a copy of the Plan,
which is made a part hereof by this reference, and agrees to be bound by the
terms thereof.  In the event of a conflict between the terms of this Agreement
and the Plan, the Plan shall be the controlling document.  Capitalized terms
used but not defined herein shall have the respective meanings ascribed to them
in the Plan.

          d.        The Executive acknowledges that Catellus has the right to
terminate, modify or amend the Plan at any time, but that no such termination,
modification or amendment may, without the Executive's consent, adversely affect
the rights of the Executive under the Option.  The Executive further
acknowledges that the grant of the Option or of any other option in one year or
at one time does not in any way obligate Catellus to make a grant of an option
at any future time or in any given amount.

          e.        In the event that any provision of this Agreement is held to
be invalid, void or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Agreement.

          f.        The rights and obligations under this Agreement shall inure
to the benefit of, and shall be binding upon, Catellus, the Executive and the
Executive's representatives and beneficiaries.

          g.        Any communication under this Agreement shall be in writing
and addressed to Catellus at 201 Mission Street, San Francisco, California
94105, Attention:  Secretary and to the Executive at the address given beneath
the Executive's signature, or at such other address as either party may
hereafter designate in writing to the other.

          h.        The interpretation, performance and enforcement of the
Option and this Agreement shall be governed by the laws of the State of
California.

                                       37
<PAGE>

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.


                              "CATELLUS"

                              CATELLUS DEVELOPMENT CORPORATION


                              By:_______________________________
                                    Stephen P. Wallace
                                    Chief Financial Officer

ATTEST:


_______________________
Assistant Secretary           "EXECUTIVE"


                              __________________________________
                              Kathleen Smalley
                              c/o Catellus Development Corporation
                              201 Mission Street
                              San Francisco, CA 94105

                                       38
<PAGE>

                                   EXHIBIT B

DO NOT DESTROY THIS NOTE: WHEN PAID, THIS NOTE, WITH DEED OF TRUST SECURING SAME
  MUST BE SURRENDERED TO TRUSTEE FOR CANCELLATION BEFORE RECONVEYANCE WILL BE
                                     MADE.


                         NOTE SECURED BY DEED OF TRUST



$400,000       San Francisco, California           October ___, 1997


For value received, the undersigned ("MAKER") promises to pay to Catellus
Development Corporation, a Delaware corporation ("HOLDER"), or order at 201
Mission Street, San Francisco, California  94105, the principal sum of FOUR
HUNDRED THOUSAND DOLLARS ($400,000) without interest, as such principal sum may
be adjusted pursuant hereto.  Principal payable in lawful money of the United
States.  This Note Secured by Deed of Trust (this "NOTE") is secured by a Deed
of Trust and certain other security documents (collectively, the "Security
Documents") encumbering Maker's interest in those certain premises known as 1333
Jones Street, Apartment 1204, San Francisco, California  94109 (the "CURRENT
RESIDENCE"; the Current Residence and any subsequent residence acquired through
an Interim Sale (as defined below), are each referred to herein, individually,
as a "RESIDENCE").  The entire principal balance of this Note, shall be due and
payable on the date of the Final Sale (as defined below), or such earlier date
as may be provided herein or in the Security Documents.

     So long as Maker is employed by Holder:  if Maker sells a Residence, (A)
Maker may: (i) pay to Holder the entire principal balance of this Note, without
interest or penalty, and this Note shall be discharged, or (ii) deposit with
Holder, cash in an amount not less than the entire principal balance of this
Note (the "Holding Deposit") without paying any amount due under this Note for a
period of nine (9) months from the closing date of the sale of such Residence
(the "Holding Period"); (B) if Maker does not purchase a new Residence within
the Holding Period, this Note shall become due and payable; (C) if Maker
purchases a new Residence within the Holding Period (the sale of a Residence and
the purchase of a new Residence within the Holding Period is referred to herein
as an "Interim Sale"), Maker shall
<PAGE>

have the option, to be exercised upon written notice to Holder; (i) to withdraw
the Holding Deposit from Holder and to secure this Note with a first priority
deed of trust encumbering such new Residence having an Appraised Value not less
than $500,000, or (ii) to finance the purchase of the new Residence on the terms
and conditions set forth on Exhibit B attached hereto (referred to herein as the
                            ---------
"Participating Mortgage Alternative"); and (D) if Maker elects the Participating
Mortgage Alternative, Maker and Holder agree to execute such documents and
perform such acts as may be necessary or appropriate to accomplish the intent of
the Participating Mortgage Alternative.  Any sale of a Residence that is not
made pursuant to an Interim Sale shall be deemed to be a "Final Sale."

     If Maker's employment with Holder is terminated for any reason by either
party ("Termination"), and Maker has not elected the Participating Mortgage
Alternative, the Maker shall repay this Note within twenty four (24) months of
Maker's receipt of Holder's demand for repayment, which demand may be made at
any time after the Termination.  If this Note is not fully repaid by the end of
such period, the Holder will have the right to buy Maker's interest in such
Residence at ninety-four percent (94%) of the excess of the Appraised Value over
the principal balance of this Note, and this Note shall be deemed discharged.
If the Holder does not make such a demand or exercise its right to purchase
Maker's interest, the next sale of such Residence will be the "Final Sale."

     For purposes hereof, "Appraised Value" means the value of such Residence
determined by an MAI appraiser selected by Maker.  The costs of such appraisal
shall be borne by Holder.

     Maker may prepay this Note at any time in whole or in part.

     If this Note conflicts with the provisions of the Security Documents, then
this Note shall control.  Specifically, without limitation, the indebtedness
evidenced by this Note shall only be due and payable when and as provided in
this Note, and Holder may not accelerate the payment hereof,

     Maker shall have sole authority to make all determinations regarding every
aspect of the use, ownership, maintenance and repair of the Residence,
including, without limitation, when and at what price to sell the Residence, the
proper level of maintenance, security and insurance coverage, and whether and to
what extent alterations, additions and improvements
<PAGE>

to the Residence will be made.  All insurance proceeds payable for damage to the
Residence shall be paid to Maker to repair such damage or, at Maker's option, to
repayment of the Note.

     Holder may not assign the Note.  The Security Documents shall only secure
the indebtedness evidenced by the Note and the liens and security interests
created thereby shall be released upon payment in full of the Note.  Holder's
recourse with respect to obligations under the Note and the Security Documents
shall be solely the property securing the Note.


                                    ____________________________________
                                    Kathleen Smalley
<PAGE>

                                   EXHIBIT B

                       PARTICIPATING MORTGAGE ALTERNATIVE


1.   Structure.  The Holder's investment in a Residence will be structured as an
     ---------
interest-free second participating mortgage (any Residence so financed being
referred to as a "Participating Mortgage Residence").

2.   Terms.
     -----
Investment:
----------

Maker will invest the first $400,000 from any combination of personal funds and
first mortgage loan proceeds; the Holder will loan up to $400,000 as an
interest-free second participating mortgage; Maker will invest any additional
funds, from any combination of personal funds and first mortgage loan proceeds.
The total Holder loan amount must be used to acquire a residence (within the
meaning of Section 217 of the Internal Revenue Code and the regulations
thereunder).  The Holder will cooperate reasonably with Maker as necessary to
prevent the Holder's interest from affecting first mortgage financing.

Control:
-------

Maker will be the controlling owner of the Participating Mortgage Residence, and
the Holder will have no rights of control.  In particular, Maker will have the
sole right to determine (i) when to sell the Participating Mortgage Residence
and the sales price, (ii) the proper level of maintenance, (iii) appropriate
security and insurance, and (iv) improvements.

Participation:
-------------

There will be no current return payable on the Holder's loan.  Upon the Final
Sale (as defined below), the Holder will receive, as full satisfaction for
Maker's obligations under the Note, an amount equal to the product of the net
proceeds (after expenses of sale and repayment of the first mortgage loan) of
the Participating Mortgage Residence and a fraction the numerator of which is
the principal balance of the Note and the denominator of which is the total
basis of the Participating Mortgage Residence (including subsequent improvements

                                      B-1
<PAGE>

made by Maker).  Maker will have no responsibility, beyond forwarding the
Holder's share of proceeds, for the return to the Holder and will be protected
from liability for any loss or poor performance of the investment.

Expenses:
--------

Maker will be responsible for taxes, insurance, and maintenance.  Maker will
determine the appropriate level of insurance and deductible; the Holder will be
a named insured to the extent of its interest.  In the event of earthquake
damage, any deductible that exceeds the deductible for any other damage under
the homeowner's policy will be borne first by the Holder.

Maker Option to Purchase:
------------------------

Maker will have the option to purchase, at any time, the Note for an amount
equal to the product of 94% of the Appraised Value and a fraction the numerator
of which is the amount of the principal balance of the Note and the denominator
of which is the total basis of the Participating Mortgage Residence.

Interim Sale:
------------

If Maker sells the Participating Mortgage Residence while employed by the Holder
and reinvests in a new Residence, the Holder will reinvest its share of the
proceeds of the sale of the Participating Mortgage Residence in the new
Residence in the same proportion that Maker reinvests her share of the proceeds
from the sale of the Participating Mortgage Residence in the new Residence,
provided that Maker must always have at least $400,000 invested in the new
Residence.

Termination of Employment:
-------------------------

If Maker's employment is terminated for any reason by either party
("Termination"), the Holder may, within 30 days of Termination, demand that a
"Final Sale" of the Participating Mortgage Residence occur within 24 months of
the end of the term of that certain Employment Agreement, dated as of December
3, 1996, by and between Holder and Maker,

                                      B-2
<PAGE>

as such agreement may be amended, restated and modified from time to time.  If
no sale of the Participating Mortgage Residence to a third party has occurred by
the end of that period, the Holder will have the right to buy Maker's interest
in the Participating Mortgage Residence for an amount equal to the product of
the amount equal to ninety-four percent (94%) of the Appraised Value multiplied
by a fraction the numerator of which is the total basis in the Participating
Mortgage Residence less the principal balance of the Note and the denominator of
which is the total basis in the Participating Mortgage Residence.  If the Holder
does not make such a demand or exercise its right to purchase Maker's interest,
the Holder's debt will be deemed to have been converted to an equity investment,
but otherwise subject to the remaining conditions of this agreement, and the
next sale of the Participating Mortgage Residence will be the "Final Sale."

Appraised Value:  For purposes hereof, "Appraised Value" means the value of the
---------------
Participating Mortgage Residence determined by an MAI appraiser selected by
Maker.  The costs of such appraisal shall be borne by Maker in the event of an
exercise of her option to purchase the Holder note and by the Holder in the
event of an exercise of its option to require the sale of the Participating
Mortgage Residence or to purchase Maker's interest.

                                      B-3



                                   EXHIBIT C

                                 (see attached)
<PAGE>


                                   EXHIBIT C

                                C A T E L L U S

                               [LOGO OF CATELLUS]

                        CATELLUS DEVELOPMENT CORPORATION
                                BENEFITS SUMMARY
                                      1995

<PAGE>


                        CATELLUS DEVELOPMENT CORPORATION
                        INSTRUCTIONS FOR OPEN ENROLLMENT
                             NOVEMBER 9 - 18, 1994

 .    If you are not making any changes to your plans, you need only to complete
                ---
     the Flexible Benefits Plan Enrollment Form.

 .    If you are changing plans or adding/dependents, please obtain appropriate
     forms from the Administrative Support person at your location.

 .    Medical-Prudential will continue to provide our medical coverage with an
     HMO and PruCare Plus option. Kaiser will remain in place only for those
     employees currently covered under the plan.

 .    Dental - Our dental plan will continue to be offered through Phoenix Home
     Life.

 .    Supplemental Life/AD&D - This benefit will continue to be provided by
     Phoenix Home Life at your cost. All employees presently covered will have
     their coverage automatically carried over.

 .    All other benefits are paid for by Catellus and enrollment is automatic.
     These benefits include:

     .    Vision Coverage

     .    Short Term/Long Term Disability

     .    Basic Life/AD&D

<PAGE>

                        CATELLUS DEVELOPMENT CORPORATION

                                BENEFIT CHANGES

 .    January 1, 1995 will see two minor changes to Catellus Development
     Corporation's benefit program.

 .    Flexible Benefit Plan Benefit Increased

         Unreimbursed medical expenses increased to S1,500 per year.

 .    Vision Plan Modified

         New eyeglass frames can be purchased once every 24 months.


               1995 MONTHLY COST OF HEALTH BENEFITS: SAME AS l994
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
  Salary Range       Employee/Dependent  HMO Cost   PruCare Plus*    Dental Cost
--------------------------------------------------------------------------------
<S>                     <C>               <C>           <C>            <C>
Up to $25,000           Employee          $5            $15            $4
                        Dependent         $10           $30            $6
--------------------------------------------------------------------------------
$25,001  - $35,000      Employee          $16.51        $26.51         $8
                        Dependent         $23.63        $53.63         $12
--------------------------------------------------------------------------------
$35,001 - $50,000       Employee          $21.51        $36.51         $10
                        Dependent         $33.63        $73.63         $14
--------------------------------------------------------------------------------
$50,001 - $70,000       Employee          $26.51        $41.51         $13
                        Dependent         $43.63        $103.63        $18
--------------------------------------------------------------------------------
$70,001 AND UP          Employee          $31.51        $51.51         $15
                        Dependent         $73.63        $133.63        $23
--------------------------------------------------------------------------------
</TABLE>




            *All Health Options Include Vision Coverage through VSP

<PAGE>

CATELLUS DEVELOPMENT CORPORATION

                                OPEN ENROLLMENT
                                MEDICAL CHOICES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                    HMO
       Benefits                                   PruCare
--------------------------------------------------------------------------------
                                      Services from or through your
                                    Prudential Primary Care Physician

<S>                                 <C>
Annual Deductible                   None
(amount you pay before plan pays)
--------------------------------------------------------------------------------
Doctor Visits                       100% after $10 copay
--------------------------------------------------------------------------------
Hospital Stay                       100%
--------------------------------------------------------------------------------
Emergency Room Visit                100% after $25 copay*
--------------------------------------------------------------------------------
Preventive Care                     100% after $10 copay
(well baby care, physicals)
--------------------------------------------------------------------------------
Prescription Drugs                  100% after $5 copay**
--------------------------------------------------------------------------------
Out-of-Pocket Maximum               $2,000 per individual
--------------------------------------------------------------------------------
</TABLE>

*  In Dallas, the copay is $50
** In Dallas, the copay is $5 for generic and $10 for brand name drugs


<PAGE>

CATELLUS DEVELOPMENT CORPORATION

                                OPEN ENROLLMENT
                                MEDICAL CHOICES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                   Point-of-Service (POS)
       Benefits                                         PruCare Plus
--------------------------------------------------------------------------------
                                Services from or            Non-Network
                                  through your               Providers
                               Prudential Primary
                                 Care Physician
--------------------------------------------------------------------------------
<S>                            <C>                         <C>
Annual Deductible              None                        $200 individual
(amount you pay before
plan pays)                     $500 family
--------------------------------------------------------------------------------
Doctor Visits                  100% after $10 copay        70% after deductible
--------------------------------------------------------------------------------
Hospital Stay                  90%                         70% after deductible
--------------------------------------------------------------------------------
Emergency Room Visit           100% after $25 copay        70% after deductible
--------------------------------------------------------------------------------
Preventive Care                100% after $10 copay        70% after deductible
(well baby care, physicals)                                Well Child Care:
                                                           Maximum eligible
                                                           charges: $15/visit,
                                                           $10/immunizations,
                                                           $100/year
--------------------------------------------------------------------------------
Prescription Drugs                             100% after $5 copay
--------------------------------------------------------------------------------
Out-of-Pocket Maximum                          $2,000 per individual
--------------------------------------------------------------------------------

</TABLE>


<PAGE>

CATELLUS DEVELOPMENT CORPORATION
<TABLE>
<CAPTION>
                                                    DENTAL
                                               PHOENIX HOME LIFE
--------------------------------------------------------------------------------
                                  In-Network               Out-of-Network

Deductible                             $25 individual/$75 family
--------------------------------------------------------------------------------
<S>                          <C>                          <C>
Preventive                   100% deductible waived       100% deductible waived

Basic                        90%                          80%

Major                        60%                          50%

Orthodontia                  50%                          50%
</TABLE>

Calendar Year maximum                            $l,000 per individual

Orthodontia Lifetime Maximum                     $1,000 per individual

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                              LONG TERM DISABILITY
                                     CIGNA
--------------------------------------------------------------------------------
<S>                           <C>
Elimination Period:           90 days

Monthly Benefit:              66.67% of basic monthly earnings to a maximum
                              monthly benefit of $10,000.


Definition of Disability      You cannot perform each of the material duties of
                              your regular occupation; and after benefits have
                              been paid for 24 months you cannot perform each of
                              the material duties of any gainful occupation for
                              which you are reasonably fitted by training,
                              education or experience.
--------------------------------------------------------------------------------

                              SHORT TERM DISABILITY
                                     CIGNA
--------------------------------------------------------------------------------
Elimination Period:           7 days accident
                              7 days illness
Monthly Benefit:              66.67% of basic monthly earnings to
                              a maximum of $2,037

Benefit Period:               13 weeks maximum (90 days).
</TABLE>
--------------------------------------------------------------------------------

<PAGE>

                                 CORE LIFE/AD&D
                               PHOENIX HOME LIFE
--------------------------------------------------------------------------------
Employee:          1.5 times basic annual earnings to a maximum benefit of
                   $300,000
--------------------------------------------------------------------------------

                             SUPPLEMENTAL LIFE/AD&D
                               PHOENIX HOME LIFE
--------------------------------------------------------------------------------
Option 1:      1.5 times basic annual earnings to a maximum benefit of $300,000
Option 2:      2.5 times basic annual earnings to a maximum benefit of S300,000

Rates:         100% employee paid
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                 Rate per $1,000                        Rate per $1,000
Age Bands           per month             Age Bands        per month
<S>              <C>                      <C>           <C>
   16-29              .11                   50-54             .587
   30-34             .135                   55-59             .953
   35-39             .154                   60-64            1.411
   40-44             .250                   65-69            2.300
   45-49             .364                   70-74            3.433
--------------------------------------------------------------------------------
</TABLE>

                  SUPPLEMENTAL LIFE/AD&D - FAMILY LIFE BENEFITS
                               PHOENIX HOME LIFE
--------------------------------------------------------------------------------

Spouse:             In $10,000 units to a maximum benefit of $100,000
--------------------------------------------------------------------------------

Rates for Spousal Benefit - Spouses rates based on Employee's spouse age
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                 Rate per $1,000                        Rate per $1,000
Age Bands           per month             Age Bands        per month
<S>              <C>                      <C>           <C>
up to 20              .11                   45-49             .364
   20-24              .11                   50-54             .587
   25-29              .11                   55-59             .953
   30-34             .135                   60-64            1.411
   35-39             .154                   65-69             2.30
   40-44             .250                   70-74        Terminates
--------------------------------------------------------------------------------
</TABLE>

Child(ren)       In $2,500 units to a maximum benefit of $10,000
--------------------------------------------------------------------------------

Rates for Children(ren):  $.60 per $2,500 per month
--------------------------------------------------------------------------------


<PAGE>

                        CATELLUS DEVELOPMENT CORPORATION
                           FLEXIBLE SPENDING ACCOUNTS

Catellus Development Corporation will continue to offer the tax advantage of
Flexible Spending Arrangements in 1995. These benefits include:

 .    Pre-tax treatment of all employee contributions for health coverages.

 .    Pre-tax treatment of up to $1,500 in unreimbursed medical expenses.

 .    Pre-tax treatment of up to $5,000 in dependent care costs.

In 1995 Catellus Development Corporation will continue to use Lipman
Administrators of Fremont, California to administer its flexible spending
program.

 .    Reimbursement checks will continue to be paid twice monthly.

 .    Claims may be filed on a timely basis by fax machine.

Carefully determine your flexible spending account contributions for 1995.
Remember the use it or lose it provision governing these benefits.

 .    Complete the election form, sign it and return it with your other
     enrollment forms.

               This summary of benefits is a brief outline of your
                insurance coverages. Please see the booklets for
                         the complete plan descriptions.