**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended September 30, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from             to               **

**Commissionfile number 1-13531**

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**Trammell Crow Company**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **75-2721454**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
| **2001 Ross Avenue  Suite 3400  Dallas, Texas**             |   | **75201**                          |
| (Address of  principal executive offices)                        |   | (Zip Code)                         |

 

**(214) 863-3000**

(Registrant’s telephonenumber, including area code)

**Not applicable**

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

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check One): Large accelerated filer x    Acceleratedfiler o    Non-accelerated filer o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

There were 36,350,819 shares of the registrant’scommon stock outstanding as of October 31, 2006.

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESINDEX**
|               | ** ** | ** **                                                                                                                                                               | ** ** | **Page  Number** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| PART I.  |       | Financial  Information                                                                                                                                                   |       |             | 3          |   |   |
| Item  1.      |       | Financial  Statements                                                                                                                                                    |       |             | 3          |   |   |
|          |       | Condensed Consolidated Balance Sheets as of  September 30, 2006 (unaudited) and December 31, 2005                                                         |       |             | 3          |   |   |
|          |       | Condensed Consolidated Statements of Income for the  three and nine months ended September 30, 2006 and 2005 (unaudited)                                            |       |             | 4          |   |   |
|          |       | Condensed Consolidated Statements of Stockholders’  Equity for the nine months ended September 30, 2006 (unaudited) and the  year ended December 31, 2005 |       |             | 5          |   |   |
|          |       | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2006 and 2005 (unaudited)                                                  |       |             | 6          |   |   |
|          |       | Condensed Consolidated Statements of Comprehensive  Income (Loss) for the three and nine months ended September 30, 2006 and  2005 (unaudited)                      |       |             | 7          |   |   |
|          |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                        |       |             | 8          |   |   |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                |       |             | 31         |   |   |
| Item 3.       |       | Quantitative and Qualitative Disclosure About Market  Risk                                                                                                               |       |             | 45         |   |   |
| Item 4.       |       | Controls and Procedures                                                                                                                                                  |       |             | 45         |   |   |
| PART II. |       | Other  Information                                                                                                                                                       |       |             | 47         |   |   |
| Item  1.      |       | Legal  Proceedings                                                                                                                                                       |       |             | 47         |   |   |
| Item 1A       |       | Risk Factors                                                                                                                                                             |       |             | 47         |   |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                                                                      |       |             | 48         |   |   |
| Item 6.       |       | Exhibits                                                                                                                                                                 |       |             | 48         |   |   |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                *Financial Statements*

**TRAMMELL CROWCOMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share and per share data)**
|                                                                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                     | ** ** | **(Unaudited)**        | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                     | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets                                                                                                                                                 |       |                   |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                     |       |                   | $          | 70,523                |       |   |   | $ | 76,919 |   |   |
| Restricted cash                                                                                                                                                |       |                   | 3,024      |                  |       |   | 1,416 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,983 in 2006 and  $3,235 in 2005                                                             |       |                   | 143,477    |                  |       |   | 127,784 |   |   |
| Receivables from  affiliates                                                                                                                                   |       |                   | 2,915      |                  |       |   | 2,146 |   |   |
| Notes and other  receivables                                                                                                                                   |       |                   | 27,871     |                  |       |   | 15,922 |   |   |
| Deferred income  taxes                                                                                                                                         |       |                   | 3,855      |                  |       |   | 3,935 |   |   |
| Real estate under  development                                                                                                                                 |       |                   | 98,684     |                  |       |   | 120,697 |   |   |
| Real estate and  other assets held for sale                                                                                                                    |       |                   | 144,171    |                  |       |   | 55,434 |   |   |
| Marketable  securities                                                                                                                                         |       |                   | 1,356      |                  |       |   | 542 |   |   |
| Other current  assets                                                                                                                                          |       |                   | 29,903     |                  |       |   | 26,870 |   |   |
| Total current  assets                                                                                                                                          |       |                   | 525,779    |                  |       |   | 431,665 |   |   |
| Furniture and  equipment, net                                                                                                                                  |       |                   | 20,386     |                  |       |   | 19,787 |   |   |
| Deferred income  taxes                                                                                                                                         |       |                   | 12,175     |                  |       |   | 16,270 |   |   |
| Real estate under  development                                                                                                                                 |       |                   | 162,640    |                  |       |   | 106,659 |   |   |
| Real estate held  for investment                                                                                                                               |       |                   | 116,208    |                  |       |   | 76,145 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                    |       |                   | 207,230    |                  |       |   | 175,411 |   |   |
| Goodwill                                                                                                                                                       |       |                   | 75,246     |                  |       |   | 75,239 |   |   |
| Receivables from  affiliates                                                                                                                                   |       |                   | 7,227      |                  |       |   | 7,458 |   |   |
| Marketable  securities                                                                                                                                         |       |                   | 18,719     |                  |       |   | 18,089 |   |   |
| Other assets                                                                                                                                                   |       |                   | 30,774     |                  |       |   | 21,444 |   |   |
|                                                                                                                                                           |       |                   | $          | 1,176,384             |       |   |   | $ | 948,167 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                 | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities                                                                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                               |       |                   | $          | 36,840                |       |   |   | $ | 31,698 |   |   |
| Accrued expenses                                                                                                                                               |       |                   | 147,141    |                  |       |   | 155,294 |   |   |
| Income taxes  payable                                                                                                                                          |       |                   | 6,551      |                  |       |   | 16,313 |   |   |
| Current portion of  long-term debt                                                                                                                             |       |                   | 21         |                  |       |   | 1,302 |   |   |
| Current portion of  notes payable on real estate                                                                                                               |       |                   | 134,418    |                  |       |   | 122,932 |   |   |
| Liabilities  related to real estate and other assets held for sale                                                                                             |       |                   | 120,455    |                  |       |   | 40,916 |   |   |
| Other current  liabilities                                                                                                                                     |       |                   | 8,542      |                  |       |   | 5,842 |   |   |
| Total current  liabilities                                                                                                                                     |       |                   | 453,968    |                  |       |   | 374,297 |   |   |
| Long-term debt,  less current portion                                                                                                                          |       |                   | 140,126    |                  |       |   | 35,034 |   |   |
| Notes payable on  real estate, less current portion                                                                                                            |       |                   | 115,857    |                  |       |   | 94,389 |   |   |
| Other liabilities                                                                                                                                              |       |                   | 18,671     |                  |       |   | 13,448 |   |   |
| Total liabilities                                                                                                                                              |       |                   | 728,622    |                  |       |   | 517,168 |   |   |
| Minority interest                                                                                                                                              |       |                   | 37,144     |                  |       |   | 29,528 |   |   |
| Stockholders’ equity                                                                                                                                      |       |                   |       |                  |       |   |   |   |   |
| Preferred stock;  $0.01 par value; 30,000,000 shares authorized; none issued or outstanding                                                                    |       |                   | —     |                  |       |   | — |   |   |
| Common stock;  $0.01 par value; 100,000,000 shares authorized; 37,903,058 shares issued;  36,337,204 shares and 36,040,317 shares outstanding in 2006 and 2005 |       |                   | 379        |                  |       |   | 379 |   |   |
| Paid-in capital                                                                                                                                                |       |                   | 182,761    |                  |       |   | 205,084 |   |   |
| Retained earnings                                                                                                                                              |       |                   | 265,666    |                  |       |   | 240,887 |   |   |
| Accumulated other  comprehensive income                                                                                                                        |       |                   | 4,927      |                  |       |   | 1,713 |   |   |
| Less: Treasury  stock                                                                                                                                          |       |                   | (43,115    | )                     |       |   | (32,776 | ) |   |
|   Unearned  stock compensation, net                                                                                                                  |       |                   | —     |                  |       |   | (13,816 | ) |   |
| Total  stockholders’ equity                                                                                                                               |       |                   | 410,618    |                  |       |   | 401,471 |   |   |
|                                                                                                                                                           |       |                   | $          | 1,176,384             |       |   |   | $ | 948,167 |   |   |

 

See accompanying notes.

3

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except share and per share data)(Unaudited)**
|                                                                                                                                       | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|--------------|
| ** **                                                                                                                            | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** **   |
| ** **                                                                                                                            | ** ** | **2006**                                | ** ** | **2005**                               | ** **   | **2006** | ** ** | **2005** | ** ** |
| **REVENUES:**                                                                                                                         |       |                                    |       | ** **                             | ** **   | ** ** | ** ** | ** ** | ** ** |
| ***User Services:***                                                                                                                  |       |                                    |       | *** ***                           | *** *** | *** *** | *** *** | *** *** | *** *** |
| Facilities management                                                                                                                 |       | $                                       | 67,105     |                                   | $            | 59,076 |   | $ | 198,305 |   | $ | 173,604 |   |
| Corporate advisory services                                                                                                           |       | 57,584                                  |       | 49,498                                 |         | 155,241 |   | 114,287 |   |
| Project management services                                                                                                           |       | 38,133                                  |       | 28,216                                 |         | 101,595 |   | 85,503 |   |
|                                                                                                                                  |       | 162,822                                 |       | 136,790                                |         | 455,141 |   | 373,394 |   |
| ***Investor Services:***                                                                                                              |       |                                    |       |                                   |         |   |   |   |   |
| Property management                                                                                                                   |       | 33,730                                  |       | 34,246                                 |         | 100,521 |   | 102,801 |   |
| Brokerage                                                                                                                             |       | 34,274                                  |       | 35,296                                 |         | 105,785 |   | 96,752 |   |
| Construction management                                                                                                               |       | 3,134                                   |       | 3,207                                  |         | 9,144 |   | 8,381 |   |
|                                                                                                                                  |       | 71,138                                  |       | 72,749                                 |         | 215,450 |   | 207,934 |   |
| Development and construction                                                                                                          |       | 13,130                                  |       | 9,223                                  |         | 31,551 |   | 24,168 |   |
| **TOTAL REVENUES**                                                                                                                    |       | 247,090                                 |       | 218,762                                |         | 702,142 |   | 605,496 |   |
| **COSTS  AND EXPENSES**                                                                                                               |       |                                    |       |                                   |         |   |   |   |   |
| Salaries, wages and benefits                                                                                                          |       | 160,173                                 |       | 140,787                                |         | 451,382 |   | 399,089 |   |
| Commissions                                                                                                                           |       | 43,705                                  |       | 41,834                                 |         | 119,907 |   | 98,790 |   |
| General and administrative                                                                                                            |       | 39,301                                  |       | 35,736                                 |         | 118,586 |   | 100,763 |   |
| Depreciation and amortization                                                                                                         |       | 3,500                                   |       | 2,335                                  |         | 8,419 |   | 6,870 |   |
| Interest                                                                                                                              |       | 2,976                                   |       | 1,320                                  |         | 6,405 |   | 3,270 |   |
| **TOTAL EXPENSES**                                                                                                                    |       | 249,655                                 |       | 222,012                                |         | 704,699 |   | 608,782 |   |
| Gain on disposition of real estate                                                                                                    |       | 16,132                                  |       | 7,285                                  |         | 19,370 |   | 9,759 |   |
| Operating income                                                                                                                      |       | 13,567                                  |       | 4,035                                  |         | 16,813 |   | 6,473 |   |
| Interest and other income                                                                                                             |       | 1,765                                   |       | 672                                    |         | 3,710 |   | 2,073 |   |
| Income from continuing operations before income  taxes, minority interest and income from investments in unconsolidated  subsidiaries |       | 15,332                                  |       | 4,707                                  |         | 20,523 |   | 8,546 |   |
| Income tax expense                                                                                                                    |       | (5,667                                  | )          | (1,726                                 | )            | (7,714 | ) | (3,111 | ) |
| Minority interest, net of income tax (expense)  benefit of $241, $1,078, $155 and ($756)                                    |       | (388                                    | )          | (1,930                                 | )            | (256 | ) | 1,321 |   |
| Income from investments in unconsolidated  subsidiaries, net of income tax expense of $3,044, $896, $6,999 and  $3,472           |       | 5,463                                   |       | 1,497                                  |         | 11,569 |   | 6,064 |   |
| Income from continuing operations                                                                                                     |       | 14,740                                  |       | 2,548                                  |         | 24,122 |   | 12,820 |   |
| Income from discontinued operations, net of income  tax expense of $597, $6,853, $1,940 and $6,879                                    |       | 1,133                                   |       | 11,969                                 |         | 3,207 |   | 12,014 |   |
| Income before cumulative effect of a change in  accounting principle                                                                  |       | 15,873                                  |       | 14,517                                 |         | 27,329 |   | 24,834 |   |
| Cumulative effect of a change in accounting  principle, net of income tax expense of $646                                        |       | —                                  |       | —                                 |         | 1,011 |   | — |   |
| Net income                                                                                                                            |       | $                                       | 15,873     |                                   | $            | 14,517 |   | $ | 28,340 |   | $ | 24,834 |   |
| **Basic earnings per share:**                                                                                                         |       |                                    |       |                                   |         |   |   |   |   |
| Income from continuing operations                                                                                                     |       | $                                       | 0.43       |                                   | $            | 0.08 |   | $ | 0.70 |   | $ | 0.38 |   |
| Income from discontinued operations                                                                                                   |       | 0.03                                    |       | 0.35                                   |         | 0.09 |   | 0.36 |   |
| Cumulative effect of a change in accounting principle                                                                                 |       | —                                  |       | —                                 |         | 0.03 |   | — |   |
| Net income                                                                                                                            |       | $                                       | 0.46       |                                   | $            | 0.43 |   | $ | 0.82 |   | $ | 0.74 |   |
| Basic weighted-average common shares outstanding                                                                                      |       | 34,518,936                              |       | 33,873,952                             |         | 34,471,414 |   | 33,663,140 |   |
| **Diluted  earnings per share:**                                                                                                      |       |                                    |       |                                   |         |   |   |   |   |
| Income from continuing operations                                                                                                     |       | $                                       | 0.40       |                                   | $            | 0.07 |   | $ | 0.65 |   | $ | 0.35 |   |
| Income from discontinued operations                                                                                                   |       | 0.03                                    |       | 0.33                                   |         | 0.09 |   | 0.33 |   |
| Cumulative effect of a change in accounting principle                                                                                 |       | —                                  |       | —                                 |         | 0.03 |   | — |   |
| Net income                                                                                                                            |       | $                                       | 0.43       |                                   | $            | 0.40 |   | $ | 0.77 |   | $ | 0.68 |   |
| Diluted  weighted-average common shares outstanding                                                                                   |       | 36,668,451                              |       | 36,679,610                             |         | 36,778,640 |   | 36,292,969 |   |

 

See accompanying notes.

4

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYNine Months Ended September 30, 2006 (Unaudited) and Year Ended December 31,2005 (Note 1)(in thousands, except share data)**

| ** **                                                                 | ** ** | ** **             | ** ** | ** **         | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                                                 | ** ** | ** **             | ** ** | ** **         | ** ** | **Common**  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** | **Unearned**     | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **Common Shares** | ** ** | **Stock Par** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury**    | ** ** | **Stock**  | ** ** | ** **       | ** ** |
| ** **                                                                 | ** ** | **Issued**             | ** ** | **Treasury**       | ** ** | **Value**   | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income**      | ** ** | **Stock**  | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| Balance at January  1, 2005                                                |       | 37,902,998             |       | 2,297,991          |       |        | $          | 379          |       |              | $          | 196,314         |       |       | $          | 190,252          |       |       |       | $ | 2,043 |   |   |   | $ | (36,921 | ) |   |   | $ | (11,117 | ) |   | $ | 340,950 |   |
| Net income                                                                 |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | 59,407     |       |       |             | —     |       |       |   | — |   |   |   | — |   |   | 59,407 |   |
| Stock-based  compensation                                                  |       | 60                     |       | (1,405,392         | )          |        | —     |         |       | 8,770             |       |            | (8,772     | )          |       |             | —     |       |       |   | 24,195 |   |   |   | (2,699 | ) |   | 21,494 |   |
| Stock repurchase                                                           |       | —                 |       | 970,142            |       |        | —     |         |       | —            |       |            | —     |       |       |             | —     |       |       |   | (20,050 | ) |   |   | — |   |   | (20,050 | ) |
| Foreign currency  translation adjustment, net of tax                       |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | —     |       |       |             | (475       | )          |       |   | — |   |   |   | — |   |   | (475 | ) |
| Net unrealized  holding gains on available for sale securities, net of tax |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | —     |       |       |             | 145        |       |       |   | — |   |   |   | — |   |   | 145 |   |
| Balance at  December 31, 2005                                              |       | 37,903,058             |       | 1,862,741          |       |        | 379        |         |       | 205,084           |       |            | 240,887    |       |       |             | 1,713      |       |       |   | (32,776 | ) |   |   | (13,816 | ) |   | 401,471 |   |
| Net income                                                                 |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | 28,340     |       |       |             | —     |       |       |   | — |   |   |   | — |   |   | 28,340 |   |
| Cumulative effect  of a change in accounting principle                     |       | —                 |       | —             |       |        | —     |         |       | (15,473           | )          |            | —     |       |       |             | —     |       |       |   | — |   |   |   | 13,816 |   |   | (1,657 | ) |
| Stock-based  compensation                                                  |       | —                 |       | (1,784,387         | )          |        | —     |         |       | (6,850            | )          |            | (3,561     | )          |       |             | —     |       |       |   | 39,781 |   |   |   | — |   |   | 29,370 |   |
| Stock repurchase                                                           |       | —                 |       | 1,487,500          |       |        | —     |         |       | —            |       |            | —     |       |       |             | —     |       |       |   | (50,120 | ) |   |   | — |   |   | (50,120 | ) |
| Foreign currency  translation adjustment, net of tax                       |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | —     |       |       |             | 3,042      |       |       |   | — |   |   |   | — |   |   | 3,042 |   |
| Net unrealized  holding gains on available for sale securities, net of tax |       | —                 |       | —             |       |        | —     |         |       | —            |       |            | —     |       |       |             | 172        |       |       |   | — |   |   |   | — |   |   | 172 |   |
| Balance at  September 30, 2006                                             |       | 37,903,058             |       | 1,565,854          |       |        | $          | 379          |       |              | $          | 182,761         |       |       | $          | 265,666          |       |       |       | $ | 4,927 |   |   |   | $ | (43,115 | ) |   |   | $ | — |   |   | $ | 410,618 |   |

 

 

See accompanying notes.

5

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**

| ** **                                                          | ** ** | **For the  Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| **Operating activities:**                                           |       |                                                              |       |   |   |
| Cash flows from earnings:                                           |       |                                                              |       |   |   |
| Net Income                                                          |       | $                                                                 | 28,340     |   | $ | 24,834 |   |
| Reconciliation of net  income to net cash provided by earnings:     |       |                                                              |       |   |   |
| Depreciation and  amortization                                      |       | 9,445                                                             |       | 7,975 |   |
| Stock-based  compensation expense                                   |       | 6,843                                                             |       | 5,030 |   |
| Cumulative effect  of a change in accounting principle              |       | (1,657                                                            | )          | — |   |
| Amortization of  employment contracts                               |       | 2,586                                                             |       | 2,202 |   |
| Amortization of  contract intangibles                               |       | 986                                                               |       | 1,540 |   |
| Bad debt expense                                                    |       | 507                                                               |       | 506 |   |
| Provision for real  estate impairment                               |       | 425                                                               |       | 23 |   |
| Gain on  disposition of real estate held for investment             |       | (124                                                              | )          | (9,866 | ) |
| Minority interest                                                   |       | 1,237                                                             |       | (2,077 | ) |
| Deferred income  tax provision                                      |       | 2,127                                                             |       | 2,760 |   |
| Income from  investments in unconsolidated subsidiaries             |       | (18,568                                                           | )          | (9,536 | ) |
| Distributions of  earnings from unconsolidated subsidiaries         |       | 5,721                                                             |       | 5,325 |   |
| Net cash provided  by earnings                                      |       | 37,868                                                            |       | 28,716 |   |
| Changes in operating  assets and liabilities:                       |       |                                                              |       |   |   |
| Restricted cash                                                     |       | (1,608                                                            | )          | 7,140 |   |
| Accounts  receivable                                                |       | (12,963                                                           | )          | (10,528 | ) |
| Receivables from  affiliates                                        |       | (538                                                              | )          | (7,450 | ) |
| Notes receivable  and other assets                                  |       | (37,688                                                           | )          | 1,928 |   |
| Marketable  securities                                              |       | (984                                                              | )          | — |   |
| Real estate held  for sale and under development                    |       | (113,939                                                          | )          | (79,137 | ) |
| Notes payable on  real estate held for sale and under development   |       | 72,017                                                            |       | 45,421 |   |
| Accounts payable  and accrued expenses                              |       | 1,915                                                             |       | (10,280 | ) |
| Payable to affiliates                                               |       | 525                                                               |       | 104 |   |
| Income taxes  payable                                               |       | (12,351                                                           | )          | (16,990 | ) |
| Other liabilities                                                   |       | 7,329                                                             |       | (2,436 | ) |
| Net cash flows  from changes in working capital                     |       | (98,285                                                           | )          | (72,228 | ) |
| Net cash used in  operating activities                              |       | (60,417                                                           | )          | (43,512 | ) |
| **Investing activities:**                                           |       |                                                              |       |   |   |
| Expenditures for  furniture and equipment                           |       | (6,909                                                            | )          | (7,262 | ) |
| Proceeds from  sales and maturities of marketable securities        |       | 6,818                                                             |       | 3,673 |   |
| Payment for  purchase of marketable securities                      |       | (6,995                                                            | )          | (21,889 | ) |
| Additions to real  estate held for investment                       |       | (34,841                                                           | )          | (32,256 | ) |
| Net proceeds from  disposition of real estate held for investment   |       | 532                                                               |       | 32,777 |   |
| Investments in  unconsolidated subsidiaries                         |       | (21,158                                                           | )          | (102,494 | ) |
| Distributions from  unconsolidated subsidiaries                     |       | 5,017                                                             |       | 10,129 |   |
| Net cash used in  investing activities                              |       | (57,536                                                           | )          | (117,322 | ) |
| **Financing activities:**                                           |       |                                                              |       |   |   |
| Principal payments  on long-term debt and capital lease obligations |       | (186,709                                                          | )          | (116,376 | ) |
| Proceeds from  long-term debt                                       |       | 290,520                                                           |       | 167,390 |   |
| Contributions from  minority interest                               |       | 9,511                                                             |       | 14,479 |   |
| Distributions to  minority interest                                 |       | (6,910                                                            | )          | (12,993 | ) |
| Proceeds from  notes payable on real estate held for investment     |       | 32,736                                                            |       | 32,175 |   |
| Payments on notes  payable on real estate held for investment       |       | (6,916                                                            | )          | (16,046 | ) |
| Proceeds from exercise  of stock options                            |       | 21,930                                                            |       | 9,355 |   |
| Excess tax  benefits from stock-based compensation                  |       | 4,016                                                             |       | 2,274 |   |
| Proceeds from  issuance of common stock                             |       | 3,499                                                             |       | 3,009 |   |
| Purchase of common  stock                                           |       | (50,120                                                           | )          | (20,050 | ) |
| Net cash provided  by financing activities                          |       | 111,557                                                           |       | 63,217 |   |
| Net decrease in  cash and cash equivalents                          |       | (6,396                                                            | )          | (97,617 | ) |
| Cash and cash  equivalents, beginning of period                     |       | 76,919                                                            |       | 163,637 |   |
| Cash and cash  equivalents, end of period                           |       | $                                                                 | 70,523     |   | $ | 66,020 |   |

 

See accompanying notes.

6

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands)(Unaudited)**
|                                                                                              | ** ** | **For the  Three Months** | ** ** | **For the  Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended September 30,**   | ** ** | **Ended September 30,**  | ** ** |
| ** **                                                                                   | ** ** | **2006**                            | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                                                   |       | $                                   | 15,873     |                               | $          | 14,517 |   | $ | 28,340 |   | $ | 24,834 |   |
| Other  comprehensive income (loss):                                                          |       |                                |       |                               |       |   |   |   |   |
| Foreign currency translation adjustments                                                     |       | 764                                 |       | (252                               | )          | 4,979 |   | 673 |   |
| Tax (expense) benefit                                                                        |       | (300                                | )          | 91                                 |       | (1,937 | ) | (243 | ) |
| Net foreign currency translation adjustments, net of  tax                                    |       | 464                                 |       | (161                               | )          | 3,042 |   | 430 |   |
| Net unrealized holding gains on available for sale  securities                               |       | 496                                 |       | 29                                 |       | 283 |   | 204 |   |
| Tax (expense) benefit                                                                        |       | (194                                | )          | 6                                  |       | (111 | ) | (74 | ) |
| Net unrealized holding gains on available for sale  securities, net of tax    |       | 302                                 |       | 35                                 |       | 172 |   | 130 |   |
| Total other comprehensive income (loss)                                                      |       | 766                                 |       | (126                               | )          | 3,214 |   | 560 |   |
| Comprehensive income                                                                         |       | $                                   | 16,639     |                               | $          | 14,391 |   | $ | 31,554 |   | $ | 25,394 |   |

 

See accompanying notes.

7

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General

The condensed consolidated interim financialstatements of Trammell Crow Company and subsidiaries (the “Company”) includedherein have been prepared in accordance with the requirements for interimfinancial statements and do not include all disclosures required underaccounting principles generally accepted in the United States (“GAAP”) forcomplete financial statements. These financial statements should be read inconjunction with the consolidated financial statements included in the Company’sAnnual Reports on Form 10-K and Form 10-K/A for the yearended December 31, 2005 as filed with the Securities and ExchangeCommission. In the opinion of management, all adjustments and eliminations,consisting only of recurring adjustments, necessary for a fair presentation ofthe financial statements for the interim periods have been made. Interimresults of operations are not necessarily indicative of the results to beexpected for the full year.

The Company has experienced and expects to continue toexperience quarterly variations in revenues and net income as a result ofseveral factors. The Company’s quarterly revenues tend to increase throughoutthe year, particularly in the last quarter of the year, because its clientshave demonstrated a tendency to close transactions toward the end of the year. Thetiming and introduction of new contracts, the disposition of investments inreal estate assets, the recognition of incentive fees (often in the latter partof the fiscal year as contractual targets are met) and other factors may alsocause quarterly fluctuations in the Company’s results of operations.

*Reclassifications*

In accordance with Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”),certain assets and liabilities at December 31, 2005, and certain revenuesand expenses for the six months ended June 30, 2006, and the three andnine months ended September 30, 2005, were reclassified to conform to thepresentation at and for the three months ended September 30, 2006 (seeNotes 8 and 11). As a result, certain balances differ from the amounts reportedin previously filed documents. Also, the Company has reclassified gains ondisposition of real estate from revenue to a separate component of operatingincome. Therefore, the Company’s total revenues of previous periods differ frompreviously filed documents. This reclassification had no impact on operatingincome, net income, earnings per share or stockholders’ equity in any period.

*Use of Estimates*

The preparation of the financial statements inaccordance with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

*Income Taxes*

TheCompany accounts for income taxes using the liability method. Deferred incometaxes result from temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amounts used forfederal and state income tax purposes and are measured using the enacted taxrates and laws that are expected to be in effect when the differences reverse.

8

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General (Continued)

*Earnings Per Share*

The weighted-averagecommon shares outstanding used to calculate diluted earnings per share reflectthe dilutive effect of common stock equivalents, including unvested restrictedstock and options to purchase shares of common stock. Diluted weighted-averagecommon shares outstanding included the following:

| ** **                                          | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                          | ** ** | **2006**                                | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic  weighted-average common shares outstanding   |       | 34,518,936                              |       | 33,873,952                             |       | 34,471,414 |   | 33,663,140 |   |
| Diluted effect of  common stock equivalents         |       | 2,149,515                               |       | 2,805,658                              |       | 2,307,226 |   | 2,629,829 |   |
| Diluted weighted-average  common shares outstanding |       | 36,668,451                              |       | 36,679,610                             |       | 36,778,640 |   | 36,292,969 |   |

 

*Non-Controlling Interestsin Consolidated Limited Life Subsidiaries*

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“FAS 150”). Certainprovisions of FAS 150 would have required the Company to classifynon-controlling interests in consolidated limited life subsidiaries asliabilities adjusted to their settlement values in the Company’s consolidatedfinancial statements. In November 2003, the FASB indefinitely deferredapplication of the measurement and recognition provisions (but not thedisclosure requirements) of FAS 150 with respect to these non-controllinginterests. As of September 30, 2006, the estimated settlement value ofnon-controlling interests in the Company’s consolidated limited lifesubsidiaries was $4,483, as compared to book value (included in minorityinterest on the Company’s consolidated balance sheet) of $4,663.

*Effect of Adopting NewAccounting Pronouncements*

*Consolidation*

In June 2005, theFASB ratified the consensus of the Emerging Issues Task Force (“EITF”) 04-5,*Determining Whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights* (“EITF 04-5”),which states that the general partner in a limited partnership is presumed tocontrol that limited partnership. That presumption may be overcome if thelimited partners have either (1) the substantive ability-either by a singlelimited partner or through a simple majority vote-to dissolve (liquidate) thelimited partnership or otherwise remove the general partner without cause or (2) substantiveparticipating rights. Substantive participating rights provide the limitedpartners with the ability to effectively participate in significant decisionsthat would be expected to be made in the ordinary course of the limitedpartnership’s business and thereby preclude the general partner from exercisingunilateral control over the partnership.

9

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General (Continued)

The effective date forapplying the guidance in EITF 04-5 to the Company’s general partnerinterests was June 29, 2005, for all new limited partnerships or limitedpartnerships amended after that date, and January 1, 2006, for all otherlimited partnerships. In the first quarter of 2006, the Company completed itsevaluation of the impact of EITF 04-5 for all of its general partnerinterests existing prior to June 29, 2005. As a result of this evaluation,the Company consolidated two real estate partnerships that had previously beenaccounted for using the equity method. These consolidations as of January 1,2006 did not impact net income, net income per share or stockholders’ equity,but did result in the following non-cash changes to the Company’s consolidatedbalance sheet:

| **ASSETS**                                                     | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| Real Estate                                                    |       | $          | 4,551      |   |
| Investments in unconsolidated subsidiaries                     |       | (1,102     | )          |
| Other current assets                                           |       | 90         |       |
| Other assets                                                   |       | 9          |       |
| Net non-cash  change in assets                                 |       | $          | 3,548      |   |
| **LIABILITIES**                                                | ** ** | ** ** | ** ** |
| Notes payable on real estate                                   |       | $          | 2,040      |   |
| Accrued expenses                                               |       | 118        |       |
| Other current liabilities                                      |       | 14         |       |
| Net non-cash  change in liabilties                             |       | 2,172      |       |
| Minority interest                                              |       | 1,721      |       |
| Cash from consolidation  of previously unconsolidated entities |       | $          | 345        |   |

 

*Stock-Based Compensation*

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 123 (revised2004), *Share-Based Payment* (“FAS 123R”), whichis a revision of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation* (“FAS 123”). Generally,the approach in FAS 123R is similar to the approach described in FAS 123. However,FAS 123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values. Pro forma disclosure is no longer an alternative.

Prior to adoption of FAS123R, the Company elected to use the intrinsic method under AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*(“APB 25”), to account for itsstock-based compensation arrangements (see Note 9 for further discussion on theCompany’s stock-based compensation plans). Compensation expense for stockoptions was recognized to the extent the market price of the underlying stockon the date of grant exceeded the exercise price of the option. The Companyrecognized compensation expense related to restricted stock grants over thevesting period of the underlying grant in an amount equal to the fair marketvalue of the Company’s stock on the date of grant. No compensation expense wasrecognized related to the difference between the employee’s cost and the 

10

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General (Continued)

market value ofstock purchased under the Company’s employee stock purchase plan.

The Company adopted FAS123R effective January 1, 2006 using the modified-prospective transitionmethod, and results for prior periods were not adjusted. Under this method, theCompany recognizes compensation cost for both unvested stock-based awardsoutstanding at January 1, 2006 (based on the grant-date fair valuedetermined in accordance with FAS 123) and stock-based awards made subsequentto January 1, 2006 (based on the grant-date fair value determined inaccordance with FAS 123R). For awards with pro rata vesting, the Companyrecognizes compensation expense using the accelerated expense attributionmethod described in FASB Interpretation No. 28, *Accountingfor Stock Appreciation Rights and Other Variable Stock Option or Award Plans*.

FAS 123R also requires theCompany to estimate forfeitures of stock-based awards upon grant and toreevaluate this estimate during the requisite service period. Prior to theadoption of FAS 123R, the Company’s policy had been to reverse expense relatedto forfeitures of restricted stock as they occurred. Upon adoption, the Companyrecorded a cumulative effect of a change in accounting principle of $1,657,less income taxes of $646, which represented a reversal of expense taken forthose shares of unvested restricted stock granted prior to adoption that theCompany estimates will be forfeited before vesting. All other impacts ofadopting FAS 123R to the Company’s consolidated statement of income and netincome per share were not material.

FAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow aspreviously required. This requirement reduces net operating cash flows and increasesnet financing cash flows. The amount of financing cash flows recognized forsuch excess tax deductions related to the exercise of stock options and vestingof restricted stock was $4,016 and $2,274 for the nine months ended September 30,2006 and 2005, respectively.

Pro forma informationregarding net income and net income per share for the three and nine monthsended September 30, 2005, shown in the table below, was determined as ifthe Company had applied the fair value recognition provisions of FAS 123 priorto January 1, 2006.

 

11

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General(Continued)

| ** **                                                                                                                              | ** ** | **For the Three Months  Ended** | ** ** | **For the Nine Months  Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **September 30, 2005**               | ** ** | **September 30, 2005**              | ** ** |
| Net income, as  reported                                                                                                                |       |                                           | $          | 14,517                                        |       |   |   | $ | 24,834 |   |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       |                                           | 1,171      |                                          |       |   | 3,198 |   |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                           | 1,462      |                                          |       |   | 4,387 |   |   |
| Pro forma net  income                                                                                                                   |       |                                           | $          | 14,226                                        |       |   |   | $ | 23,645 |   |   |
| Net income per share:                                                                                                                   |       |                                           |       |                                          |       |   |   |   |   |
| Basic—as reported                                                                                                                  |       |                                           | $          | 0.43                                          |       |   |   | $ | 0.74 |   |   |
| Basic—pro forma                                                                                                                    |       |                                           | $          | 0.42                                          |       |   |   | $ | 0.70 |   |   |
| Net income per share:                                                                                                                   |       |                                           |       |                                          |       |   |   |   |   |
| Diluted—as reported                                                                                                                |       |                                           | $          | 0.40                                          |       |   |   | $ | 0.68 |   |   |
| Diluted—pro forma                                                                                                                  |       |                                           | $          | 0.39                                          |       |   |   | $ | 0.65 |   |   |

 

The Company typicallyissues shares related to stock-based compensation plans from its treasury. In February 2006,the Company received authorization from its Board of Directors to repurchase upto $50,000 of its common stock from time to time in open market purchases orprivately negotiated transactions. In June 2006, the Company completed its$50,000 share repurchase program. A total of 1,487,500 shares were repurchasedat an average price of $33.61 per share.

*Income Taxes*

In June 2006, theFASB issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the Company’s consolidated financialstatements in accordance with FASB Statement No. 109, *Accountingfor Income Taxes* (“FAS 109”). FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 creates a two-step process in evaluating a tax position. The first step,recognition, requires the Company to determine whether it is more likely thannot that a tax position will be sustained upon examination, includingresolution of any related appeals or litigation, based on the technical meritsof the position. The second step, measurement, states that a tax position thatmeets the more likely than not recognition threshold should be measured todetermine the amount of benefit to be recognized in the Company’s consolidatedfinancial statements with the tax position measured at the largest amount ofbenefit that is greater than 50 percent likely of being realized upon ultimatesettlement.

12

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General (Continued)

Upon initial adoption, alltax positions should be reviewed and only positions that meet the “more-likely-than-not”recognition threshold may be recognized or continue to be recognized. Thecumulative effect of applying FIN 48 shall be reported as an adjustment to theopening balance of retained earnings (or other appropriate components of equityor net assets). The amount of the cumulative adjustment is the differencebetween the net assets and liabilities recognized prior to the adoption of FIN48 and the net assets and liabilities recognized as a result of applying FIN 48.FIN 48 is effective for fiscal years beginning after December 15, 2006. TheCompany has not yet determined the impact of FIN 48 on its consolidatedfinancial statements.

**2.   VariableInterest Entities**

In June 2006,the Company was involved in the formation of a limited partnership establishedto acquire land and develop residential and retail projects. The limitedpartnership, through its two wholly-owned subsidiaries, acquired land andobtained a loan to finance the entire project. No equity was contributed by theowners of the entity. The entity’s note payable balance of $40,189 isnon-recourse to the Company and is collateralized by the underlying real estate.The Company and other partners of the limited partnership may be required tomake equity contributions to the entity to fund certain cost overruns andupgrades to project plans from the original project budget agreed to by thepartners. Based upon the Company’s evaluation, this entity is a variableinterest entity (“VIE”) under FASB Interpretation No. 46 (revised December 2003),*Consolidation of Variable Interest Entities*(“FIN 46R”). However, based upon its evaluation, the Company is not the primarybeneficiary of the entity. As of September 30, 2006, the Company cannotestimate its maximum exposure to loss, but believes that its exposure to lossunder this arrangement is not material.

TheCompany sponsored the formation of a legal entity to act primarily as an agentof the Company to enter into policies with insurance carriers. The policies arefor various types of insurance, including general liability, workers’compensation and automotive. The entity is wholly-owned by an employee of theCompany who holds the appropriate local insurance agent’s licenses required toissue these insurance policies on behalf of the insurance carriers. The entitycollects premiums and remits them to the insurance carriers. In exchange, theentity receives commissions from the insurance carriers and remits a portion ofthe commission revenue to the Company (determined at the Company’s fulldiscretion) in accordance with a facilities and services agreement. Based uponthe Company’s evaluation, the entity is a VIE with the Company being theprimary beneficiary. As such, the VIE has been consolidated into the Company’sfinancial statements. As of September 30, 2006, the Company had $2,740recorded in restricted cash and $298 recorded in marketable securities(non-current) that are held by the VIE and serve as collateral for the VIE’sobligations to the insurance carriers.

In2005, the Company restructured a consolidated entity established to develop anoffice building by admitting a majority interest partner. Based upon itsevaluation at this reconsideration event, the Company consolidated this entityas the primary beneficiary of a VIE. The entity’s note payable balance of$40,738 at September 30, 2006, is non-recourse to the Company and iscollateralized by the underlying real estate project.

13

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**2.**   Variable Interest Entities (Continued)

In 2005,the Company obtained $110,000 of tax credits through a program enacted by theCommunity Renewal Tax Relief Act of 2000. This program creates tax credits forequity investments in Community Development Entities (“CDEs”). The CDEs makequalified loans or equity investments to Qualified Active Low-Income CommunityBusinesses. Also in 2005, the Company obtained 0% to 0.01% managing interestsin various CDEs established to make these loans and investments. The CDEs’equity used to fund the loans and investments was contributed by its 99.98% to100% third-party investor members or through loans from qualified lenders. ThroughSeptember 30, 2006, the CDEs have made qualified loans totalingapproximately $75,870 and qualified equity investments of $4,951. The Companyhas determined that each of these CDEs is a VIE. However, based upon itsevaluation, the Company is not the primary beneficiary of the entities. TheCompany believes that its maximum exposure to loss as a result of itsinvolvement with these VIEs is not material. Additionally, in 2005, the Companyobtained a 49% membership interest in a related entity that acts as theadministrative member performing loan servicing and tax matters for the CDEs. Basedupon the Company’s evaluation, this entity is also a VIE since the entity’sequity was funded from up-front fees received from the CDEs. However, basedupon its evaluation, the Company is not the primary beneficiary of the entity. TheCompany believes that its maximum exposure to loss as a result of its involvementwith this VIE is not material.

In2004, the Company issued a budget guaranty relating to a development project. Underthe budget guaranty, the Company is responsible for all costs in excess of anapproved budget of approximately $35,700 at September 30, 2006. TheCompany was involved in the design of the underlying entity and has determinedthat its budget guaranty represents a variable interest in a VIE for which theCompany is not the primary beneficiary. The Company cannot estimate its actualmaximum exposure to loss as a result of its involvement with this VIE becausethe budget guaranty is unlimited. However, based on the Company’s experience ofminimal payments under similar arrangements and the existence of a guaranteedmaximum price contract between the general contractor and the owner of theproject that mitigates the Company’s risk, the Company believes that itsexposure to loss is not material.

The Company is part of aco-lender group with an independent third party that issued a mezzanine loan tothe owner of two office buildings. In 2000, the Company provided $567 of thetotal $5,667 mezzanine loan. At that time, another independent third-partylender provided the senior financing of $19,100 to the owner. The Company alsoprovides building management and leasing services for the buildings under along-term contract at market rates for such services. The mezzanine loanarrangement is considered to be a variable interest in the entity that owns theproperty, which the Company believes is a VIE. However, based upon the Company’sevaluation, the Company is not the primary beneficiary of the entity, and,therefore, the Company has not consolidated the VIE. The VIE sold one of itsbuildings in 2004 and paid a portion of the Company’s note receivable at thattime. The Company’s maximum exposure to loss as a result of its involvementwith this VIE is limited to its outstanding note balance of $430 as of September 30,2006.

14

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**3.**   Real Estate

Certainreal estate assets owned by the Company secure the outstanding balances ofunderlying mortgage or construction loans. All real estate is included in theCompany’s Development and Investment segment (see Note 14). Real estate ownedby the Company consisted of the following:

| ** **                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Real estate under  development (current)                   |       |                   | $          | 98,684                |       |   |   | $ | 120,697 |   |   |
| Real estate  included in assets held for sale (see Note 8) |       |                   | 141,420    |                  |       |   | 54,112 |   |   |
| Real estate under  development (non-current)               |       |                   | 162,640    |                  |       |   | 106,659 |   |   |
| Real estate held  for investment(1)                        |       |                   | 116,208    |                  |       |   | 76,145 |   |   |
|                                                       |       |                   | $          | 518,952               | (2)        |   |   | $ | 357,613 |   |   |

----

(1)                Net of accumulateddepreciation of $4,312 and $1,568 at September 30, 2006, and December 31,2005, respectively.

(2)                Includes balancesfor lease intangibles and tenant origination costs of $(277) and $2,932 at September 30,2006, and $(1,627) and $1,833 at December 31, 2005, respectively. TheCompany records lease intangibles and tenant origination costs upon acquiringbuildings with in-place leases. The balances are shown net of amortization(recorded as an increase to or a reduction of rental income for leaseintangibles and as amortization expense for tenant origination costs).

In2003, the Company sold a parcel of land for $1,750 of which $1,125 of theconsideration received was in the form of an interest-bearing note from thebuyer. The Company retained a unilateral right to repurchase the property atany time through 2006, in addition to maintaining the right to approve anyplans for development on the property. During the third quarter of 2006, theCompany decided not to exercise its option to repurchase the property andrecorded the transaction as a sale resulting in a gain on the transaction of$322.

15

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**3.**   Real Estate (Continued)

In thesecond quarter of 2006, the Company consolidated an operating real estateproject that had previously been accounted for under the equity method. TheCompany is the general partner of the partnership. The Company reassessed theaccounting treatment of the entity as required under EITF 04-5 anddetermined that the limited partners lacked the substantive participatingrights necessary to overcome the presumption of control by the general partner.As a result of this consolidation, the Company recorded the following non-cashchanges in its consolidated balance sheet:

| **ASSETS**                                                     | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| Accounts receivable                                            |       | $          | 21         |   |
| Real estate                                                    |       | 7,401      |       |
| Investments in unconsolidated subsidiaries                     |       | (88        | )          |
| Other current assets                                           |       | 457        |       |
| Other assets                                                   |       | —     |       |
| Net non-cash  change in assets                                 |       | $          | 7,791      |   |
| **LIABILITIES**                                                | ** ** | ** ** | ** ** |
| Notes payable                                                  |       | $          | 5,626      |   |
| Accrued expenses                                               |       | 126        |       |
| Other current liabilities                                      |       | 39         |       |
| Net non-cash  change in liabilities                            |       | 5,791      |       |
| Minority interest                                              |       | 2,057      |       |
| Cash from consolidation  of previously unconsolidated entities |       | $          | 57         |   |

 

**4.   Investments inUnconsolidated Subsidiaries**

Investments inunconsolidated subsidiaries consisted of the following:

| ** **  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------|------------|------------------------|------------|-----------------------|------------|
| ** **  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Real estate |       |                   | $          | 63,539                |       |   |   | $ | 44,496 |   |   |
| Other       |       |                   | 143,691    |                  |       |   | 130,915 |   |   |
|        |       |                   | $          | 207,230               |       |   |   | $ | 175,411 |   |   |

 

In April 2005,the Company exercised its option to acquire additional shares of Savills plc (“Savills”),a property services firm headquartered in the United Kingdom and a leadingprovider of real estate services in Europe, Asia-Pacific and Australia. Theexercise of the option resulted in the issuance of 10,486,458 shares by Savillsat a price of 350.64 pence per share, for a total cost of £36,770 ($70,392). Theexercise price represented a 20% premium to the average mid-market closingprice of the shares in trading on the London Stock Exchange for the fivetrading days preceding the exercise of the option. Preceding its exercise ofthe option, also in April 2005, the Company acquired 3,355,940 of Savills’Ordinary Shares in open market purchases at an average price of 325.00 penceper share, having the effect of reducing the 

16

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**4.**   Investments in Unconsolidated Subsidiaries (Continued)

number of shares purchasable under the option. The option exercise andthe market purchase together increased the Company’s ownership stake toapproximately 19.6% of Savills’ Ordinary Shares then outstanding. The aggregatecost of the market purchases and the shares issued upon exercise of the optionwas $91,272. The purchases were funded by borrowings under the Company’s lineof credit. The investment is classified as an “other” investment in the tableabove. The number of shares and per share prices related to Savills have beenadjusted for Savills’ two-for-one stock split in May 2006.

Of the total Savills’purchase price, approximately $3,251 has been allocated to the value ofcustomer relationships, property and facilities management contracts andbacklog. These allocated amounts are being amortized over periods up to tenyears from the date the Company purchased the shares. The estimated differencebetween the carrying value of the investment and the amount of underlyingequity in net assets of $67,371 will be evaluated for impairment as part of theinvestment as a whole when evidence of a loss in value occurs.

The summarizedfinancial information below does not include the results of Savills becauseSavills qualifies as a foreign private issuer. Summarized operating results forother unconsolidated subsidiaries accounted for on the equity method were asfollows: 

| ** **     | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|----------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **     | ** ** | **2006**                                | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Total revenues |       | $                                       | 40,438     |                                   | $          | 22,741 |   | $ | 100,318 |   | $ | 69,806 |   |
| Total expenses |       | 31,458                                  |       | 22,405                                 |       | 86,221 |   | 61,306 |   |
| Net income     |       | $                                       | 8,980      |                                   | $          | 336 |   | $ | 14,097 |   | $ | 8,500 |   |

**5.**   AccruedExpenses

Accrued expenses consistedof the following:

| ** **                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Payroll and  bonuses                                                                                                |       |                   | $          | 52,185                |       |   |   | $ | 68,683 |   |   |
| Commissions                                                                                                         |       |                   | 26,076     |                  |       |   | 34,449 |   |   |
| Development costs                                                                                                   |       |                   | 37,980     |                  |       |   | 24,016 |   |   |
| Deferred income                                                                                                     |       |                   | 16,788     |                  |       |   | 13,193 |   |   |
| Interest                                                                                                            |       |                   | 543        |                  |       |   | 398 |   |   |
| Insurance                                                                                                           |       |                   | 2,648      |                  |       |   | 2,144 |   |   |
| Restructuring  charges                                                                                              |       |                   | 1,318      |                  |       |   | 1,810 |   |   |
| Other                                                                                                               |       |                   | 15,739     |                  |       |   | 12,574 |   |   |
|                                                                                                                |       |                   | 153,277    |                  |       |   | 157,267 |   |   |
| Less: Accrued  expenses included in liabilities related to real estate and other assets held  for sale (see Note 8) |       |                   | 6,136      |                  |       |   | 1,973 |   |   |
|                                                                                                                |       |                   | $          | 147,141               |       |   |   | $ | 155,294 |   |   |

 

17

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**6.**   Long-TermDebt

Long-term debt consistedof the following:

| ** **                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Borrowings under  $175,000 line of credit with a bank (the “Credit Facility”)                     |       |                   | $          | 140,100               |       |   |   | $ | 35,000 |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       |                   | —     |                  |       |   | 1,286 |   |   |
| Other                                                                                                       |       |                   | 47         |                  |       |   | 50 |   |   |
| Total long-term  debt                                                                                       |       |                   | 140,147    |                  |       |   | 36,336 |   |   |
| Less: Current  portion of long-term debt                                                                    |       |                   | 21         |                  |       |   | 1,302 |   |   |
|                                                                                                        |       |                   | $          | 140,126               |       |   |   | $ | 35,034 |   |   |

Theinterest rate for borrowings under the Credit Facility was 7.3% and 5.4% at September 30,2006 and 2005, respectively.

TheCompany is subject to various covenants associated with the Credit Facility,such as maintenance of minimum net worth and liquidity and certain keyfinancial data. There are also certain restrictions on investments andacquisitions that can be made by the Company. In addition, the Company may notpay dividends or make other distributions on account of its common stockexceeding 50% of the previous year’s net income before depreciation andamortization. In February 2006, the Company amended its Credit Facility toallow for additional repurchases or other distributions on account of itscommon stock in an amount up to $100,000 through December 31, 2006 and toreduce the minimum required net worth covenant. At September 30, 2006, theCompany was in compliance with all covenants of the Credit Facility.

The covenants associated with the Credit Facility and the amount of theCompany’s other borrowings and contingent liabilities may have the effect oflimiting the credit available to the Company under the Credit Facility to anamount less than the $175,000 commitment. At September 30, 2006, theCompany had unused borrowing capacity of $29,892 (taking into accountborrowings and letters of credit outstanding) under its Credit Facility.

18

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**7.   Notes Payable on Real Estate**

The Company hadloans (the majority of which were construction loans) secured by real estate,which consisted of the following:

| ** **                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Current portion  of notes payable on real estate                                                                          |       |                   | $          | 134,418               |       |   |   | $ | 122,932 |   |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 8) |       |                   | 114,140    |                  |       |   | 38,837 |   |   |
| Total notes  payable on real estate, current portion                                                                      |       |                   | 248,558    |                  |       |   | 161,769 |   |   |
| Notes payable on  real estate, non-current portion                                                                        |       |                   | 115,857    |                  |       |   | 94,389 |   |   |
| Total notes  payable on real estate                                                                                       |       |                   | $          | 364,415               |       |   |   | $ | 256,158 |   |   |

 

At September 30,2006, $17,937 of the current portion and $6,308 of the non-current portion ofnotes payable on real estate are recourse to the Company (beyond being recourseto the single-purpose entity that held the real estate asset and was theobligor on the note payable).

The Company has aparticipating mortgage loan obligation related to a real estate project. Theparticipating mortgage loan is subordinate to a construction loan on theunderlying project. The mortgage lender participates in net operating cash flowof the mortgaged real estate project, if any, and capital proceeds, net ofrelated expenses, upon the sale of the project, after payment of amounts dueunder the construction loan. The lender receives 6% fixed interest on theoutstanding balance of its note, compounded monthly, and participates in 35% to80% of proceeds remaining after the construction loan is paid, based onreaching various internal rates of return. The amount of the participatingliability was $13,729 and $12,809, at September 30, 2006 and December 31,2005, respectively. The related debt discount was fully amortized at September 30,2006 and was $1,835 at December 31, 2005. During the nine months ended September 30,2006 and 2005, the Company amortized $2,754 and $4,243, respectively, of thedebt discount, which has been capitalized to real estate.

**8.   Real Estate andOther Assets Held for Sale and Related Liabilities**

Realestate and other assets held for sale include completed real estate projects orland for sale in their present condition that have met all of the “held forsale” criteria of FAS 144 and other assets directly related to such projects. Liabilitiesrelated to real estate and other assets held for sale have been included as asingle line item in the Company’s consolidated balance sheet. In accordancewith FAS 144, certain assets classified as held for sale at September 30,2006, or sold in the nine months ended September 30, 2006, that were notclassified as held for sale at December 31, 2005, were reclassified toreal estate and other assets held for sale in the Company’s consolidated balancesheet as of December 31, 2005.

19

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**8.**   Real Estate and Other Assets Held for Sale and Related Liabilities(Continued)

Realestate and other assets held for sale and related liabilities were as follows:

| ** **                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **Assets:**                                                              |       |                   |       |                  |       |   |   |   |   |
| Notes and other receivables                                              |       |                   | $          | —                |       |   |   | $ | 381 |   |   |
| Real estate held for sale (see Note 3)                                   |       |                   | 141,420    |                  |       |   | 54,112 |   |   |
| Other current assets                                                     |       |                   | 2,078      |                  |       |   | 601 |   |   |
| Other assets                                                             |       |                   | 673        |                  |       |   | 340 |   |   |
| Total real estate  and other assets held for sale                        |       |                   | 144,171    |                  |       |   | 55,434 |   |   |
| **Liabilities:**                                                         | ** ** |                   |       |                  |       |   |   |   |   |
| Accrued expenses (see Note 5)                                            |       |                   | 6,136      |                  |       |   | 1,973 |   |   |
| Notes payable on real estate held for sale (see Note  7)                 |       |                   | 114,140    |                  |       |   | 38,837 |   |   |
| Other current liabilities                                                |       |                   | 137        |                  |       |   | 106 |   |   |
| Other liabilities                                                        |       |                   | 42         |                  |       |   | — |   |   |
| Total liabilities  related to real estate and other assets held for sale |       |                   | 120,455    |                  |       |   | 40,916 |   |   |
| **Net real estate and other  assets held for sale**                      |       |                   | $          | 23,716                |       |   |   | $ | 14,518 |   |   |

**9.   Stock-BasedCompensation**

TheCompany has two share-based compensation plans and an employee stock purchaseplan, which are described below. For the nine months ended September 30,2006 and 2005, the Company recognized total stock-based compensation expense of$6,843 and $5,030, with a related income tax benefit realized of $2,689 and $1,832,respectively**.**The Company typically issuesshares related to stock-based compensation plans from its treasury.

Underthe Trammell Crow Company 1997 Option Plan (the “Assumed Option Plan”), theCompany issued options to purchase 2,423,769 shares of the Company’s commonstock at an exercise price of $3.85 per share. All options available under theAssumed Option Plan were granted on August 1, 1997. The options vested atthe closing of the Company’s initial public offering on December 1, 1997,and became exercisable 30 days after that date. The options expire ten yearsfrom the date of grant and are not contingent on continued employment with theCompany.  At September 30, 2006,common shares reserved for future issuance under the Assumed Option Plantotaled 204,392.

TheTrammell Crow Long-Term Incentive Plan (the “Long-Term Plan”) provides for theissuance of up to 8,634,878 shares of common stock. Options to acquire sharesof common stock granted by the Company under the Long-Term Plan have exerciseprices equal to the fair market value of the common stock on the date of grantand expire seven to ten years from the date of grant.

Exceptfor options granted to members of the Board of Directors and options granted inconnection with acquisitions of real estate service companies, options vestover periods ranging from three to five years, and generally have partialvesting on anniversaries of the grant date. The Company has not granted anyoptions since 2003.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**9.   Stock-BasedCompensation (Continued)**

TheLong-Term Plan also provides for the awards of Stock Appreciation Rights,Restricted Stock and Performance Units. The Restricted Stock that has beenissued under this plan vests over periods of up to five years from the date ofgrant. No Stock Appreciation Rights have been granted by the Company as of September 30,2006. As of September 30, 2006, the Company had outstanding PerformanceUnits representing the right to receive, at the election of the grantee, an aggregateof up to 34,424 shares of the Company’s common stock or cash in the amountequal to the fair market value of such shares of common stock on thedistribution date or dates.

At September 30,2006, common shares reserved for future issuance under the Long-Term Plantotaled 3,811,518 shares, of which 553,270 common shares were available forfuture awards.

TheCompany has also established the Trammell Crow Company Employee Stock PurchasePlan (the “ESPP”). Employees may elect to have bi-weekly payroll deductions of1% to 10% of gross earnings, which is used to purchase, on a semi-annual basis,stock of the Company at a 15% discount from market value, which is establishedon the date of issuance. The ESPP is available to all employees and requires atwelve-month holding period for stock purchased under the plan. The Company hasreserved 3,000,000 shares of common stock for issuance under the ESPP, of which803,187 had been issued through September 30, 2006. For the nine monthsended September 30, 2006, activity related to the ESPP plan was notmaterial.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**9.**   Stock-Based Compensation (Continued)

TheCompany’s stock option activity for the nine months ended September 30,2006, was as follows:

| ** **                                            | ** ** | **Exercise Price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise price  of $9.74 to  $14.50 (at  market price  at grant date)** | ** ** | **Exercise price of  $14.51 to $22.75  (at market price  at grant date)** | ** ** | **Exercise price of  $22.76 to $36.00  (at market price  at grant date)** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| **Options outstanding:**                              | ** ** |                                                                                            | ** ** | ** **                                                                                                   |       |                                                                                                              | ** ** | ** **                                                                                                        |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| December 31, 2005                                |       |                                                                                            | 412,255    |                                                                                                         |       |                                                                                                              | 2,740,586  |                                                                                                              |       |      | 1,588,380  |   |   |   | 144,621 |   |   | 4,885,842 |   |
| Granted                                               |       |                                                                                            | —     |                                                                                                         |       |                                                                                                              | —     |                                                                                                              |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                             |       |                                                                                            | (180,532   | )                                                                                                            |       |                                                                                                              | (674,243   | )                                                                                                                 |       |      | (477,896   | ) |   |   | (34,950 | ) |   | (1,367,621 | ) |
| Forfeited                                             |       |                                                                                            | (27,331    | )                                                                                                            |       |                                                                                                              | (8,313     | )                                                                                                                 |       |      | (5,319     | ) |   |   | (7,118 | ) |   | (48,081 | ) |
| September 30, 2006                               |       |                                                                                            | 204,392    |                                                                                                         |       |                                                                                                              | 2,058,030  |                                                                                                              |       |      | 1,105,165  |   |   |   | 102,553 |   |   | 3,470,140 |   |
| **Weighted-average exercise price  of options:** | ** ** |                                                                                            | ** ** | ** **                                                                                                   |       |                                                                                                              | ** ** | ** **                                                                                                        |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Granted                                               |       |                                                                                            | $          | —                                                                                                       |       |                                                                                                              |       | $                                                                                                                 | —     |      |       |   | $ | — |   |   |   | $ | — |   |   |   |   |
| Exercised                                             |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                              |       | $                                                                                                                 | 11.57      |      |       |   | $ | 17.64 |   |   |   | $ | 29.54 |   |   |   |   |
| Forfeited                                             |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                              |       | $                                                                                                                 | 12.65      |      |       |   | $ | 17.61 |   |   |   | $ | 31.65 |   |   |   |   |
| Outstanding at September 30, 2006                |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                              |       | $                                                                                                                 | 11.87      |      |       |   | $ | 17.76 |   |   |   | $ | 28.87 |   |   |   |   |
| Weighted-average fair value of options granted        |       |                                                                                            | —     |                                                                                                         |       |                                                                                                              | —     |                                                                                                              |       |      | —     |   |   |   | — |   |   |   |   |
| Weighted-average remaining contractual life           |       |                                                                                            | 0.8 years  |                                                                                                         |       |                                                                                                              | 2.7 years  |                                                                                                              |       |      | 2.0 years  |   |   |   | 1.5 years |   |   |   |   |
| **Options exercisable:**                              | ** ** |                                                                                            | ** ** | ** **                                                                                                   |       |                                                                                                              | ** ** | ** **                                                                                                        |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Number of options                                     |       |                                                                                            | 204,392    |                                                                                                         |       |                                                                                                              | 2,041,780  |                                                                                                              |       |      | 1,105,165  |   |   |   | 102,553 |   |   | 3,453,890 |   |
| Weighted-average  exercise price                      |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                              |       | $                                                                                                                 | 11.89      |      |       |   | $ | 17.76 |   |   |   | $ | 28.87 |   |   |   |   |

 

As of September 30,2006, the aggregate intrinsic value of stock options outstanding was $74,245. Theaggregate intrinsic value of exercisable stock options as of September 30,2006 was $73,832. During the nine months ended September 30, 2006, thetotal intrinsic value of options exercised was $30,487. The amount of the taxbenefit realized related to those exercises for the same period was $4,445.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**9.**   Stock-Based Compensation (Continued)

TheCompany’s restricted stock activity for the nine months ended September 30,2006, was as follows:

| ** **              | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair  value per share** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| **Restricted Stock:**   | ** ** | ** ** | ** ** |                                                                  | ** ** | ** ** |   |
| December 31,  2005 |       | 1,857,151  |       |                                                                  | $          | 13.61 | ** ** |   |
| Granted                 |       | 383,984    |       |                                                                  | 35.45      | ** ** |   |
| Vested                  |       | (365,987   | )          |                                                                  | 10.59      | ** ** |   |
| Forfeited               |       | (139,621   | )          |                                                                  | 11.08      | ** ** |   |
| September 30, 2006 |       | 1,735,527  |       |                                                                  | $          | 19.28 | ** ** |   |

 

As of September 30,2006, the total compensation cost related to unvested restricted stock awardsnot yet recognized was $16,780, net of expected forfeitures, and theweighted-average period over which these awards are expected to be recognizedwas 2.6 years. The total fair value of restricted stock that vested during thenine months ended September 30, 2006 was $17,074.

**10.   DeferredCompensation Plan**

Effective January 1,2006, the Company established a non-qualified deferred compensation plan forcertain key employees of the Company through a Rabbi Trust. A portion of theeligible employees’ compensation can be directed into the plan. In accordancewith EITF 97-14, *Accounting for DeferredCompensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested*,assets of the Rabbi Trust are consolidated by the Company. The Company haselected to account for the investments as trading securities, in accordancewith Statement of Financial Accounting Standards No. 115, *Accounting for Certain Investments in Debt and Equity Securities.*Asa result, investments are marked to market through the statement of income,with an offsetting increase in the deferred compensation liability. Noinvestments in the Rabbi Trust can consist of the Company’s stock. Theinvestments are included in current marketable securities and a deferredcompensation liability is included in other current liabilities on the Company’sconsolidated balance sheet. The investment balance and the deferredcompensation liability were both $984 at September 30, 2006.

**11.   Gain onDisposition of Real Estate and Discontinued Operations**

Real estatedispositions, excluding those accounted for as discontinued operations, were asfollows:

| ** **     | ** ** | **For the Nine Months** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **Ended September 30,**      | ** ** |
| ** **     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Projects sold  |       | 9                                      |       | 4 |   |
| Net sale price |       | $                                      | 96,420     |   | $ | 14,962 |   |
| Gain on sale   |       | $                                      | 19,370     |   | $ | 9,759 |   |

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**11.**   Gain on Disposition of Real Estate and Discontinued Operations(Continued)

TheCompany’s income from discontinued operations consists of the operations andgains on disposition of real estate projects held for sale or sold subsequentto the adoption of FAS 144, effective January 1, 2002, that are considered“components of an entity” as defined by FAS 144 and for which the Company doesnot have or expect to have any significant involvement in the operations of theproject after the disposal. As required by FAS 144, certain revenues andexpenses for the six months ended June 30, 2006, and the three and ninemonths ended September 30, 2005, have been reclassified to conform to thepresentation for the three months ended September 30, 2006.

Real estatedispositions accounted for as discontinued operations were as follows:

| ** **     | ** ** | **For the Nine Months** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **Ended September 30,**      | ** ** |
| ** **     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Projects sold  |       | 5                                      |       | 13 |   |
| Net sale price |       | $                                      | 35,831     |   | $ | 80,315 |   |
| Gain on sale   |       | $                                      | 7,231      |   | $ | 22,005 |   |

 

The components ofdiscontinued operations were as follows:

| ** **                                                | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                                | ** ** | **2006**                                | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                             | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Development and  construction                             |       | $                                       | 1,120      |                                   | $          | 1,567 |   | $ | 3,129 |   | $ | 5,425 |   |
| Total Revenues                                            |       | 1,120                                   |       | 1,567                                  |       | 3,129 |   | 5,425 |   |
| **Costs  and Expenses:**                                  | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages,  and benefits                            |       | 81                                      |       | 120                                    |       | 233 |   | 419 |   |
| Commissions                                               |       | 89                                      |       | 350                                    |       | 395 |   | 350 |   |
| General and  administrative                               |       | 715                                     |       | 1,325                                  |       | 1,999 |   | 4,297 |   |
| Depreciation and  amortization                            |       | 294                                     |       | 274                                    |       | 1,026 |   | 1,105 |   |
| Interest                                                  |       | 510                                     |       | 672                                    |       | 1,159 |   | 2,402 |   |
| Total Expenses                                            |       | 1,689                                   |       | 2,741                                  |       | 4,812 |   | 8,573 |   |
| Gain on disposition of real estate                        |       | 2,163                                   |       | 19,985                                 |       | 7,231 |   | 22,005 |   |
| Operating income                                          |       | 1,594                                   |       | 18,811                                 |       | 5,548 |   | 18,857 |   |
| Interest and  other income                                |       | 136                                     |       | 11                                     |       | 425 |   | 36 |   |
| Income from  discontinued operations, before income taxes |       | 1,730                                   |       | 18,822                                 |       | 5,973 |   | 18,893 |   |
| Income tax  expense                                       |       | (597                                    | )          | (6,853                                 | )          | (1,940 | ) | (6,879 | ) |
| Minority interest                                         |       | —                                  |       | —                                 |       | (826 | ) | — |   |
| Income from discontinued  operations, net of income taxes |       | $                                       | 1,133      |                                   | $          | 11,969 |   | $ | 3,207 |   | $ | 12,014 |   |

 

24

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**12.   FinancialInstruments**

TheCompany’s participation in derivative transactions has been limited to riskmanagement purposes. Derivative instruments are not held or issued for tradingpurposes. From time to time, the Company enters into interest rate cap agreementsin order to limit its interest expense on the Credit Facility, mortgages onassets acquired for investment purposes or on certain construction loansrelated to consolidated real estate projects. These interest rate capagreements are not designated as effective hedges and therefore are marked tomarket each period with the change in fair market value recognized in currentperiod earnings.

In thefirst nine months of 2005, the Company had an agreement with a notional amountof $7,686 and the Company was to receive payments if the 30-dayLIBOR-based floating interest rate exceeded 3.5%. This agreement terminatedprior to 2006. The amounts recorded in 2005 related to these agreements werenot material. In addition, at September 30, 2006, the Company held twosuch agreements with notional amounts of $25,650 and $18,500 and under bothagreements, the Company receives payments if the 30-day LIBOR-basedfloating interest rate exceeds 5.5%. These agreements expire on January 2,2008 and April 1, 2009, respectively. Through September 30, 2006,amounts recorded related to these interest rate cap agreements were notmaterial.

Accounts receivable,accounts payable and accrued expenses and other liabilities are carried atamounts that reasonably approximate their fair values. The current values ofthe Company’s long-term debt and notes payable on real estate reasonablyapproximate their fair values based on the Company’s incremental borrowingrates for similar types of borrowing arrangements.

**13.**   Commitmentsand Contingencies

The Company has guaranteedrepayment of a maximum of $7,138 of real estate notes payable of itsunconsolidated subsidiaries, of which $7,108 was outstanding at September 30,2006. These notes are secured by the underlying real estate projects and havematurity dates through December 2009.

In2004, the Company issued a debt repayment guaranty of an unconsolidatedsubsidiary in conjunction with a $30,000 loan agreement. As part of this loanagreement, the Company issued a repayment guaranty of up to 50% of the loanbalance plus any accrued and unpaid interest. In accordance with the terms ofthe guaranty, at such time as the principal balance has been reduced to $15,000or less and a target loan-to-value ratio has been reached, the Company’sguaranty is reduced to 25% of the loan balance. In exchange for the guaranty,the Company receives a priority return with respect to its capital contributionbased on the outstanding amount of principal on the loan. The Company estimatesthat its likely exposure under the guaranty is not material and has determinedthat the present value of the priority return is the best estimate of the fairvalue of the guaranty under FASB Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Direct Guarantees of Indebtedness of Others* (“FIN 45”). TheCompany initially recorded a liability offset by an increase in its investmentin unconsolidated subsidiary balance of $1,886. The underlying note was paiddown to $15,000 in the second quarter of 2005, resulting in a decrease in theCompany’s guaranty. As a result, the Company decreased the liability balance,with a corresponding decrease to the investment balance. The liability balancewas $472 at September 30, 2006.

25

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**13.**   Commitments and Contingencies (Continued)

In2004, the Company also issued a $1,000 debt repayment guaranty on a $10,185construction loan in order to obtain a development fee contract and allow athird-party owner to obtain financing for a construction project. The guarantyexpires upon project completion and achievement of a specified leasing target. Thethird-party owner has agreed to transfer a separate parcel of land to theCompany, should the Company be required to perform under the guaranty. The loanmatures in November 2009. The Company estimates that its likely exposureunder the guaranty is not material and has recorded the fair value of theguaranty in an amount equivalent to the consideration received, or $102.

TheCompany issued several other debt repayment guarantees of unconsolidatedsubsidiaries that are subject to the provisions of FIN 45. The Companyestimates that its likely exposure under these guarantees is not material. Onthis basis, the Company estimates that the fair value of these guarantees isequivalent to the amount necessary to secure the guarantees using letters ofcredit from a bank, and the aggregate amount is nominal.

At September 30,2006, the Company had outstanding letters of credit totaling $19,697, including$2,255 and $12,434 of which collateralize amounts recorded in accrued expensesand other liabilities, respectively. The letters of credit expire at varyingdates through August 2008.

Inaddition, at September 30, 2006, the Company had numerous completion andbudget guarantees relating to development projects. These guarantees are madewith third-party owners in the normal course of business. Each of theseguarantees requires the Company to complete construction of the relevantproject within a specified time frame and/or within a specified budget, withthe Company potentially being liable for costs to complete in excess of suchbudget. However, the Company generally has “guaranteed maximum price” contractswith reputable general contractors with respect to projects for which theCompany provides these guarantees. These contracts are intended to pass thebudget risk to such contractors. Management does not expect to incur anymaterial losses under these guarantees.

The Companyowns several real estate buildings that contain asbestos. The Company plans todemolish one of these buildings and has recorded a conditional asset retirementobligation of $3,000, in accordance with FASB Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations* (“FIN47”). With respect to these other buildings, the Company has not recorded anyrelated asset retirement obligation, as the fair value of the liability cannotbe reasonably estimated, due to uncertainties in the timing and manner ofsettlement of the obligations.

Fromtime to time, the Company acts as a general contractor with respect toconstruction projects. The Company does not consider these activities to be amaterial part of its business. In connection with these activities, the Companyseeks to subcontract construction work for certain projects to reputablesubcontractors. Should construction defects arise related to the underlyingprojects, the Company could potentially be liable to the client for the coststo repair such defects, but the Company would generally look to thesubcontractor that performed the work to remedy the defect. Management does notexpect to incur material losses with respect to construction defects.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**13.**   Commitments and Contingencies (Continued)

As of September 30, 2006, the Company had madenon-refundable earnest money deposits totaling  $2,438 in conjunction with contracts toacquire approximately $145,418 of real estate from other entities.

From time to time, theCompany is involved in litigation matters that arise in the ordinary course ofits business, some of which involve claims for damages that are substantial inamount. The ultimate liability for these matters cannot be determined. However,based on the information currently available, the Company does not believe thatthe resolution of any such matters to which it is currently a party will have amaterial adverse effect on the Company’s results of operations, financialcondition or liquidity.

**14.**   SegmentInformation

*Description ofServices by Segment*

The Global Servicessegment includes property and facilities management, brokerage and corporateadvisory, and project and construction management services delivered to bothuser and investor clients. The Development and Investment segment includesdevelopment activities performed on behalf of investor and user clients on afee basis, as well as development and investment activities pursuant to whichthe Company takes an ownership position. The Development and Investment segmentresults also include activities related to the Company’s operating real estateprojects prior to disposition.

*Measurement ofSegment Profit or Loss and Segment Assets*

The Company evaluatesperformance and allocates resources between its two reportable segments basedon income before income taxes. The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies.

*Factors ManagementUsed to Identify the Company’s Reportable Segments*

TheCompany’s reportable segments are defined by the nature of the service providedand activities conducted. Because development services require specializedknowledge, the Company’s organizational structure allows the group of individualswith specialized knowledge and experience in development activities to performthese services with greater focus through the Company’s Development andInvestment segment. The organizational structure of the Global Services segmentallows the Company to leverage resources in specific geographic areas, asnon-development services provided to user and investor clients often requiresimilar expertise.

Duringthe nine months ended September 30, 2006 and 2005, approximately 95% and96%, respectively, of the Company’s revenues were from clients located in theUnited States. For the three and nine months ended September 30, 2006, oneindividual client accounted for $27,052 (11%) and $81,357 (12%), respectively,of the Company’s consolidated revenues. For the three and nine months ended September 30,2005, the same client accounted for $27,090 (12%) and $77,840 (13%),respectively, of the Company’s consolidated revenues. Revenues from this clientare included primarily in the Company’s Global Services segment.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**14.**   Segment Information (Continued)

Summarizedfinancial information for reportable segments was as follows:

| ** **                                                                                                                                   | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                                                                                                                   | ** ** | **2006**                                | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Global Services:**                                                                                                                         | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                               |       | $                                       | 233,960    |                                   | $          | 209,539 |   | $ | 670,591 |   | $ | 581,328 |   |
| Costs and expenses                                                                                                                           |       | (224,135                                | )          | (200,237                               | )          | (640,790 | ) | (555,226 | ) |
| Gain on  disposition of real estate                                                                                                          |       | 10                                      |       | 1,264                                  |       | 53 |   | 1,264 |   |
| Operating income                                                                                                                             |       | 9,835                                   |       | 10,566                                 |       | 29,854 |   | 27,366 |   |
| Interest and other  income                                                                                                                   |       | 1,028                                   |       | 440                                    |       | 2,368 |   | 1,590 |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries        |       | 10,863                                  |       | 11,006                                 |       | 32,222 |   | 28,956 |   |
| Minority interest,  before income taxes                                                                                                      |       | 163                                     |       | (260                                   | )          | 442 |   | 282 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       | 5,194                                   |       | 1,856                                  |       | 13,175 |   | 5,755 |   |
| Income from  continuing operations, before income taxes                                                                                      |       | 16,220                                  |       | 12,602                                 |       | 45,839 |   | 34,993 |   |
| Income from  discontinued operations, before income taxes                                                                                    |       | 209                                     |       | 565                                    |       | 673 |   | 565 |   |
| Income before  cumulative effect of a change in accounting principle                                                                         |       | 16,429                                  |       | 13,167                                 |       | 46,512 |   | 35,558 |   |
| Cumulative effect  of a change in accounting principle, before income taxes                                                                  |       | —                                  |       | —                                 |       | 984 |   | — |   |
| Income before  income taxes                                                                                                                  |       | $                                       | 16,429     |                                   | $          | 13,167 |   | $ | 47,496 |   | $ | 35,558 |   |
| **Development  and Investment:**                                                                                                             | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                               |       | $                                       | 13,130     |                                   | $          | 9,223 |   | $ | 31,551 |   | $ | 24,168 |   |
| Costs and expenses                                                                                                                           |       | (25,520                                 | )          | (21,775                                | )          | (63,909 | ) | (53,556 | ) |
| Gain on disposition  of real estate                                                                                                          |       | 16,122                                  |       | 6,021                                  |       | 19,317 |   | 8,495 |   |
| Operating income  (loss)                                                                                                                     |       | 3,732                                   |       | (6,531                                 | )          | (13,041 | ) | (20,893 | ) |
| Interest and other  income                                                                                                                   |       | 737                                     |       | 232                                    |       | 1,342 |   | 483 |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 4,469                                   |       | (6,299                                 | )          | (11,699 | ) | (20,410 | ) |
| Minority interest,  before income taxes                                                                                                      |       | (792                                    | )          | (2,748                                 | )          | (853 | ) | 1,795 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       | 3,313                                   |       | 537                                    |       | 5,393 |   | 3,781 |   |
| Income (loss) from  continuing operations, before income taxes                                                                               |       | 6,990                                   |       | (8,510                                 | )          | (7,159 | ) | (14,834 | ) |
| Income from  discontinued operations, before income taxes                                                                                    |       | 1,521                                   |       | 18,257                                 |       | 4,474 |   | 18,328 |   |
| Income (loss)  before cumulative effect of a change in accounting principle                                                                  |       | 8,511                                   |       | 9,747                                  |       | (2,685 | ) | 3,494 |   |
| Cumulative effect  of a change in accounting principle, before income taxes                                                                  |       | —                                  |       | —                                 |       | 673 |   | — |   |
| Income before  income taxes                                                                                                                  |       | $                                       | 8,511      |                                   | $          | 9,747 |   | $ | (2,012 | ) | $ | 3,494 |   |
| **Total:**                                                                                                                                   | ** ** | ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                               |       | $                                       | 247,090    |                                   | $          | 218,762 |   | $ | 702,142 |   | $ | 605,496 |   |
| Costs and expenses                                                                                                                           |       | (249,655                                | )          | (222,012                               | )          | (704,699 | ) | (608,782 | ) |
| Gain on  disposition of real estate                                                                                                          |       | 16,132                                  |       | 7,285                                  |       | 19,370 |   | 9,759 |   |
| Operating income                                                                                                                             |       | 13,567                                  |       | 4,035                                  |       | 16,813 |   | 6,473 |   |
| Interest and other  income                                                                                                                   |       | 1,765                                   |       | 672                                    |       | 3,710 |   | 2,073 |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries        |       | 15,332                                  |       | 4,707                                  |       | 20,523 |   | 8,546 |   |
| Minority interest,  before income taxes                                                                                                      |       | (629                                    | )          | (3,008                                 | )          | (411 | ) | 2,077 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       | 8,507                                   |       | 2,393                                  |       | 18,568 |   | 9,536 |   |
| Income from  continuing operations, before income taxes                                                                                      |       | 23,210                                  |       | 4,092                                  |       | 38,680 |   | 20,159 |   |
| Income from  discontinued operations, before income taxes                                                                                    |       | 1,730                                   |       | 18,822                                 |       | 5,147 |   | 18,893 |   |
| Income before  cumulative effect of a change in accounting principle                                                                         |       | 24,940                                  |       | 22,914                                 |       | 43,827 |   | 39,052 |   |
| Cumulative effect  of a change in accounting principle, before income taxes                                                                  |       | —                                  |       | —                                 |       | 1,657 |   | — |   |
| Income before  income taxes                                                                                                                  |       | $                                       | 24,940     |                                   | $          | 22,914 |   | $ | 45,484 |   | $ | 39,052 |   |

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**14.**   Segment Information (Continued)

 

| ** **                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **Total Assets:**           | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Global Services             |       |                   | $          | 518,878               | ** ** |   |   | $ | 434,712 | ** ** |   |
| Development and  Investment |       |                   | 657,506    | ** **            |       |   | 513,455 | ** ** |   |
| Total consolidated  assets  |       |                   | $          | 1,176,384             | ** ** |   |   | $ | 948,167 | ** ** |   |

 

**15.**   SupplementalCash Flow Information

Supplemental cash flowinformation is summarized below: 

| ** **                                        | ** ** | **For the Nine Months** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **Ended September 30,**      | ** ** |
| ** **                                        | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| **Non-cash  activities:**                         |       |                                   |       |   |   |
| Issuance of  restricted stock, net of forfeitures |       | 5,820                                  |       | 7,045 |   |

 

**16.   Subsequent Event**

*Merger with CBRichard Ellis*

On October 31,2006, the Company announced that it had entered into an Agreement and Plan ofMerger (the “Merger Agreement”) with CB Richard Ellis Group, Inc. (“CBRichard Ellis”) whereby CB Richard Ellis would acquire the Company in atransaction valued at approximately $2.2 billion, including the assumption ofcorporate debt and transaction and integration costs. Under the terms of theMerger Agreement, the Company’s stockholders will receive $49.51 in cash foreach share of the Company’s common stock they hold.

TheMerger Agreement has been approved by the boards of directors of both theCompany and CB Richard Ellis, and the Company’s board of directors hasrecommended to the Company’s stockholders that they approve and adopt theMerger Agreement, subject to the board’s right to change its recommendation topermit the board to comply with its fiduciary duties. The Company and CBRichard Ellis have each agreed to certain covenants in the Merger Agreement, including,among other things, that, subject to certain exceptions to permit the Company’sboard of directors to comply with its fiduciary duties, the Company will notsolicit, negotiate, provide information in furtherance of, approve, recommendor enter into any alternative transaction. The Merger Agreement also containscustomary covenants relating to the Company’s conduct of business prior to theclosing of the transaction.

Completion of themerger is conditioned on, among other things, regulatory review and approval bythe Company’s stockholders, and other customary closing conditions. The mergeris not conditioned on the receipt of financing by CB Richard Ellis, and themerger is expected to close in late 2006 or early 2007. The foregoingdescription of the Merger Agreement does not purport to be complete and isqualified in its 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2006 (dollars in thousands, except per share data) (Unaudited)**

**16.**   Subsequent Event (Continued)

entirety by reference tothe Merger Agreement, which is filed as an exhibit to the Company’s Form 8-Kfiled on October 31, 2006, and is incorporated by reference herein.

The MergerAgreement requires the Company to suspend payroll deductions to fund purchasesunder the ESPP at the end of the payroll period ending November 10, 2006. Employeeswill still be entitled to purchase shares under the ESPP for the currentpurchase period, but the amounts available to purchase shares will be frozen atthe amount that has been withheld through November 10, 2006, which willnow be the end of the current purchase period.

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**ITEM 2.**                *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussionshould be read in conjunction with the Company’s unaudited CondensedConsolidated Financial Statements and the notes thereto included in Item 1 ofthis Quarterly Report on Form 10-Q.

**Business Overview**

Trammell Crow Company (the “Company”) is one of thelargest diversified commercial real estate service companies in the world. TheCompany delivers brokerage, project management and building management servicesthrough its Global Services group and undertakes development and investmentactivities through its Development and Investment group. The Company serves twodifferent types of clients: user clients, which include large corporations,healthcare systems, public sector clients and other end users that occupycommercial property in connection with their business operations; and investorclients, which include pension funds, advisors and others that own or managereal estate assets primarily for investment purposes.

Services provided to user clients by the Company’sGlobal Services group, which has approximately 6,900 employees, consist ofcorporate advisory services, project management and facilities management. Corporateadvisory services are brokerage and brokerage-related services that includeprimarily tenant representation brokerage services, as well as othertransaction or portfolio services such as acquisition/disposition brokerage,lease administration and lease audits. Project management services includefacility planning, construction oversight, space planning, site consolidations,multi-location expansion programs, facilities design, signage conversions,portfolio-wide operational refits and upgrades, and workplace moves, adds andchanges. Facilities management services are building management services thatinclude administration and day-to-day operation, maintenance and repair ofclient-occupied facilities, office services and call center services.

Services provided to investor clients by the Company’sGlobal Services group consist of brokerage, construction management andproperty management. Brokerage services include project leasing and capitalmarkets services. Project leasing is when the Company is engaged as the owner’sleasing agent for renewals, expansions and leasing of vacant space ininvestor-owned properties while capital markets services include investmentsales and capital sourcing. Construction management services are projectmanagement services that primarily include space planning and tenant finishcoordination, typically in conjunction with property management and leasingassignments. Property management services are building management services thatinclude all aspects of building operations, maintenance and repair, tenantrelations and oversight of building improvement processes.

Global Services clients are served through a networkof offices in the United States, Canada, Europe, Asia-Pacific and Latin/SouthAmerica. Operations outside of the United States are primarily focused on theprovision of services to user clients, which generally include U.S.-basedmulti-nationals who have outsourced their services requirements to the Companyon a portfolio basis. The Company’s international service delivery is enhancedby its affiliations and alliances with Savills plc (“Savills”), a leadingproperty services company based in the United Kingdom with operationsthroughout Europe, Asia Pacific and Australia; Trammell Crow Meghraj, a leadingproperty services company in India; and JJ Barnicke, a leading Canadian realestate services provider.

The Development andInvestment group, with approximately 280 employees, provides developmentservices to users and investors and pursues opportunistic but risk-mitigateddevelopment and investment in commercial real estate across a wide spectrum ofproduct types, including industrial, office and retail properties; healthcarefacilities of all types including medical office buildings, hospitals andambulatory surgery centers; higher education facilities, including studenthousing; and residential/mixed-use projects. The Company acts as the generalmanager of the development process providing services that are vital in 

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allstages of the process, including: (i) site identification, due diligenceand acquisition; (ii) evaluating project feasibility, budgeting,scheduling and cash flow analysis; (iii) procurement of approvals andpermits, including zoning and other entitlements; (iv) project financeadvisory services; (v) coordination of project design and engineering; (vi) constructionbidding and management and tenant finish coordination; and (vii) projectclose-out and tenant move coordination. The Company may pursue development andinvestment activity on behalf of its user and investor clients (with noownership), in partnership with its clients (through co-investment-either on anindividual project basis or through a fund or program) or for its own account(100% Company ownership).

**Financial Overview**

***Merger with CBRichard Ellis Group, Inc.  ***On October 31,2006, the Company announced that it had entered into an Agreement and Plan ofMerger (the “Merger Agreement”) with CB Richard Ellis Group, Inc. (“CBRichard Ellis”) whereby CB Richard Ellis would acquire the Company in atransaction valued at approximately $2.2 billion, including the assumption ofcorporate debt and transaction and integration costs. Under the terms of theMerger Agreement, the Company’s stockholders will receive $49.51 in cash foreach share of the Company’s common stock they hold.

The Merger Agreement has been approved by the boardsof directors of both the Company and CB Richard Ellis, and the Company’s boardof directors has recommended to the Company’s stockholders that they approveand adopt the Merger Agreement, subject to the board’s right to change itsrecommendation to permit the board to comply with its fiduciary duties. TheCompany and CB Richard Ellis have each agreed to certain covenants in theMerger Agreement, including, among other things, that, subject to certainexceptions to permit the Company’s board of directors to comply with itsfiduciary duties, the Company will not solicit, negotiate, provide informationin furtherance of, approve, recommend or enter into any alternative transaction.The Merger Agreement also contains customary covenants relating to the Company’sconduct of business prior to the closing of the transaction.

Completion of the merger is conditioned on, amongother things, regulatory review and approval by the Company’s stockholders, andother customary closing conditions. The merger is not conditioned on thereceipt of financing by CB Richard Ellis, and the merger is expected to closein late 2006 or early 2007. The foregoing description of the Merger Agreementdoes not purport to be complete and is qualified in its entirety by referenceto the Merger Agreement, which is filed as an exhibit to the Company’s Form 8-Kfiled on October 31, 2006, and is incorporated by reference herein.

***ConsolidatedResults.***   The Company’s net income for thethird quarter and first nine months of 2006 was up 9% and 14% from the thirdquarter and first nine months of 2005, from $14.5 million and $24.8 millionto $15.9 million and $28.3 million, respectively. Global Services segmentprofit growth was partially offset by the increased year-to-date Developmentand Investment loss. The Development and Investment loss for 2006 isattributable to costs associated with the significant increase in projectactivity that are expected to generate revenues in future periods. The Company’sdiluted earnings per share for the third quarter and first nine months of 2006was $0.43 and $0.77, up from $0.40 and $0.68 reported for the third quarter andfirst nine months of 2005, respectively. Consolidated revenues increased $28.3million (13%) and $96.6 million (16%) for the third quarter and first ninemonths of 2006 as compared to the same periods of 2005, respectively.

***SegmentPerformance.******  ***TheGlobal Services segment income before income taxes increased 34% from $35.6million for the first nine months of 2005 to $47.5 million for the first ninemonths of 2006. Revenues for this segment increased 15%, from $581.3 millionfor the first nine months of 2005 to $670.6 million for the first nine monthsof 2006. Increases in all of the user services revenues lines (facilitiesmanagement up 14%, corporate advisory services up 36% and project management up19%) contributed to the increase in income before income taxes, as did the 9%increase in brokerage and construction management revenues 

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from investor customers. Therevenue increases reflect the impact of the Company’s success in winning newoutsourcing business, both through new contract awards and expansions withexisting customers, and its continued efforts to grow its brokerage business.

The Development andInvestment segment posted a loss before income taxes of $2.0 million in thefirst nine months of 2006 as compared to income of $3.5 million for the firstnine months of 2005. Revenues for this segment increased 31% from $24.2 millionfor the first nine months of 2005 to $31.6 million for the first ninemonths of 2006. The increase in revenues was offset by a 19% increase insegment operating expenses which were $53.6 million for the first nine monthsof 2005 compared to $63.9 million for the first nine months of 2006. Theincrease in expenses reflects investments in additional personnel to drive andsupport growth and increases in real estate operating expense, interest, anddepreciation and amortization associated with increased real estate developmentand investment activity. Gains on disposition of real estate, income frominvestments in unconsolidated subsidiaries (through which the Company conductsmany of its development projects) and income from discontinued operations makesignificant contributions to Development and Investment segment results but areexcluded from GAAP revenues.

**Results ofOperations—Three and Nine Months Ended September 30, 2006 Compared toThree and Nine MonthsEnded September 30, 2005**

In accordance with Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”), certainrevenues and expenses for the six months ended June 30, 2006 and for thethree and nine months ended September 30, 2005, have been reclassified toconform to the presentation for the three months ended September 30, 2006.As a result, certain balances differ from the amounts reported in previouslyfiled documents. See *Income from DiscontinuedOperations, Net of Income Taxes*, below, for additional information.

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| ** **                                                                                                                            | ** **   | **For the Nine Months  Ended September 30,** | ** **   | ** **   | ** **   | ** **        | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------------------------------|--------------|--------------|--------------|-------------------|--------------|
| ** **                                                                                                                            | ** **   | **2006**                                                              | ** **   | **2005**     | ** **   | **$ Change** | ** **   | **% Change** | ** ** |
| ** **                                                                                                                            | ** **   | **($ in thousands)**                                        | ** **   |
| **REVENUES:**                                                                                                                         |         |                                                                  |         |         |         |              |         |   |   |   |   |
| ***User  Services:***                                                                                                                 | * *     | * *                                                              | * *     | * *     | * *     | * *          | * *     |   |   |   |   |
| Facilities  management                                                                                                                |         | $                                                                     | 198,305      |         | $            | 173,604           |         | $ | 24,701 |   |   | 14.2 | % |   |
| Corporate  advisory services                                                                                                          |         | 155,241                                                               |         | 114,287      |         | 40,954            |         |   | 35.8 | % |   |
| Project  management services                                                                                                          |         | 101,595                                                               |         | 85,503       |         | 16,092            |         |   | 18.8 | % |   |
|                                                                                                                                  |         | 455,141                                                               |         | 373,394      |         | 81,747            |         |   | 21.9 | % |   |
| ***Investor  Services:***                                                                                                             | *** *** | *** ***                                                          | *** *** | *** *** | *** *** | *** ***      | *** *** |   |   |   |   |
| Property  management                                                                                                                  |         | 100,521                                                               |         | 102,801      |         | (2,280            | )            |   | -2.2 | % |   |
| Brokerage                                                                                                                             |         | 105,785                                                               |         | 96,752       |         | 9,033             |         |   | 9.3 | % |   |
| Construction  management                                                                                                              |         | 9,144                                                                 |         | 8,381        |         | 763               |         |   | 9.1 | % |   |
|                                                                                                                                  |         | 215,450                                                               |         | 207,934      |         | 7,516             |         |   | 3.6 | % |   |
| Development and  construction                                                                                                         |         | 31,551                                                                |         | 24,168       |         | 7,383             |         |   | 30.5 | % |   |
| **TOTAL  REVENUES**                                                                                                                   |         | 702,142                                                               |         | 605,496      |         | 96,646            |         |   | 16.0 | % |   |
| **COST AND EXPENSES:**                                                                                                                | ** **   | ** **                                                            | ** **   | ** **   | ** **   | ** **        | ** **   |   |   |   |   |
| Salaries, wages  and benefits                                                                                                         |         | 451,382                                                               |         | 399,089      |         | 52,293            |         |   | 13.1 | % |   |
| Commissions                                                                                                                           |         | 119,907                                                               |         | 98,790       |         | 21,117            |         |   | 21.4 | % |   |
| General and  administrative                                                                                                           |         | 118,586                                                               |         | 100,763      |         | 17,823            |         |   | 17.7 | % |   |
| Depreciation and  amortization                                                                                                        |         | 8,419                                                                 |         | 6,870        |         | 1,549             |         |   | 22.5 | % |   |
| Interest                                                                                                                              |         | 6,405                                                                 |         | 3,270        |         | 3,135             |         |   | 95.9 | % |   |
| **TOTAL EXPENSES**                                                                                                                    |         | 704,699                                                               |         | 608,782      |         | 95,917            |         |   | 15.8 | % |   |
| Gain on disposition of real estate                                                                                                    |         | 19,370                                                                |         | 9,759        |         | 9,611             |         |   | 98.5 | % |   |
| Operating income                                                                                                                      |         | 16,813                                                                |         | 6,473        |         | 10,340            |         |   | 159.7 | % |   |
| Interest and  other income                                                                                                            |         | 3,710                                                                 |         | 2,073        |         | 1,637             |         |   | 79.0 | % |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |         | 20,523                                                                |         | 8,546        |         | 11,977            |         |   | 140.1 | % |   |
| Income tax  expense                                                                                                                   |         | (7,714                                                                | )            | (3,111       | )            | (4,603            | )            |   | -148.0 | % |   |
| Minority  interest, net of income taxes                                                                                               |         | (256                                                                  | )            | 1,321        |         | (1,577            | )            |   | -119.4 | % |   |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                          |         | 11,569                                                                |         | 6,064        |         | 5,505             |         |   | 90.8 | % |   |
| Income from  continuing operations                                                                                                    |         | 24,122                                                                |         | 12,820       |         | 11,302            |         |   | 88.2 | % |   |
| Income from  discontinued operations, net of income taxes                                                                             |         | 3,207                                                                 |         | 12,014       |         | (8,807            | )            |   | -73.3 | % |   |
| Income before  cumulative effect of a change in accounting principle                                                                  |         | 27,329                                                                |         | 24,834       |         | 2,495             |         |   | 10.0 | % |   |
| Cumulative effect  of a change in accounting principle, net of income taxes                                                           |         | 1,011                                                                 |         | —       |         | 1,011             |         |   | 0.0 | % |   |
| **Net income**                                                                                                                        |         | $                                                                     | 28,340       |         | $            | 24,834            |         | $ | 3,506 |   |   | 14.1 | % |   |

 

34

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| ** **                                                                                                                            | ** **   | **For the Three Months  Ended September 30,** | ** **   | ** **   | ** **   | ** **        | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------|--------------|--------------|--------------|-------------------|--------------|
| ** **                                                                                                                            | ** **   | **2006**                                                               | ** **   | **2005**     | ** **   | **$ Change** | ** **   | **% Change** | ** ** |
| ** **                                                                                                                            | ** **   | **($ in thousands)**                                         | ** **   |
| **REVENUES:**                                                                                                                         | ** **   | ** **                                                             | ** **   | ** **   | ** **   | ** **        | ** **   |   | ** ** | ** ** |   |
| ***User  Services:***                                                                                                                 | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** ***      | *** *** | * * | *** *** | *** *** | * * |
| Facilities  management                                                                                                                |         | $                                                                      | 67,105       |         | $            | 59,076            |         | $ | 8,029 |   |   | 13.6 | % |   |
| Corporate  advisory services                                                                                                          |         | 57,584                                                                 |         | 49,498       |         | 8,086             |         |   | 16.3 | % |   |
| Project  management services                                                                                                          |         | 38,133                                                                 |         | 28,216       |         | 9,917             |         |   | 35.1 | % |   |
|                                                                                                                                  |         | 162,822                                                                |         | 136,790      |         | 26,032            |         |   | 19.0 | % |   |
| ***Investor  Services:***                                                                                                             | *** *** | *** ***                                                           | *** *** | *** *** | *** *** | *** ***      | *** *** | * * | *** *** | *** *** | * * |
| Property  management                                                                                                                  |         | 33,730                                                                 |         | 34,246       |         | (516              | )            |   | -1.5 | % |   |
| Brokerage                                                                                                                             |         | 34,274                                                                 |         | 35,296       |         | (1,022            | )            |   | -2.9 | % |   |
| Construction  management                                                                                                              |         | 3,134                                                                  |         | 3,207        |         | (73               | )            |   | -2.3 | % |   |
|                                                                                                                                  |         | 71,138                                                                 |         | 72,749       |         | (1,611            | )            |   | -2.2 | % |   |
| Development and  construction                                                                                                         |         | 13,130                                                                 |         | 9,223        |         | 3,907             |         |   | 42.4 | % |   |
| **TOTAL  REVENUES**                                                                                                                   |         | 247,090                                                                |         | 218,762      |         | 28,328            |         |   | 12.9 | % |   |
| **COST AND EXPENSES:**                                                                                                                | ** **   | ** **                                                             | ** **   | ** **   | ** **   | ** **        | ** **   |   | ** ** | ** ** |   |
| Salaries, wages  and benefits                                                                                                         |         | 160,173                                                                |         | 140,787      |         | 19,386            |         |   | 13.8 | % |   |
| Commissions                                                                                                                           |         | 43,705                                                                 |         | 41,834       |         | 1,871             |         |   | 4.5 | % |   |
| General and  administrative                                                                                                           |         | 39,301                                                                 |         | 35,736       |         | 3,565             |         |   | 10.0 | % |   |
| Depreciation and  amortization                                                                                                        |         | 3,500                                                                  |         | 2,335        |         | 1,165             |         |   | 49.9 | % |   |
| Interest                                                                                                                              |         | 2,976                                                                  |         | 1,320        |         | 1,656             |         |   | 125.5 | % |   |
| **TOTAL  EXPENSES**                                                                                                                   |         | 249,655                                                                |         | 222,012      |         | 27,643            |         |   | 12.5 | % |   |
| Gain on disposition of real estate                                                                                                    |         | 16,132                                                                 |         | 7,285        |         | 8,847             |         |   | 121.4 | % |   |
| Operating income                                                                                                                      |         | 13,567                                                                 |         | 4,035        |         | 9,532             |         |   | 236.2 | % |   |
| Interest and  other income                                                                                                            |         | 1,765                                                                  |         | 672          |         | 1,093             |         |   | 162.6 | % |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |         | 15,332                                                                 |         | 4,707        |         | 10,625            |         |   | 225.7 | % |   |
| Income tax  expense                                                                                                                   |         | (5,667                                                                 | )            | (1,726       | )            | (3,941            | )            |   | -228.3 | % |   |
| Minority  interest, net of income taxes                                                                                               |         | (388                                                                   | )            | (1,930       | )            | 1,542             |         |   | 79.9 | % |   |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                          |         | 5,463                                                                  |         | 1,497        |         | 3,966             |         |   | 264.9 | % |   |
| Income from  continuing operations                                                                                                    |         | 14,740                                                                 |         | 2,548        |         | 12,192            |         |   | 478.5 | % |   |
| Income from  discontinued operations, net of income taxes                                                                             |         | 1,133                                                                  |         | 11,969       |         | (10,836           | )            |   | -90.5 | % |   |
| Income before  cumulative effect of a change in accounting principle                                                                  |         | 15,873                                                                 |         | 14,517       |         | 1,356             |         |   | 9.3 | % |   |
| Cumulative effect  of a change in accounting principle, net of income taxes                                                           |         | —                                                                 |         | —       |         | —            |         |   | 0.0 | % |   |
| **Net income**                                                                                                                        |         | $                                                                      | 15,873       |         | $            | 14,517            |         | $ | 1,356 |   |   | 9.3 | % |   |

 

35

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***Revenues.******  ***Facilitiesmanagement revenue increased from the third quarter and first nine months of2005 to the third quarter and first nine months of 2006. This increase isprimarily the result of the addition of several new customers as well as theexpansion of existing client relationships. Reimbursement of salaries, wages,benefits and out-of-pocket general and administrative costs, a component offacilities management revenue, comprised the majority of the revenue increasesfrom 2005. The composition of facilities management revenue, includingmanagement fees and reimbursements, can vary significantly from period toperiod based on the terms of the underlying management agreements in effecteach period.

Corporateadvisory services revenue increased for the third quarter and first nine monthsof 2006 over the third quarter and first nine months of 2005. The year-to-dateincrease was driven largely by increases in commissions generated from tenantrepresentation transactions. The increase in commission revenues was in partthe result of an increase in the number of tenant representation brokers as theCompany has focused on expanding its brokerage network. In addition,transaction volumes have increased as clients continue to show a willingness tomake real estate commitments. The third quarter increase in corporate advisoryservices revenue was primarily the result of an increase in capital marketstransactions for user customers.

Therevenue growth in project management was the result of the addition of newclients and the expansion of services provided to existing clients such asincreases in clients’ portfolios, the scope of the Company’s services undercertain outsourcing contracts and transaction volume.

Propertymanagement revenue decreased for the three and nine months ended September 30,2006 as compared to the same periods in 2005. Square footage under managementhas increased since September 30, 2005, although this increase is due to squarefootage increases associated with new business won just prior to the end of thethird quarter 2006 (thus contributing little to revenue for either the threemonths or nine months ended September 30, 2006). Prior to this late thirdquarter square footage addition, the Company had experienced decreases in squarefootage from the comparable period in 2005 due the sales of buildings in theCompany’s management portfolio to real estate investment trusts (“REITs”) orother investors that self-manage their properties or use other serviceproviders and from existing clients taking services in-house or to otherservice providers.

Brokeragerevenue from investor clients increased for the first nine months of 2006 fromthe first nine months of 2005, due to increases in project leasing commissions.Project leasing revenue increased due to improving market fundamentals, such asdecreasing vacancies and increasing rents in certain markets. Investment salesrevenue decreased slightly for the year-to-date period in 2006. The increase inproject leasing during the third quarter of 2006 (versus the comparable periodin the prior year) was more than offset by the quarter-to-quarter decrease ininvestment sales revenue, resulting in a slight decrease in total brokeragerevenue on a quarter-to-quarter basis. The small percentage decrease in totalbrokerage revenues for the third quarter of 2006 follows a very strong thirdquarter of 2005.

Constructionmanagement revenue increased for the first nine months of 2006 as compared to2005 and remained relatively flat between the third quarter of 2006 and 2005. Constructionmanagement revenue is generated from services including space planning andtenant finish coordination for investor clients in conjunction with propertymanagement and leasing assignments and is directly related to tenants’ realestate demands. The increase in construction management revenue year over yearresulted from a higher volume of construction projects as tenant leasingactivity increased and is consistent with the increase in project leasingrevenue.

Developmentand construction revenue increased for the third quarter and first nine monthsof 2006 as compared 2005, driven in part by an increase in development fees dueto higher activity levels. In addition, development and construction revenuealso increased due to higher rental revenue from acquisitions of operating realestate properties.

36

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Throughapproximately 1990, the Company focused its commercial real estate developmentbusiness on office, industrial and retail projects primarily for investorclients. Since that time, the Company has expanded its focus to include othertypes of commercial development and development for user clients. Nationalinitiative teams source development and acquisition opportunities with bothuser and investor clients in healthcare, higher education, on-airportdistribution and residential/mixed-use, and initiative personnel support localdevelopment teams in the execution of the resulting projects. By expanding itsfocus to include development for user clients and through these initiatives,particularly those in the healthcare sector, the Company seeks to mitigate thecyclicality traditionally inherent in the commercial development business. TheCompany seeks to establish funds and programs with capital partners and tochannel increasing amounts of development and investment activity into thosefunds and programs. The Company’s in-process inventory of projects has grown to$5.3 billion at September 30, 2006, up from $3.5 billion at September 30,2005.

Inaddition, Development and Investment income is generated from investments inunconsolidated subsidiaries and from the operation and/or disposition of real estateclassified as “discontinued operations.” The impact of Development and Investment project sales accounted for asincome from the Company’s unconsolidated subsidiaries or as income fromdiscontinued operations is a regular part of, and can contribute significantlyto, Development and Investment results in any given period. See *Gain on Disposition of Real Estate*, *Income fromInvestments in Unconsolidated Subsidiaries, Net of Income Taxes*and *Income from Discontinued Operations, Net of Income Taxes*, below,for additional information.

***Costs and Expenses.******  ***Salaries,wages and benefits expense includes all compensation paid to Company employeesother than brokerage commissions. As such, it includes salaries, benefits andannual incentive bonuses for employees whose compensation is reimbursed byclients (“reimbursed employees”); salaries, benefits and annual incentivebonuses for employees whose compensation is not so reimbursed (“unreimbursedemployees”); long-term incentive compensation associated with stock-basedawards to certain employees; and transaction-related incentive compensationother than brokerage commissions, primarily paid in connection with developmentand investment transactions, including those transactions recorded as gain ondisposition of real estate, income from investments in unconsolidatedsubsidiaries and income from discontinued operations. Salaries, wages andbenefits expense for both reimbursed and unreimbursed employees increased inthe third quarter and first nine months of 2006 from the third quarter andfirst nine months of 2005. Salaries,****wages andbenefits for reimbursed employees grew as the Company increased its facilitiesmanagement and project management headcount to service client expansions andnew clients. The increased expense for unreimbursed employees resulted from anincrease in personnel to support the Company’s overall growth. In addition, theCompany experienced an unusual increase in employee medical costs in the firstand third quarters of 2006 when compared to recent historical experience. TheCompany is self-insured for employee medical costs with third-party stop-lossinsurance for large individual claims.

Theincrease in commission expense during the third quarter and first nine monthsof 2006 over the same periods of 2005 was directly attributable to theincreases in the Company’s corporate advisory services and brokerage revenuediscussed above.

Generaland administrative expenses increased in the third quarter and first ninemonths of 2006 as compared to the same periods of 2005, due in part toincreased client-reimbursed out-of-pocket general and administrative expensesassociated with growth in the Company’s facilities management and projectmanagement service lines. The 2006 increase is also due in part to an increasein unreimbursed expenses such as travel and entertainment. In addition, theacquisition of several operating real estate properties has led to increasedreal estate operating expenses in 2006. These properties, which the Companyplans to redevelop, lease and sell, include acquisitions made through theCompany’s fifth discretionary development and investment fund (“Fund V”).

37

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Depreciationand amortization expenses increased in the third quarter and first nine monthsof 2006 as compared to 2005 mainly due to increased depreciation on acquiredoperating real estate as mentioned above. Interest expense increased in thethird quarter and first nine months of 2006 partially as a result of higheroutstanding balances and interest rates under the Company’s revolving line ofcredit as compared to the third quarter and first nine months of 2005 and anincrease in notes payable related to operating real estate properties in 2006as compared to 2005. The higher balances under the Credit Facility wereincurred to fund the Company’s stock repurchases and additional real estateinvestments made during 2006.

***Gain on Disposition of Real Estate.******  ***TheCompany’s gain on disposition of real estate, excluding those accounted for asdiscontinued operations, increased in the third quarter and first nine monthsof 2006 as compared to the third quarter and first nine months of 2005 as shownin the following table:

| ** **     | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|----------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(Dollars in thousands)**                                   | ** ** |
| Projects sold  |       | 4                                                                      |       | 3                                                                     |       | 9 |   | 4 |   |
| Net sale price |       | $                                                                      | 89,236     |                                                                  | $          | 13,347 |   | $ | 96,420 |   | $ | 14,962 |   |
| Gain on sale   |       | $                                                                      | 16,132     |                                                                  | $          | 7,285 |   | $ | 19,370 |   | $ | 9,759 |   |

 

***Minority Interest, Net of Income Taxes.******  ***Minorityinterest decreased from income for the first nine months of 2005 to expense forthe first nine months of 2006. This change is primarily due to more minorityinterest income in 2005 for the minority interest owners’ share of fees earnedby the Company related to certain consolidated real estate projects, ascompared to 2006. Minority interest expense decreased from the third quarter of2005 to the third quarter of 2006. This decrease is mainly due to the Companyhaving more sales of real estate projects with outside partners in the thirdquarter of 2005 as compared to 2006, resulting in greater minority interestexpense in 2005 for the outside partners’ share of such gains.

***Income from Investments in UnconsolidatedSubsidiaries, Net of Income Taxes.******  ***Inthe ordinary course of business, a significant portion of the Company’sdevelopment and investment activities are conducted, and are expected to beconducted in future periods, through unconsolidated subsidiaries. The Companyalso has certain investments in unconsolidated subsidiaries which are notrelated to its development and investment activities. Income from investmentsin unconsolidated subsidiaries fluctuates from period to period based on thevolume and profitability of the business and transactions carried out by theunderlying unconsolidated subsidiaries. The increase in income from investmentsin unconsolidated subsidiaries in 2006 as compared to 2005 reflects, amongother things, the Company’s increased investment in Savills made in April 2005.In 2006, income from investments in unconsolidated subsidiaries also includesthe Company’s share of the operating results of Trammell Crow Meghraj, theCompany’s affiliate operating in India (investment made in October 2005)and of Trammell Crow Company Krombach Partners, the affiliate through which theCompany provides services in the St. Louis area (formed in October 2005).

***Income from Discontinued Operations, Net of IncomeTaxes.******  ***Income fromdiscontinued operations consists of the operations of real estate propertiesand gain on disposition of real estate properties held for sale or sold, thatwere considered components of an entity under FAS 144 and in which the Companyhad not retained or did not expect to retain significant continuing involvement.Dispositions of real estate assets have been and continue to be a significantpart of the Company’s activities and, as a result of applying the provisions ofFAS 144, the Company expects a significant amount of these activities to beclassified as discontinued operations in future periods. Because gains on saleof real estate projects accounted for as income from discontinued operationsgive rise to indirect costs, such as incentive and other compensation expenseof Development and Investment segment personnel and fund-level minorityinterest associated with the gains, the portion of the Company’s net incomeattributable to sales of real estate projects was significantly less than theamount shown as income from discontinued operations.

38

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Thefollowing table depicts the sales of real estate considered discontinuedoperations for the three and nine months ended September 30, 2006 and2005:

| ** **     | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|----------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(Dollars in thousands)**                                   | ** ** |
| Projects sold  |       | 1                                                                      |       | 7                                                                     |       | 5 |   | 13 |   |
| Net sale price |       | $                                                                      | 12,262     |                                                                  | $          | 51,071 |   | $ | 35,831 |   | $ | 80,315 |   |
| Gain on sale   |       | $                                                                      | 2,163      |                                                                  | $          | 19,985 |   | $ | 7,231 |   | $ | 22,005 |   |

 

***Cumulative Effectof a Change in Accounting Principle, Net of Income Taxes.******  ******The income from cumulative effectof a change in accounting principle is due to the implementation of Statementof Financial Accounting Standards No. 123 (revised 2004),******Share-BasedPayment******, effective January 1, 2006 (“FAS123R”).***FAS 123R requires the Company to estimateforfeitures of share-based payments upon grant and to reevaluate this estimateduring the requisite service period. Prior to the adoption of FAS 123R, theCompany’s policy had been to reverse expense related to forfeitures ofrestricted stock as they occurred. Upon adoption, the Company recorded acumulative effect of a change in accounting principle, net of income taxes,which represented a reversal of expense taken for those shares of unvestedrestricted stock granted prior to adoption that the Company estimates will beforfeited before vesting. See*New AccountingPronouncements,* below, for additional information.

***Net Income.******  ******Net income increased due to thefluctuations in revenues and expenses described above. In addition, net incomefor the third quarter and first nine months of 2006 was adversely impacted dueto an increase in the Company’s effective income tax rate.***

**New AccountingPronouncements**

The Company adopted FAS 123R effective January 1,2006, using the modified-prospective transition method, and results for priorperiods were not adjusted. Prior to adoption of FAS 123R, the Company electedto use the intrinsic method under Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,to account for its stock-based compensation arrangements. Compensation expensefor stock options was recognized to the extent the market price of theunderlying stock on the date of grant exceeded the exercise price of the option.The Company recognized compensation expense related to restricted stock grantsover the vesting period of the underlying award in an amount equal to the fairmarket value of the Company’s stock on the date of grant. No compensationexpense was recognized related to the difference between the employee’s costand the market value of stock purchased under the Company’s employee stockpurchase plan.

FAS 123R requires all stock-based awards to employeesto be recognized in the income statement based on their fair values. FAS 123Ralso requires the Company to estimate forfeitures of share-based payments upongrant and to reevaluate this estimate during the requisite service period. Priorto the adoption of FAS 123R, the Company’s policy had been to reverse expenserelated to forfeitures of restricted stock as they occurred. See *Cumulative Effect of a Change in Accounting Principle, Net of IncomeTaxes*. All other impacts of adopting FAS 123R to the Company’sconsolidated statement of income and net income per share were not material.

For the nine months ended September 30, 2006 and2005, the Company recognized total stock-based compensation expense of $6.8million and $5.0 million with a related income tax benefit realized of $2.7 millionand $1.8 million, respectively.

As of September 30, 2006, the total compensationcost related to unvested restricted stock awards not yet recognized was $16.8million, net of expected forfeitures, and the weighted-average period overwhich these awards are expected to be recognized was 2.6 years.

39

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In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”), which clarifies the accounting for uncertainty in income taxesrecognized in the Company’s consolidated financial statements in accordancewith FASB Statement No. 109, *Accounting for IncomeTaxes* (“FAS 109”). FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 creates atwo-step process in evaluating a tax position. The first step, recognition,requires the Company to determine whether it is more likely than not that a taxposition will be sustained upon examination, including resolution of anyrelated appeals or litigation, based on the technical merits of the position. Thesecond step, measurement, states that a tax position that meets the more likelythan not recognition threshold should be measured to determine the amount ofbenefit to be recognized in the Company’s consolidated financial statementswith the tax position measured at the largest amount of benefit that is greaterthan 50 percent likely of being realized upon ultimate settlement.

Upon initial adoption, alltax positions should be reviewed and only positions that meet the “more-likely-than-not”recognition threshold may be recognized or continue to be recognized. Thecumulative effect of applying FIN 48 shall be reported as an adjustment to theopening balance of retained earnings (or other appropriate components of equityor net assets). The amount of the cumulative adjustment is the differencebetween the net assets and liabilities recognized prior to the adoption of FIN48 and the net assets and liabilities recognized as a result of applying FIN 48.FIN 48 is effective for fiscal years beginning after December 15, 2006. TheCompany has not yet determined the impact of FIN 48 on its consolidatedfinancial statements.

**Quarterly Resultsof Operations and Seasonality**

The results of operationsfor any quarter are not necessarily indicative of results for any future period.The Company’s revenues and net income during the fourth fiscal quarterhistorically have been significantly greater than in each of the first threefiscal quarters, primarily because its clients have demonstrated a tendency toclose transactions toward the end of the fiscal year. The timing andintroduction of new contracts, the disposition of investments in real estateassets, the recognition of incentive fees which often occur in the latter partof the fiscal year as contractual targets are met, and other factors may alsocause quarterly fluctuations in the Company’s results of operations.

**Liquidity andCapital Resources**

The Company’s liquidity and capital resourcesrequirements include the funding of working capital needs that are primarilycosts incurred in providing services to its clients before collection ofrelated billings; the funding of capital investments including the acquisitionof or investments in other real estate service companies; the repurchase of itsshares if authorized by the Board of Directors; expenditures for real estateand payments on notes payable associated with its development and investmentactivities; and expenditures related to upgrading the Company’s managementinformation systems. The Company finances its operations with internallygenerated funds and borrowings under the $175.0 million revolving line ofcredit (the “Credit Facility”) described below. The portion of the Company’sdevelopment and investment business that includes the acquisition anddevelopment of real estate is financed with loans secured by underlying realestate, external equity, internal sources of funds, or a combination thereof.

Net cash used in operating activities totaled $60.4million for the first nine months of 2006, compared to $43.5 million in thefirst nine months of 2005. This increase in cash used was due in part to cashused in real estate activities, net of related borrowings of $41.9 millionin the first nine months of 2006 compared to $33.7 million for the same periodof 2005 as a result of increased real estate investment activity in the firstnine months of 2006. In addition, the Company experienced higher accountsreceivable balances in 2006 as compared to the first nine months of 2005 due toan increase in project and facilities management, along with the closing ofseveral brokerage transactions at the end of September 2006. There wasalso an 

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increase in notesreceivable in the first nine months of 2006 related to higher amounts loaned bythe Company with regard to real estate projects as compared to 2005. Also,restricted cash increased $1.6 million in 2006, as compared to a decreaseof $7.1 million in 2005. The majority of the fluctuation in restricted cash isdue to greater disbursements in 2005 out of restricted cash held by the Companyto fund client development costs on projects performed by the Company on behalfof its clients. In addition, cash restricted for use to pay insurance premiumsto third-party insurance companies increased in 2006. These cash outflows werepartially offset by the change in receivables from affiliates activity. Receivablesfrom affiliates increased $7.5 million in 2005 compared to an increase of only$0.5 million in 2006 due to amounts loaned to an unconsolidated subsidiary in2005. The outflows were further reduced by a decrease in income tax payments inthe first nine months of 2006 on account of 2005 activity, as compared to suchpayments in the first nine months of 2005 on account of 2004 activity, primarilydue to the timing of payments made for each period.

Net cash used in investing activities totaled $57.5million for the first nine months of 2006, compared to $117.3 million for thefirst nine months of 2005. This decrease in cash used is primarily due to adecrease in investments in unconsolidated subsidiaries, net of distributions,to $16.1 million for the first nine months of 2006 as compared to $92.4 millionin the same period of 2005. The 2005 investments primarily related to theCompany’s additional investment in Savills. In addition, cash used decreaseddue to the Company’s wholly-owned captive insurance company making purchases ofmarketable securities, net of sales proceeds, of $18.2 million in 2005 ascompared to net purchases of only $0.2 million in 2006. Also, during 2005, theCompany received $32.8 million related to dispositions of real estate held forinvestment as compared to only $0.5 million in 2006.

Net cash provided by financing activities totaled$111.6 million during the first nine months of 2006 as compared to $63.2million during the same period of 2005. The increase in cash provided in 2006is in part due to borrowings, net of principal debt payments, under the Company’sline of credit of $105.1 million, compared to borrowings, net of principal debtpayments, of $51.0 million in the comparable 2005 period. The Company used the2006 borrowings to fund its purchase of shares of its own stock, for income taxand incentive payments on account of 2005 results and for additional realestate investments. The Company used the 2005 borrowings, together with cash onhand, to fund its purchase of additional shares of Savills in 2005. Inaddition, the Company received proceeds from the exercise of employee stockoptions of $21.9 million in 2006, as compared to $9.4 million in 2005. Therewas also less cash used for payments on notes payable related to real estateheld for investment totaling $6.9 million in 2006 as compared to $16.0 millionin 2005. Also, the Company repurchased shares of its own stock totaling $50.0million in 2006, as compared to $20.1 million of stock repurchases in thecomparable period in 2005.

In June 2005, the Company obtained the $175.0million Credit Facility arranged by Bank of America, N.A., as theadministrative agent, which replaced the Company’s previous $150.0 millionrevolving line of credit. The Company can obtain loans under the terms of theCredit Facility, which are Base Rate Loans or Eurodollar Rate Loans. Base RateLoans bear interest at a base rate plus a margin up to 0.25% depending on theCompany’s leverage ratio. The base rate is the higher of the prime lending rateor an average federal funds rate plus 0.5%. Eurodollar Rate Loans bear interestat the Eurodollar rate plus a margin, which ranges from 1.75% to 2.0%,depending upon the Company’s leverage ratio. The Eurodollar rate is based onthe British Bankers Association LIBOR rate.

The Credit Facility contains various covenants such asthe maintenance of minimum equity, liquidity, revenues, interest coverage ratiosand fixed charge ratios. The Credit Facility also includes restrictions onrecourse indebtedness and total indebtedness, restrictions on liens and certainrestrictions on investments and acquisitions that can be made by the Company. Inaddition, the Company may not pay dividends, repurchase common shares, or makeother distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization. In February 2006,the Company amended its Credit Facility to allow for repurchases or otherdistributions on account of its common stock 

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in an amount up to $100.0million through December 31, 2006 and to reduce the minimum required networth covenant. The Credit Facility is guaranteed by certain significant subsidiariesof the Company and is secured by a pledge of the stock of such significantsubsidiaries and a pledge of certain intercompany indebtedness.

The Company’s participation in derivative transactionshas been limited to risk management purposes, and derivative instruments arenot held for trading purposes. If a certain interest coverage ratio is notmaintained, as defined in the Credit Facility, the Company is required to enterinto one or more interest rate agreements for the Company’s floating rateindebtedness in excess of $30.0 million ensuring the net interest on suchexcess is fixed, capped or hedged. Certain construction loans under whichinterest is capitalized in accordance with GAAP are excluded from the excess of$30.0 million calculation.

The Company also has a $25.0 million short-termrevolving line of credit (the “Swing Line”) with Bank of America, N.A. Eachloan obtained by the Company under the Swing Line matures in five businessdays, but no later than June 28, 2008, and bears interest at a 30-dayLIBOR-based rate plus an applicable margin as defined per the agreement. Borrowingsunder the Swing Line are unsecured and reduce borrowing capacity under theCredit Facility.

At September 30, 2006, the Company hadoutstanding borrowings of $140.1 million under the Credit Facility and noborrowings outstanding under the Swing Line. The covenants contained in theCredit Facility and the amount of the Company’s other borrowings and contingentliabilities may have the effect of limiting the borrowing capacity available tothe Company under the Credit Facility to an amount less than the $175.0 millioncommitment. The Company’s unused borrowing capacity, taking into accountborrowings and letters of credit outstanding, under the Credit Facility was $29.9million at September 30, 2006. Since many of the financial covenants inthe Credit Facility are dependent on the Company’s earnings before interest,taxes, depreciation and amortization, “EBITDA,” as defined in the CreditFacility agreement and calculated on a trailing four-quarter basis, a declinein the Company’s overall operations could adversely impact the Company’sability to comply with these financial covenants and, in turn, the Company’sborrowing capacity.

At September 30, 2006, the Company was incompliance with all covenants of the Credit Facility. The Company expects tocontinue to borrow under the Credit Facility to finance future strategicacquisitions and investments, fund its co-investment activities and provide theCompany with an additional source of working capital.

In 2005 and 2006, the Company entered into twointerest rate cap agreements in order to limit its interest expense onconstruction loans with 30-day LIBOR-based floating interest ratesrelated to consolidated real estate projects. The interest rate cap agreementshave notional amounts of $25.7 million and $18.5 million, and the Companyreceives payments if the LIBOR-based interest rate exceeds 5.5%. Theseagreements expire on January 2, 2008 and April 1, 2009. Through September 30,2006, amounts recorded related to these interest rate cap agreements were notmaterial.

The Company does not anticipate paying any dividendsin the foreseeable future. The Company believes that funds generated fromoperations, together with existing cash and available credit under the CreditFacility and loans secured by underlying real estate, will be sufficient tofinance its current operations, planned capital expenditure requirements,payment obligations for development purchases, investments in development andinvestment funds and programs, share repurchases, acquisitions of andinvestments in service companies, signing bonuses or loans for new employeesand internal growth for the foreseeable future. The Company’s need, if any, toraise additional funds to meet its working capital and capital requirementswill depend upon numerous factors, including the success and pace ofimplementation of its growth strategy. The Company regularly considers capitalraising alternatives to be able to take advantage of available avenues tosupplement its working capital, including strategic corporate partnerships orother alliances, bank borrowings and the sale of equity and/or debt securities.

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In February 2006, the Company announced that itsBoard of Directors had authorized the purchase of up to $50.0 million of itscommon stock from time to time in open market purchases or in privatelynegotiated transactions. The repurchase of shares is intended to be accretiveto future earnings per share for holders who retain their shares. The Company’sintent with respect to its stock repurchase programs is to reserve therepurchased shares for issuance in connection with the Company’s equity-basedincentive plans, as well as for other corporate purposes. In June 2006,the Company completed its $50.0 million share repurchase program. A total of1,487,500 shares were repurchased at an average price of $33.61 per share

***Merger with CBRichard Ellis Group, Inc.***   On October 31,2006, the Company announced that it had entered into the Merger Agreement withCB Richard Ellis whereby CB Richard Ellis would acquire the Company in atransaction valued at approximately $2.2 billion, including the assumption ofcorporate debt and transaction and integration costs. Under the terms of theMerger Agreement, the Company’s stockholders will receive $49.51 in cash foreach share of the Company’s common stock they hold.

The Merger Agreement has been approved by the boardsof directors of both the Company and CB Richard Ellis, and the Company’s boardof directors has recommended to the Company’s stockholders that they approveand adopt the Merger Agreement, subject to the board’s right to change itsrecommendation to permit the board to comply with its fiduciary duties. TheCompany and CB Richard Ellis have each agreed to certain covenants in theMerger Agreement, including, among other things, that, subject to certainexceptions to permit the Company’s board of directors to comply with itsfiduciary duties, the Company will not solicit, negotiate, provide informationin furtherance of, approve, recommend or enter into any alternative transaction.The Merger Agreement also contains customary covenants relating to the Company’sconduct of business prior to the closing of the transaction.

Completion of the mergeris conditioned on, among other things, regulatory review and approval by theCompany’s stockholders, and other customary closing conditions. The merger isnot conditioned on the receipt of financing by CB Richard Ellis, and the mergeris expected to close in late 2006 or early 2007. The foregoing description ofthe Merger Agreement does not purport to be complete and is qualified in itsentirety by reference to the Merger Agreement, which is filed as an exhibit tothe Company’s Form 8-K filed on October 31, 2006, and isincorporated by reference herein.

**Off-Balance SheetArrangements**

The Company hasoff-balance sheet arrangements consisting of certain debt repayment guaranteesthat have been provided by the Company as security for the obligations ofothers, primarily unconsolidated subsidiaries of the Company, in the normalcourse of the Company’s real estate development business. The Company has notmade any material payments under such arrangements during the nine months endedSeptember 30, 2006 or 2005. The Company has guaranteed a maximum of $7.14million of such notes payable, of which $7.11 million was outstanding at September 30,2006. Payments required under these arrangements, if any, could be indicativeof impairment in the Company’s investments in the underlying unconsolidatedsubsidiaries and therefore could result in additional expense to the Company.

**Forward-LookingStatements**

Certain statementscontained in this press release, including without limitation statementscontaining the words “believe,” “anticipate,” “attainable,” “forecast,” “will,”“may,” “expect(ation),” “envision,” “project,” “budget,” “objective,” “goal,” “target(ing),”“estimate,” “could,” “should,” “would,” “conceivable,” “intend,” “possible,” “prospects,”“foresee”, “look(ing) for,” “look to” and words of similar import, areforward-looking statements within the meaning of the federal securities laws. Suchforward-looking statements involve known and unknown risks, uncertainties andother matters which may cause the actual results, performance or achievementsof the Company or industry results to be materially different 

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fromany future results, performance or achievements expressed or implied by such forward-lookingstatements. Such risks, uncertainties and other matters include, but are notlimited to:

·       theability of the Company to complete the proposed transaction with CB RichardEllis Group, Inc. due to a number of factors, including but not limitedto, the ability of the Company and CB Richard Ellis Group, Inc. to satisfythe various conditions contained in the merger agreement between the parties,including Company stockholder approval, regulatory approvals and othercustomary conditions;

·       theability of the Company to retain its major customers and renew its contracts;

·       theability of the Company to attract new user and investor customers;

·       theability of the Company to manage fluctuations in net earnings and cash flowwhich could result from the company’s participation as a principal in realestate investments;

·       theCompany’s ability to continue to pursue its growth strategy;

·       theCompany’s ability to pursue strategic acquisitions on favorable terms andmanage challenges and issues commonly encountered as a result of thoseacquisitions;

·       theCompany’s ability to compete in highly competitive national and local businesslines;

·       theCompany’s ability to attract and retain qualified personnel in all areas of itsbusiness (particularly senior management);

·       thetiming of individual transactions;

·       theability of the Company to identify, implement and maintain the benefit of costreduction measures and achieve economies of scale; and

·       theability of the Company to compete effectively in the international arena andmanage the risks of operating in the international arena (including foreigncurrency exchange risk).

In addition, theCompany’s ability to achieve certain anticipated results will be subject toother factors affecting the company’s business that are beyond the Company’scontrol, including but not limited to:

·       generaleconomic conditions (including interest rates, the cost and availability ofcapital for investment in real estate, clients’ willingness to make real estatecommitments and other factors impacting the value of real estate assets);

·       theeffect of government regulation on the conduct of the company’s business; and

·       thethreat of terrorism and acts of war.

Given these uncertainties, readers are cautioned notto place undue reliance on such forward-looking statements. The Companydisclaims any obligation to update any such statements or publicly announce anyupdates or revisions to any of the forward-looking statements contained hereinto reflect any change in the Company’s expectation with regard thereto or anychange in events, conditions, circumstances or assumptions underlying suchstatements. Reference is hereby made to the disclosures contained under in “Item1A. Risk Factors” of the Company’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 15, 2006 and “Item1A. Risk Factors” of this report.

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**ITEM3.****                *Quantitative and Qualitative Disclosures About Market Risk***

The Company’s primarymarket risk exposure is to changes in interest rates. The Company is exposed to market risk related toits Credit Facility and loans secured by real estate properties as discussed in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” and in Notes 6 and 7 to the Company’sCondensed Consolidated Financial Statements. The Credit Facility and themajority of the loans secured by real estate bear interest at variable ratesand are subject to fluctuations in the market. During the first nine months of2006, the Company’s borrowings under the Credit Facility increased $105.1million, net of principal debt payments, primarily to fund incentivecompensation and income tax payments, investment in real estate and repurchasesof its common stock. From time to time, the Company purchases interest rateagreements to hedge, cap or lock a portion, but not all, of its exposure tofluctuations in interest rates, and, as such, the effects of interest ratechanges may be limited.

The Company’s earnings arealso somewhat affected by fluctuations in the value of the U.S. dollar ascompared to foreign currencies as a result of the operations of the Company andits consolidated and unconsolidated subsidiaries in Canada, Europe, Asia andAustralia. There have been no significant changes in foreign currency marketrisks since December 31, 2005.

**ITEM 4.**                *Controls and Procedures*

The Company accounts for its interest in Savills onthe equity method. See Note 4, “Investments in Unconsolidated Subsidiaries.”  For the year ended December 31, 2005,the Company’s share of Savills’ income from continuing operations before incometaxes represented approximately 22% of the Company’s income from continuingoperations before income taxes, calculated in accordance with Rule 1-02(w) ofRegulation S-X. As this exceeds the 20% threshold under Rule 3-09 ofRegulation S-X, the Company was required to file Savills’ audited financialstatements on a Form 10-K/A by June 29, 2006. The Companybelieves that the use of income from continuing operations as the measure ofrecurring income by which Savills’ significance is calculated overstatesSavills’ significance because the Company’s income from continuing operationsdoes not include a category of income that is routinely generated by sales ofproperties created through its development operations—“income from discontinuedoperations” that is categorized as such solely as a result of the applicationof FAS 144. If this type of recurring income from property sales transactionswere included as income from continuing operations, Savills would haveaccounted for approximately 16% of the Company’s 2005 recurring income(measured on this basis), and the filing of Savills’ financial statements wouldnot have been required. Nonetheless, because the Company’s share of Savills’2005 income from continuing operations calculated in accordance with Rule 1-02(w) ofRegulation S-X exceeded the 20% threshold, the Company requested Savills totake the actions required of it to facilitate the Company’s filing of Savills’audited financial statements on a Form 10-K/A by June 29, 2006.Savills refused to take such actions. While the Company was unable to file the required financial statements,Savills did provide the Company with all information required to properlyaccount for its interest in Savills (which information was reflected in theCompany’s 2005 10-K) and the Company did file a Form 10-K/A toprovide certain information regarding Savills, including summarized unauditedfinancial information of Savills as of December 31, 2005 and 2004, and forthe years then ended and to provide a reference to where Savills’ full auditedfinancial statements may be viewed or obtained. The Company will be unable todetermine if it is required to file Savills’ audited financial statements withrespect to the 2006 calendar year until the year has ended and the Company andSavills have finalized their full year financial results. If so required, theCompany will seek Savills’ cooperation in taking the actions required of it tofacilitate the Company’s filing of Savills’ audited financial statements, butthe Company has no contractual or other right to require Savills to socooperate and, accordingly, gives no assurances that the Company’s efforts willbe successful. The result of this circumstance is that, based solely on theCompany’s inability to provide the financial statements of Savills, the Companywas not in 

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compliance with Section 13(a) ofthe Securities Exchange Act of 1934 with respect to its 10-K/A filing. Theprimary effect of this non-compliance is that the Company may be limited in itsability to effect registered sales of its securities until it can comply withthe requirement to file Savills’ financial statements, or the requirementceases to apply to the Company. The Company has not sought to effect registeredsale of its securities since 1999, other than in connection with its employeebenefit plans.

As of the end of theperiod covered by this report, the Company carried out an evaluation under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures as defined in 13a-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”). Based solely on theCompany’s inability to provide the financial statements of Savills describedabove (and no other aspects of the Company’s disclosure controls andprocedures), the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s design and operation of the Company’s disclosure controlsand procedures were ineffective in ensuring that all information relating tothe Company, including its consolidated subsidiaries, required to be includedin the Company’s periodic filings or submissions with the Securities andExchange Commission is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities andExchange Commission. There were no changes in the Company’s internal controlover financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that occurred during the Company’s last fiscal quarter thathave materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                *Legal Proceedings*

From time to time, theCompany is involved in litigation matters that arise in the ordinary course ofits business, some of which involve claims for damages which are substantial inamount. The ultimate liability for these matters cannot be determined. However,based on the information currently available, the Company does not believe thatthe resolution of any such matters to which it is currently a party will have amaterial adverse effect on the Company’s results of operations, financialcondition or liquidity.

**ITEM 1A.**        *Risk Factors*

The risk factors included in the Company’s annualreport on Form 10-K for the year-ended December 31, 2005 havenot materially changed with the exception of the addition of risk factorsrelated to the proposed merger with CB Richard Ellis. Some of the risks whichmay be relevant to the Company include:

·       *Business Uncertainties and Contractual Restrictions While Merger isPending*—Uncertainty about the effect of the merger on employees,suppliers, partners, regulators and customers may have an adverse effect on theCompany. These uncertainties may impair the Company’s ability to attract,retain and motivate key personnel until the merger is consummated, and couldcause suppliers, customers and others that deal with the Company to deferdecisions concerning the Company, or seek to change existing businessrelationships with the Company. Employee retention may be particularlychallenging while the merger is pending, as employees may experienceuncertainty about their future roles with CB Richard Ellis. In addition, themerger agreement restricts the Company from taking certain specified actionsthat are generally outside the ordinary course of business, without CB RichardEllis’s approval. These restrictions could prevent the Company from pursuingattractive business opportunities that are generally outside the ordinarycourse of business that may arise prior to the completion of the merger.

·        *Failure to Complete Merger Could Negatively Impact Stock Price, FutureBusiness and Financial Results*—Although the Company has agreed thatits board of directors will, subject to fiduciary exceptions, recommend thatits stockholders approve and adopt the merger agreement, there is no assurancethat the merger agreement and the merger will be approved, and there is noassurance that the other conditions to the completion of the merger will besatisfied. If the merger is not completed, the Company will be subject toseveral risks, including the following:

·        TheCompany may be required to pay CB Richard Ellis a termination fee of $40million in the aggregate if the merger agreement is terminated under certaincircumstances and the Company enters into or completes an alternativetransaction;

·        Thecurrent market price of the Company’s common stock may reflect a marketassumption that the merger will occur, and a failure to complete the mergercould result in a negative perception by the stock market of the Companygenerally and a resulting decline in the market price of the Company’s commonstock;

·        Certaincosts relating to the merger (such as legal, accounting and financial advisoryfees) are payable by the Company whether or not the merger is completed;

·        Theremay be substantial disruption to the Company’s business and a distraction ofits management and employees from day-to-day operations, because mattersrelated to the merger (including integration planning) may require substantialcommitments of time and resources, which could otherwise have been devoted toother opportunities that could have been beneficial to the Company;

·        TheCompany’s business could be adversely affected if it is unable to retain keyemployees or attract qualified replacements; and

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·        TheCompany would continue to face the risks that it currently faces as anindependent company.

**ITEM 4.**                *Submissions of Matters to a Vote of Security Holders*

At aSpecial Meeting of Stockholders held on August 3, 2006, the shareholderswere asked to ratify and approve certain performance-based award provisions ofthe Trammell Crow Company Long-Term Incentive Plan. The vote was as follows:

| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
| For        |       |                           | 31,504,449 |   |   |
| Against    |       |                           | 1,562,864  |   |   |
| Abstain    |       |                           | 127,940    |   |   |

 

**ITEM 6.     *Exhibits***

(a)           Exhibits:
| 3.1(1)   |   | Certificate of Incorporation of the Company                                                                                                                             |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2(1)   |   | Bylaws of the Company                                                                                                                                                   |
| 3.2.1(2) |   | First Amendment to the Bylaws of the Company                                                                                                                            |
| 3.2.1(3) |   | Second Amendment to the Bylaws of the Company                                                                                                                           |
| 3.2.1(4) |   | Third Amendment to the Bylaws of the Company                                                                                                                            |
| 4.1(5)   |   | Form of Certificate for Shares of Common Stock  of the Company                                                                                                     |
| 10.1(6)  |   | Performance Unit Award Agreement                                                                                                                                        |
| 31.1     |   | Certification by the Chief Executive Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
| 31.2     |   | Certification by the Chief Financial Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
| 32.1     |   | Certification by the Chief Executive Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |
| 32.2     |   | Certification by the Chief Financial Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |

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(1)                 Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-1(File Number 333-34859) filed with the Securities and ExchangeCommission on September 3, 1997, and incorporated herein by reference.

(2)                 Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on August 11, 2000, and incorporatedherein by reference.

(3)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 31, 2003, and incorporatedherein by reference.

(4)                 Previouslyfiled as Exhibit 3.2.3 to the Company’s Form 10-K filed withthe Securities and Exchange Commission on March 15, 2004, and incorporatedherein by reference.

(5)                 Previouslyfiled as Exhibit 4.1 to the Company’s Registration Statement onForm S-1/A (File Number 333-34859) filed with theSecurities and Exchange Commission on October 23, 1997, and incorporatedherein by reference.

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on August 15, 2006, as incorporatedherein by reference.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                              | TRAMMELL CROW COMPANY |
|------------------------------|-----------------------|
|                         |                  |   |
|                              | By:                   | /s/ DEREK  R. MCCLAIN |
|                         |                  | Derek R. McClain |
|                         |                  | *Chief Financial Officer* |
|                         |                  | *(Principal Financial Officer and duly authorized  to sign this report on behalf of the Registrant)* |
| Date:  November 9, 2006 |                  |   |

 

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**Exhibit Index**
| Exhibit  Number | ** ** | **Description** | ** ** |
|-----------------|------------|-----------------|------------|
|            | 3.1        | (1)             |       | Certificate of  Incorporation of the Company |   |
|            | 3.2        | (1)             |       | Bylaws of the Company |   |
|            | 3.2.1      | (2)             |       | First Amendment to the  Bylaws of the Company |   |
|            | 3.2.1      | (3)             |       | Second Amendment to the  Bylaws of the Company |   |
|            | 3.2.1      | (4)             |       | Third Amendment to the  Bylaws of the Company |   |
|            | 4.1        | (5)             |       | Form of Certificate  for Shares of Common Stock of the Company |   |
|            | 10.1       | (6)             |       | Performance Unit Award  Agreement |   |
|            | 31.1       |            |       | Certification  by the Chief Executive Officer of the Company Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   |
|            | 31.2       |            |       | Certification  by the Chief Financial Officer of the Company Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   |
|            | 32.1       |            |       | Certification  by the Chief Executive Officer of the Company Pursuant to 18 U.S.C. § 1350,  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |
|            | 32.2       |            |       | Certification by the  Chief Financial Officer of the Company Pursuant to 18 U.S.C. § 1350,  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |

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(1)                 Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-1(File Number 333-34859) filed with the Securities and Exchange Commissionon September 3, 1997, and incorporated herein by reference.

(2)                 Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on August 11, 2000, and incorporatedherein by reference.

(3)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 31, 2003, and incorporatedherein by reference.

(4)                 Previouslyfiled as Exhibit 3.2.3 to the Company’s Form 10-K filed withthe Securities and Exchange Commission on March 15, 2004, and incorporatedherein by reference.

(5)                 Previouslyfiled as Exhibit 4.1 to the Company’s Registration Statement onForm S-1/A (File Number 333-34859) filed with the Securitiesand Exchange Commission on October 23, 1997, and incorporated herein byreference.

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on August 15, 2006, as incorporatedherein by reference.

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