**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 June 30, 2005**

**Or**

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

**Forthe transition periodfrom           to**

**Commissionfile number 1-13531**

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Trammell Crow Company

(Exact name of registrantas specified in its charter)

| **Delaware**  (State or other jurisdiction of  incorporation or organization) | **75-2721454**  (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, formeraddress and formerfiscal year, if changed since last report)

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes x  No o

Therewere  35,648,481 shares of the registrant’s common stock outstandingas of August 1, 2005.

 

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESINDEX**
|               | ** ** | ** **                                                                                                                                                         | ** ** | **Page  Number** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I.  |       | Financial  Information                                                                                                                                             |       | 3                |   |
| Item  1.      |       | Financial  Statements                                                                                                                                              |       | 3                |   |
|          |       | Condensed Consolidated Balance Sheets as of  June 30, 2005 (unaudited) and December 31, 2004                                                             |       | 3                |   |
|          |       | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2005 and 2004 (unaudited)                                            |       | 4                |   |
|          |       | Condensed Consolidated Statements of Stockholders’  Equity for the six months ended June 30, 2005 (unaudited) and the year  ended December 31, 2004 |       | 5                |   |
|          |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2005 and 2004 (unaudited)                                                  |       | 6                |   |
|          |       | Condensed Consolidated Statements of Comprehensive  Income for the three and six months ended June 30, 2005 and 2004  (unaudited)                             |       | 7                |   |
|          |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                  |       | 8                |   |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                        |       | 28               |   |
| Item 3.       |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                        |       | 38               |   |
| Item 4.       |       | Controls and Procedures                                                                                                                                            |       | 38               |   |
| PART II. |       | Other  Information                                                                                                                                                 |       | 39               |   |
| Item  1.      |       | Legal  Proceedings                                                                                                                                                 |       | 39               |   |
| Item 2.       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                       |       | 39               |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                                                                |       | 40               |   |
| Item 6.       |       | Exhibits                                                                                                                                                           |       | 41               |   |

 

2

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**PART I—FINANCIAL INFORMATION**

**ITEM1.**                *Financial Statements*

**TRAMMELLCROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)**
| ** **                                                                                                                                                                                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **(Unaudited)**         | ** ** | **(Note 1)**           | ** ** |
| **ASSETS**                                                                                                                                                                                                 |       |                    |       |                        |       |   |   |   |   |
| Current assets                                                                                                                                                                                             |       |                    |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                 |       |                    | $          | 46,049                      |       |   |   | $ | 163,637 |   |   |
| Restricted cash                                                                                                                                                                                            |       |                    | 6,186      |                        |       |   | 9,950 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,975 in 2005 and  $3,144 in 2004                                                                                                    |       |                    | 97,378     |                        |       |   | 103,551 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |                    | 7,649      |                        |       |   | 1,626 |   |   |
| Notes and other  receivables                                                                                                                                                                               |       |                    | 7,057      |                        |       |   | 19,726 |   |   |
| Income taxes  recoverable                                                                                                                                                                                  |       |                    | 518        |                        |       |   | — |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |                    | 3,971      |                        |       |   | 4,021 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                    | 40,541     |                        |       |   | 16,027 |   |   |
| Real estate and  other assets held for sale                                                                                                                                                                |       |                    | 26,406     |                        |       |   | 23,108 |   |   |
| Available for sale  securities                                                                                                                                                                             |       |                    | 497        |                        |       |   | — |   |   |
| Other current  assets                                                                                                                                                                                      |       |                    | 27,465     |                        |       |   | 18,066 |   |   |
| Total current  assets                                                                                                                                                                                      |       |                    | 263,717    |                        |       |   | 359,712 |   |   |
| Furniture and  equipment, net                                                                                                                                                                              |       |                    | 19,795     |                        |       |   | 18,649 |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |                    | 21,567     |                        |       |   | 22,935 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                    | 135,475    |                        |       |   | 60,381 |   |   |
| Real estate held  for investment                                                                                                                                                                           |       |                    | 104,935    |                        |       |   | 122,703 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                                                |       |                    | 167,011    |                        |       |   | 74,090 |   |   |
| Goodwill, net                                                                                                                                                                                              |       |                    | 74,366     |                        |       |   | 74,357 |   |   |
| Available for sale  securities                                                                                                                                                                             |       |                    | 17,473     |                        |       |   | — |   |   |
| Other assets                                                                                                                                                                                               |       |                    | 17,643     |                        |       |   | 16,123 |   |   |
|                                                                                                                                                                                                       |       |                    | $          | 821,982                     |       |   |   | $ | 748,950 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                             | ** ** |                    |       |                        |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                        |       |                    |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                           |       |                    | $          | 24,548                      |       |   |   | $ |   23,731 |   |   |
| Accrued expenses                                                                                                                                                                                           |       |                    | 108,637    |                        |       |   | 147,689 |   |   |
| Payables to  affiliates                                                                                                                                                                                    |       |                    | 45         |                        |       |   | 40 |   |   |
| Income taxes  payable                                                                                                                                                                                      |       |                    | —     |                        |       |   | 18,121 |   |   |
| Current portion of  long term debt                                                                                                                                                                         |       |                    | 4,629      |                        |       |   | 6 |   |   |
| Current portion of  notes payable on real estate                                                                                                                                                           |       |                    | 32,287     |                        |       |   | 14,193 |   |   |
| Liabilities  related to real estate and other assets held for sale                                                                                                                                         |       |                    | 25,229     |                        |       |   | 22,736 |   |   |
| Other current  liabilities                                                                                                                                                                                 |       |                    | 10,547     |                        |       |   | 12,613 |   |   |
| Total current  liabilities                                                                                                                                                                                 |       |                    | 205,922    |                        |       |   | 239,129 |   |   |
| Long-term debt,  less current portion                                                                                                                                                                      |       |                    | 71,022     |                        |       |   | 8 |   |   |
| Notes payable on  real estate, less current portion                                                                                                                                                        |       |                    | 155,437    |                        |       |   | 114,079 |   |   |
| Other liabilities                                                                                                                                                                                          |       |                    | 12,444     |                        |       |   | 10,028 |   |   |
| Total liabilities                                                                                                                                                                                          |       |                    | 444,825    |                        |       |   | 363,244 |   |   |
| Minority interest                                                                                                                                                                                          |       |                    | 37,143     |                        |       |   | 44,756 |   |   |
| 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 and  35,529,131 shares outstanding in 2005 and 37,902,998 shares issued and  35,605,007 shares outstanding in 2004 |       |                    | 379        |                        |       |   | 379 |   |   |
| Paid in capital                                                                                                                                                                                            |       |                    | 199,461    |                        |       |   | 196,314 |   |   |
| Retained earnings                                                                                                                                                                                          |       |                    | 195,140    |                        |       |   | 190,252 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                    |       |                    | 2,729      |                        |       |   | 2,043 |   |   |
| Less:   Treasury  stock                                                                                                                                                                     |       |                    | (41,628    | )                           |       |   | (36,921 | ) |   |
|  Unearned stock compensation, net                                                                                                                                                                     |       |                    | (16,067    | )                           |       |   | (11,117 | ) |   |
| Total  stockholders’ equity                                                                                                                                                                           |       |                    | 340,014    |                        |       |   | 340,950 |   |   |
|                                                                                                                                                                                                       |       |                    | $          | 821,982                     |       |   |   | $ | 748,950 |   |   |

 

See accompanying notes.

3

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except share and per share data)(Unaudited)**
| ** **                                                                                                                                   | ** **   | **For the Three Months  Ended June 30,** | ** **   | **For the Six Months  Ended June 30,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|-----------------------------------------------------------------|--------------|
| ** **                                                                                                                                   | ** **   | **2005**                                                          | ** **   | **2004**                                                        | ** **   | **2005** | ** ** | **2004** | ** ** |
| **REVENUES**                                                                                                                                 | ** **   | ** **                                                        | ** **   | ** **                                                      | ** **   | ** ** | ** ** | ** ** | ** ** |
| ***User  Services:***                                                                                                                        | *** *** | *** ***                                                      | *** *** | *** ***                                                    | *** *** | *** *** | *** *** | *** *** | *** *** |
| Facilities  management                                                                                                                       |         | $     59,391                             |         | $     50,556                           |         | $   114,528 |   | $   101,312 |   |
| Corporate advisory  services                                                                                                                 |         | 40,116                                                            |         | 33,744                                                          |         | 64,789 |   | 56,278 |   |
| Project management  services                                                                                                                 |         | 31,963                                                            |         | 19,675                                                          |         | 57,287 |   | 37,637 |   |
|                                                                                                                                         |         | 131,470                                                           |         | 103,975                                                         |         | 236,604 |   | 195,227 |   |
| ***Investor  Services:***                                                                                                                    | *** *** | *** ***                                                      | *** *** | *** ***                                                    | *** *** | *** *** | *** *** | *** *** | *** *** |
| Property  management                                                                                                                         |         | 34,468                                                            |         | 34,762                                                          |         | 68,555 |   | 69,324 |   |
| Brokerage                                                                                                                                    |         | 33,676                                                            |         | 28,710                                                          |         | 61,456 |   | 50,859 |   |
| Construction  management                                                                                                                     |         | 2,959                                                             |         | 2,343                                                           |         | 5,174 |   | 4,061 |   |
|                                                                                                                                         |         | 71,103                                                            |         | 65,815                                                          |         | 135,185 |   | 124,244 |   |
| Development and  construction                                                                                                                |         | 9,387                                                             |         | 8,336                                                           |         | 18,223 |   | 16,343 |   |
|                                                                                                                                         |         | 211,960                                                           |         | 178,126                                                         |         | 390,012 |   | 335,814 |   |
| Gain on  disposition of real estate                                                                                                          |         | 963                                                               |         | 3,885                                                           |         | 2,531 |   | 4,331 |   |
| **TOTAL  REVENUES**                                                                                                                          |         | 212,923                                                           |         | 182,011                                                         |         | 392,543 |   | 340,145 |   |
| **COSTS AND EXPENSES**                                                                                                                       | ** **   | ** **                                                        | ** **   | ** **                                                      | ** **   | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages  and benefits                                                                                                                |         | 132,818                                                           |         | 112,793                                                         |         | 258,559 |   | 228,945 |   |
| Commissions                                                                                                                                  |         | 34,298                                                            |         | 27,982                                                          |         | 56,956 |   | 47,995 |   |
| General and  administrative                                                                                                                  |         | 36,794                                                            |         | 32,474                                                          |         | 67,392 |   | 58,651 |   |
| Depreciation and  amortization                                                                                                               |         | 2,634                                                             |         | 2,816                                                           |         | 5,244 |   | 5,974 |   |
| Interest                                                                                                                                     |         | 2,117                                                             |         | 1,058                                                           |         | 3,222 |   | 1,862 |   |
| **TOTAL  EXPENSES**                                                                                                                          |         | 208,661                                                           |         | 177,123                                                         |         | 391,373 |   | 343,427 |   |
| Operating income  (loss)                                                                                                                     |         | 4,262                                                             |         | 4,888                                                           |         | 1,170 |   | (3,282 | ) |
| Interest and other  income                                                                                                                   |         | 483                                                               |         | 477                                                             |         | 1,407 |   | 1,361 |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |         | 4,745                                                             |         | 5,365                                                           |         | 2,577 |   | (1,921 | ) |
| Income tax  (expense) benefit                                                                                                                |         | (1,757                                                            | )            | (2,232                                                          | )            | (930 | ) | 826 |   |
| Minority interest,  net of income tax (expense) benefit of $(607), $445, $(1,834) and $470                                              |         | 1,263                                                             |         | (590                                                            | )            | 3,251 |   | (625 | ) |
| Income from  investments in unconsolidated subsidiaries, net of income tax expense of  $(1,599), $(719), $(2,576), and $(5,035)         |         | 2,984                                                             |         | 713                                                             |         | 4,567 |   | 6,683 |   |
| Income from  continuing operations                                                                                                           |         | 7,235                                                             |         | 3,256                                                           |         | 9,465 |   | 4,963 |   |
| Income (loss) from  discontinued operations, net of income tax (expense) benefit of $(591), $21,  $(481), and $(263)                         |         | 1,029                                                             |         | (42                                                             | )            | 852 |   | 350 |   |
| Net income                                                                                                                                   |         | $       8,264                  |         | $       3,214                |         | $     10,317 |   | $       5,313 |   |
| Income per share from continuing operations:                                                                                                 |         |                                                              |         |                                                            |         |   |   |   |   |
| Basic                                                                                                                                        |         | $         0.22       |         | $         0.09     |         | $         0.28 |   | $         0.14 |   |
| Diluted                                                                                                                                      |         | $         0.20       |         | $         0.09     |         | $         0.27 |   | $         0.13 |   |
| Income (loss) per share from discontinued operations,  net of income taxes:                                                             |         |                                                              |         |                                                            |         |   |   |   |   |
| Basic                                                                                                                                        |         | $         0.03       |         | $         0.00     |         | $         0.03 |   | $         0.01 |   |
| Diluted                                                                                                                                      |         | $         0.03       |         | $         0.00     |         | $         0.02 |   | $         0.01 |   |
| Net income per share:                                                                                                                        |         |                                                              |         |                                                            |         |   |   |   |   |
| Basic                                                                                                                                        |         | $         0.25       |         | $         0.09     |         | $         0.31 |   | $         0.15 |   |
| Diluted                                                                                                                                      |         | $         0.23       |         | $         0.09     |         | $         0.29 |   | $         0.14 |   |
| Weighted average common shares outstanding:                                                                                                  |         |                                                              |         |                                                            |         |   |   |   |   |
| Basic                                                                                                                                        |         | 33,422,946                                                        |         | 35,545,234                                                      |         | 33,555,988 |   | 35,521,715 |   |
| Diluted                                                                                                                                      |         | 36,053,250                                                        |         | 37,462,293                                                      |         | 36,097,902 |   | 37,426,216 |   |

 

See accompanying notes.

4

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYSix Months Ended June 30, 2005 (Unaudited) and Year EndedDecember 31, 2004 (Note 1)(in thousands, except share data)**
| ** **                                                                      | ** ** | **Common Shares** | ** ** | **Common  Stock Par ** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive ** | ** ** | **Treasury**   | ** ** | **Unearned  Stock ** | ** **   | ** **       | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|-------------|------------|--------------|------------|---------------------------------------------|------------|----------------|------------|---------------------------|--------------|------------------|------------|
| ** **                                                                      | ** ** | **Issued**             | ** ** | **Treasury**                     | ** ** | **Value**   | ** ** | **Capital**  | ** ** | **Earnings**                                | ** ** | **Income**     | ** ** | **Stock**                 | ** **   | **Compensation** | ** ** | **Total** | ** ** |
| Balance at January 1, 2004                                                 |       | 37,783,595             |       | 921,353                          |       |        | $ 377 |         |       | $ 192,336                              |       | $ 151,560 |       |                      | $ 1,106 |             |       | $ (8,363 | ) |   | $ (9,387 | ) |   | $ 327,629 |   |
| Net income                                                                      |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | 39,119         |       |                      | —       |             |       | — |   |   | — |   |   | 39,119 |   |
| Issuance of restricted stock                                                    |       | 28,000                 |       | (644,313                         | )          |        | 1          |         |       | 2,846                                       |       | —         |       |                      | —       |             |       | 5,870 |   |   | (8,717 | ) |   | — |   |
| Forfeiture of restricted stock                                                  |       | —                 |       | 32,632                           |       |        | —     |         |       | —                                      |       | —         |       |                      | —       |             |       | (394 | ) |   | 304 |   |   | (90 | ) |
| Amortization of unearned stock compensation                                |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | —         |       |                      | —       |             |       | — |   |   | 6,683 |   |   | 6,683 |   |
| Issuance of common stock                                                        |       | 91,403                 |       | (366,118                         | )          |        | 1          |         |       | 1,132                                       |       | (427           | )          |                      | —       |             |       | 3,900 |   |   | — |   |   | 4,606 |   |
| Stock repurchase                                                                |       | —                 |       | 2,354,437                        |       |        | —     |         |       | —                                      |       | —         |       |                      | —       |             |       | (37,934 | ) |   | — |   |   | (37,934 | ) |
| Foreign currency translation adjustment, net of tax                             |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | —         |       |                      | 937          |             |       | — |   |   | — |   |   | 937 |   |
| Balance at December 31, 2004                                               |       | 37,902,998             |       | 2,297,991                        |       |        | 379        |         |       | 196,314                                     |       | 190,252        |       |                      | 2,043        |             |       | (36,921 | ) |   | (11,117 | ) |   | 340,950 |   |
| Net income                                                                      |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | 10,317         |       |                      | —       |             |       | — |   |   | — |   |   | 10,317 |   |
| Issuance of restricted stock                                                    |       | —                 |       | (371,024                         | )          |        | —     |         |       | 2,189                                       |       | —         |       |                      | —       |             |       | 6,541 |   |   | (8,730 | ) |   | — |   |
| Forfeiture of restricted stock                                                  |       | —                 |       | 172,475                          |       |        | —     |         |       | —                                      |       | —         |       |                      | —       |             |       | (3,061 | ) |   | 389 |   |   | (2,672 | ) |
| Amortization of unearned stock compensation                                |       | —                 |       | —                           |       |        | —     |         |       | 676                                         |       | —         |       |                      | —       |             |       | — |   |   | 3,391 |   |   | 4,067 |   |
| Issuance of common stock                                                        |       | 60                     |       | (695,657                         | )          |        | —     |         |       | 282                                         |       | (5,429         | )          |                      | —       |             |       | 11,863 |   |   | — |   |   | 6,716 |   |
| Stock repurchase                                                                |       | —                 |       | 970,142                          |       |        | —     |         |       |                                        |       | —         |       |                      | —       |             |       | (20,050 | ) |   | — |   |   | (20,050 | ) |
| Foreign currency translation adjustment, net of tax                             |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | —         |       |                      | 591          |             |       | — |   |   | — |   |   | 591 |   |
| Unrealized holding gains/(losses) on available for  sale securities, net of tax |       | —                 |       | —                           |       |        | —     |         |       | —                                      |       | —         |       |                      | 95           |             |       | — |   |   | — |   |   | 95 |   |
| Balance at  June 30, 2005                                                  |       | 37,903,058             |       | 2,373,927                        |       |        | $ 379 |         |       | $ 199,461                              |       | $ 195,140 |       |                      | $ 2,729 |             |       | $ (41,628 | ) |   | $ (16,067 | ) |   | $ 340,014 |   |

 

See accompanying notes.

5

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                            | ** ** | **For the  Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                                    | ** ** | **2004** | ** ** |
| **Operating activities**                                              |       |                                                        |       |   |   |
| Cash flows from earnings:                                             |       |                                                        |       |   |   |
| Net income                                                            |       | $ 10,317                                               |       | $   5,313 |   |
| Reconciliation of net  income to net cash provided by earnings:       |       |                                                        |       |   |   |
| Depreciation and  amortization                                        |       | 5,366                                                       |       | 6,126 |   |
| Amortization of  employment contracts and unearned stock compensation |       | 4,502                                                       |       | 3,618 |   |
| Amortization of  contract intangibles                                 |       | 1,172                                                       |       | 1,069 |   |
| Bad debt expense                                                      |       | 67                                                          |       | 487 |   |
| Provision for  losses and writedowns for impairment on real estate    |       | —                                                      |       | 672 |   |
| Gain on  disposition of real estate held for investment               |       | (44                                                         | )          | (758 | ) |
| Minority interest                                                     |       | (5,085                                                      | )          | 1,095 |   |
| Deferred income  tax expense (benefit)                                |       | 1,004                                                       |       | (1 | ) |
| Income from  investments in unconsolidated subsidiaries               |       | (7,143                                                      | )          | (11,718 | ) |
| Net cash provided  by earnings                                        |       | 10,156                                                      |       | 5,903 |   |
| Changes in operating  assets and liabilities:                         |       |                                                        |       |   |   |
| Restricted cash                                                       |       | 3,764                                                       |       | 967 |   |
| Accounts  receivable                                                  |       | 6,117                                                       |       | 2,604 |   |
| Receivables from  affiliates                                          |       | (6,023                                                      | )          | (3,415 | ) |
| Notes receivable  and other assets                                    |       | (13,201                                                     | )          | 5,209 |   |
| Real estate held  for sale and under development                      |       | (53,019                                                     | )          | (21,456 | ) |
| Notes payable on  real estate held for sale and under development     |       | 38,008                                                      |       | 20,553 |   |
| Accounts payable  and accrued expenses                                |       | (36,643                                                     | )          | (22,565 | ) |
| Payables to  affiliates                                               |       | 5                                                           |       | (51 | ) |
| Income taxes  payable                                                 |       | (18,639                                                     | )          | (5,804 | ) |
| Other liabilities                                                     |       | 2,028                                                       |       | 1,391 |   |
| Net cash flows  from changes in working capital                       |       | (77,603                                                     | )          | (22,567 | ) |
| Net cash used in  operating activities                                |       | (67,447                                                     | )          | (16,664 | ) |
| **Investing activities**                                              |       |                                                        |       |   |   |
| Expenditures for  furniture and equipment                             |       | (5,164                                                      | )          | (3,319 | ) |
| Purchase of  available for sale securities                            |       | (17,795                                                     | )          | — |   |
| Additions to real  estate held for investment                         |       | (21,047                                                     | )          | (28,882 | ) |
| Net proceeds from  disposition of real estate held for investment     |       | 44                                                          |       | 14,860 |   |
| Investments in  unconsolidated subsidiaries                           |       | (100,255                                                    | )          | (1,346 | ) |
| Distributions from  unconsolidated subsidiaries                       |       | 13,977                                                      |       | 11,709 |   |
| Net cash used in  investing activities                                |       | (130,240                                                    | )          | (6,978 | ) |
| **Financing activities**                                              |       |                                                        |       |   |   |
| Principal payments  on long-term debt and capital lease obligations   |       | (78,332                                                     | )          | (113,943 | ) |
| Proceeds from long-term  debt                                         |       | 153,693                                                     |       | 102,539 |   |
| Contributions from  minority interest                                 |       | 9,053                                                       |       | 12,683 |   |
| Distributions to  minority interest                                   |       | (11,581                                                     | )          | (2,560 | ) |
| Proceeds from  notes payable on real estate held for investment       |       | 24,090                                                      |       | 9,944 |   |
| Payments on notes  payable on real estate held for investment         |       | (3,490                                                      | )          | (13,407 | ) |
| Proceeds from  exercise of stock options                              |       | 5,213                                                       |       | 140 |   |
| Proceeds from  issuance of common stock                               |       | 1,503                                                       |       | 1,240 |   |
| Purchase of common  stock                                             |       | (20,050                                                     | )          | — |   |
| Net cash provided  by (used in) financing activities                  |       | 80,099                                                      |       | (3,364 | ) |
| Net decrease in  cash and cash equivalents                            |       | (117,588                                                    | )          | (27,006 | ) |
| Cash and cash  equivalents, beginning of period                       |       | 163,637                                                     |       | 105,616 |   |
| Cash and cash  equivalents, end of period                             |       | $ 46,049                                               |       | $ 78,610 |   |

 

See accompanying notes.

6

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)(Unaudited)**
| ** **                                                                                                                                                                                                                                                           | ** ** | **For the  Three Months  Ended June 30,** | ** ** | **For the  Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                           | ** ** | **2005**                                                      | ** ** | **2004**                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                                                                                                                                                                                           |       | $                                                             | 8,264      |                                                        | $          | 3,214 |   | $ | 10,317 |   | $ | 5,313 |   |
| Other  comprehensive income:                                                                                                                                                                                                                                         |       |                                                          |       |                                                        |       |   |   |   |   |
| Foreign currency translation adjustments, net of tax  expense (benefit) of $341 and $334 in the three and six months ended June 30,  2005, respectively, and $(157) and $(9) in the three and six months  ended June 30, 2004, respectively |       | 602                                                           |       | (224                                                        | )          | 591 |   | (25 | ) |
| Unrealized holding gains/(losses) on available for  sale securities, net of tax expense of $127 and $80 in the three and six  months ended June 30, 2005, respectively                                                                                          |       | 206                                                           |       | —                                                      |       | 95 |   | — |   |
| Comprehensive income                                                                                                                                                                                                                                                 |       | $                                                             | 9,072      |                                                        | $          | 2,990 |   | $ | 11,003 |   | $ | 5,288 |   |

 

See accompanying notes.

7

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (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 Report on Form 10-K for the year ended December 31, 2004. Inthe opinion of management, all adjustments and eliminations, consisting only ofrecurring adjustments, necessary for a fair presentation of the financialstatements for the interim periods have been made. Interim results ofoperations are not necessarily indicative of the results to be expected for thefull year.

The Company hasexperienced and expects to continue to experience quarterly variations inrevenues and net income as a result of several factors. The Company’s quarterlyrevenues tend to increase throughout the year, particularly in the last quarterof the year, because its clients have demonstrated a tendency to closetransactions toward the end of the year. The timing and introduction of newcontracts, the disposition of investments in real estate assets, therecognition of incentive fees towards the latter part of the fiscal year ascontractual targets are met and other factors may also cause quarterlyfluctuations in the Company’s results of operations.

*Reclassifications*

In accordance withFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”),certain assets and liabilities at December 31, 2004, and certain revenuesand expenses for the three months ended March 31, 2005, and the three andsix months ended June 30, 2004, have been reclassified to conform to thepresentation at and for the three months ended June 30, 2005 (seeNotes 9 and 11). As a result, certain balances differ from the amountsreported in previously filed documents.

*Use of Estimates*

The preparation of thefinancial statements in accordance with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

*MarketableSecurities*

The Company accounts for investments in debt andequity securities in accordance with FASB Statement of Financial AccountingStandards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities* (“FAS 115”). The Companydetermines the appropriate classification of debt and equity securities at thetime of purchase and reevaluates such designation as of each balance sheetdate. The Company classifies marketable securities it acquires with the intentto generate a profit from short-term movements in market prices as tradingsecurities. Debt securities are classified as held to maturity when the Companyhas the positive intent and ability to hold the securities to maturity.Marketable equity and 

8

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General(Continued)

debt securities notclassified as trading or held to maturity are classified as available for sale.All of the marketable securities held by the Company at June 30, 2005 areclassified as available for sale.

In accordance with FAS 115,the securities are carried at their fair market value and any differencebetween cost and market value is recorded as unrealized gain or loss, net oftax, and is reported as accumulated other comprehensive income in theconsolidated statement of stockholders’ equity. Premiums and discounts arerecognized in interest and other income using the effective interest method.Realized gains and losses and declines in value judged to beother-than-temporary on available for sale securities are included in interestand other income. The cost of securities sold is based on the specificidentification method. Interest and dividends on securities classified asavailable for sale are included in interest and other income.

*Income Taxes*

The Company accounts forincome taxes using the liability method. Deferred income taxes result fromtemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for federal income taxpurposes, and are measured using the enacted tax rates and laws that areexpected to be in effect when the differences reverse.

*Earnings Per Share*

The weighted-averagecommon shares outstanding used to calculate diluted earnings per share for thethree and six months ended June 30, 2005, include 2,630,304 and 2,541,914shares, respectively, to reflect the dilutive effect of unvested restrictedstock and options to purchase shares of common stock. The weighted-averagecommon shares outstanding used to calculate diluted earnings per share for thethree and six months ended June 30, 2004, include 1,917,059 and 1,904,501shares, respectively, to reflect the dilutive effect of unvested restrictedstock and options to purchase shares of common stock.

*Stock-BasedCompensation*

The Company has elected to use the intrinsic methodunder Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”),to account for its stock-based compensation arrangements. Compensationexpense for stock options is recognized to the extent the market price of theunderlying stock on the date of grant exceeds the exercise price of the option.The Company recognizes compensation expense related to restricted stock awardsover 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.

9

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General(Continued)

Pro forma informationregarding net income and net income per share, shown in the table below, hasbeen determined as if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*.
| ** **                                                                                                                              | ** ** | **For the Three Months  Ended June 30,**                | ** ** | **For the Six Months  Ended June 30,**                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Net income, as  reported                                                                                                                |       |                                                                             | $          | 8,264                                                                            |       |   |   | $ | 3,214 |   |   |   | $ | 10,317 |   |   |   | $ | 5,313 |   |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       |                                                                             | 967        |                                                                             |       |   | 963 |   |   |   | 2,028 |   |   |   | 1,657 |   |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                                                             | 1,133      |                                                                             |       |   | 1,485 |   |   |   | 2,926 |   |   |   | 2,691 |   |   |
| Pro forma net  income                                                                                                                   |       |                                                                             | $          | 8,098                                                                            |       |   |   | $ | 2,692 |   |   |   | $ | 9,419 |   |   |   | $ | 4,279 |   |   |
| Net income per  share:                                                                                                                  |       |                                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                  |       |                                                                             | $          | 0.25                                                                             |       |   |   | $ | 0.09 |   |   |   | $ | 0.31 |   |   |   | $ | 0.15 |   |   |
| Basic—pro forma                                                                                                                    |       |                                                                             | $          | 0.24                                                                             |       |   |   | $ | 0.08 |   |   |   | $ | 0.28 |   |   |   | $ | 0.12 |   |   |
| Net income per  share:                                                                                                                  |       |                                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted—as reported                                                                                                                |       |                                                                             | $          | 0.23                                                                             |       |   |   | $ | 0.09 |   |   |   | $ | 0.29 |   |   |   | $ | 0.14 |   |   |
| Diluted—pro forma                                                                                                                  |       |                                                                             | $          | 0.22                                                                             |       |   |   | $ | 0.07 |   |   |   | $ | 0.26 |   |   |   | $ | 0.11 |   |   |

 

*Non-ControllingInterests in 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 financialstatements. In November 2003, the FASB indefinitely deferred applicationof the measurement and recognition provisions (but not the disclosurerequirements) of FAS 150 with respect to these non-controlling interests.As of June 30, 2005, the estimated settlement value of non-controllinginterests in the Company’s consolidated limited life subsidiaries is $9,086, ascompared to book value (included in minority interest on the Company’s balancesheet) of $6,001. The excess of settlement value over book value is driven byan even larger estimated appreciation of certain consolidated real estate assetsand investments compared to the Company’s book value, offset by selling costsand debt prepayment penalties, if any.

10

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General(Continued)

*New AccountingPronouncements*

On December 16, 2004, the FASB issued Statementof Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“FAS 123R”), which is a revision of FAS123. Generally, the approach in FAS 123R is similar to the approach describedin FAS 123. However, FAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer analternative.

In April 2005, the SEC deferred theimplementation date of FAS 123R to become effective for annual periodsbeginning after June 15, 2005, or January 1, 2006 for the Company.FAS 123R permits public companies to adopt its requirements using one of twomethods: a “modified-prospective” method or a “modified-retrospective” method.The company plans to adopt FAS 123R using the modified-prospective method.

As permitted by FAS 123, the Company currentlyaccounts for share-based payments to employees using APB 25’s intrinsic valuemethod and, as such, generally recognizes no compensation cost for employeestock options. Accordingly, the adoption of FAS 123R’s fair value method couldhave a significant impact on the Company’s results of operations, although itwill have no impact on the Company’s overall financial position. The impact ofadoption of FAS 123R cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, had the Companyadopted FAS 123R, the impact of that standard would have approximated theimpact of FAS 123 as described in the disclosure of pro forma net incomeand earnings per share in this Note 1.

In June 2005,the FASB ratified the consensus in EITF Issue No. 04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights* (“EITF 04-5”). To promote consistencyin applying this guidance to corporate entities and those entities that holdreal estate:

·       theEITF amended Issue No. 96-16, *Investor’s Accounting foran Investee When the Investor Has a Majority of the Voting Interest but theMinority Interest Shareholder or Shareholders Have Certain Approval or VetoRights* (“EITF 96-16”), and

·       theFASB staff issued FSP No. SOP 78-9-1, *Interaction of AICPAStatement of Position 78-9 with EITF Issue No. 04-5* (“FSP SOP78-9-1”) which amends AICPA Statement of Position 78-9, *Accountingfor Investments in Real Estate Ventures*, to reflect the consensusreached in EITF 04-5.

EITF 04-5 states that the general partner in a limitedpartnership is presumed to control that limited partnership. That presumptionmay be overcome if the limited partners have either (1) the substantiveability—either by a single limited partner or through a simple majority vote—todissolve (liquidate) the limited partnership or otherwise remove the generalpartner without cause or (2) substantive participating rights. Substantiveparticipating rights—which are based on the concept discussed in EITF96-16—provide the limited partners with the ability to effectively participatein significant decisions that would be expected to be made in the ordinarycourse of the limited partnership’s business and thereby preclude the generalpartner from exercising unilateral control over the partnership.

11

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**1.**   General(Continued)

The effective date for applying the guidance in EITF04-5 and FSP SOP 78-9-1 is (1) June 29, 2005, for all new limitedpartnerships and existing limited partnerships for which the partnershipagreements are modified, and (2) no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005, forall other limited partnerships. The effect of initially applying this guidancemay be accounted for similarly to a change in accounting principle or byrestating the financial statements of prior periods. The amendments to EITF96-16 are to be applied prospectively to new investment agreements and toinvestment agreements that are modified after June 29, 2005. Retrospectiveapplication is not required for investments in limited partnerships for whichthe entity is no longer a general partner as of the date that the guidance inEITF 04-5 is adopted.

The Company has notentered into any new limited partnerships or amended any existing limitedpartnerships that require application of EITF 04-5 in its June 30, 2005financial statements. The impact of adopting EITF 04-5 cannot be predicted atthis time, however, the Company anticipates that the adoption will not impactnet income, earnings per share or stockholders’ equity. The Company isevaluating the impact of the new guidance on its existing limited partnerships.The Company plans to account for any initial effect of applying the newguidance under the method similar to a change in accounting principle.

**2.**   Variable InterestEntities

The Company was involved in the formation of a legalentity to act primarily as an agent of the Company to enter into policies withinsurance carriers. The policies are for various types of insurance, includinggeneral liability, workers’ compensation and auto. The entity is wholly-ownedby an employee of the Company who holds the appropriate local insurance agent’slicense required to issue these insurance policies on behalf of the insurancecarriers. The entity collects premiums and remits them to the insurancecarriers. In exchange, the entity receives commissions from the insurancecarriers and remits a portion of the commission revenue to the Company(determined at the Company’s full discretion) in accordance with a facilitiesand services agreement. Based upon its evaluation, the Company consolidatesthis entity as the primary beneficiary of a variable interest entity (“VIE”)under FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities* (“FIN 46R”). Asof June 30, 2005, the Company has $2,913 recorded in restricted cash and$357 recorded in available for sale securities that serve as collateral for theVIE’s obligations to the insurance carriers.

In January 2005, the Company restructured aconsolidated entity established to develop an office building by admitting amajority interest partner. Based upon its evaluation at this reconsiderationevent, the Company consolidates this entity as the primary beneficiary of aVIE. The entity’s note payable balance of $22,489 at June 30, 2005, isnon-recourse to the Company and is collateralized by the real estate project.

In May 2005, the Company obtained a 0.01%managing interest in an entity established to make loans to a Qualified ActiveLow-Income Community Business through a program enacted by the CommunityRenewal Tax Relief Act of 2000. The entity made two qualified loans to a singleborrower totaling $34,500. The entity’s equity used to fund the loans wascontributed by its 99.99% investor member. The Company 

12

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**2.**   VariableInterest Entities (Continued)

has determined that thisentity is a VIE. However, based upon its evaluation, the Company has determinedit is not the primary beneficiary of the entity. The Company believes that itsmaximum exposure to loss as a result of its involvement with this VIE is notmaterial. Additionally in May 2005, the Company obtained a 49% membershipinterest in a related entity that acts as the administrative member performingservicing and tax matters for the above referenced entity. Based upon itsevaluation, the Company has determined that this entity is also a VIE since theentity’s equity was funded from up-front fees received from the abovereferenced entity. However, based upon its evaluation, the Company hasdetermined it is not the primary beneficiary of the entity. The Companybelieves that its maximum exposure to loss as a result of its involvement withthis VIE is not material.

In September 2004, the Company issued a budgetguaranty relating to a development project. Under the budget guaranty, theCompany is responsible for all costs in excess of an approved budget ofapproximately $35,400. The Company was involved in the design of the underlyingentity and has determined that its budget guaranty represents a variableinterest in a VIE for which the Company is not the primary beneficiary. TheCompany cannot estimate its actual maximum exposure to loss as a result of itsinvolvement with this VIE because the budget guaranty is unlimited. However,based on the Company’s experience of minimal payments under similararrangements and the existence of a guaranteed maximum price contract betweenthe general contractor and the owner of the project that mitigates the Company’srisk, the Company believes that its exposure 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 April 2000, the Company provided$567 of the total $5,667 mezzanine loan. At that time, another independentthird-party lender provided the senior financing of $19,100 to the owner. TheCompany also provides building management and leasing services for thebuildings under a long-term contract at market rates for such services. Themezzanine loan arrangement is considered to be a variable interest in theentity that owns the property, which the Company believes is a VIE. However,based upon the Company’s evaluation, the Company is not the primary beneficiaryof the entity, and, therefore, the Company has not consolidated the VIE. TheVIE sold one of its buildings in December 2004 and paid a portion of theCompany’s note receivable at that time. The Company’s maximum exposure to lossas a result of its involvement with this VIE is limited to its outstanding notebalance of $430 as of June 30, 2005.

13

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**3.**   RealEstate

Allreal estate is included in the Company’s Development and Investment segment(see Note 14). Certain real estate assets owned by the Company secure theoutstanding balances of underlying mortgage or construction loans. Real estateowned by the Company consists of the following:
| ** **                                                      | ** ** | **June 30,        2005      ** | ** ** | **December 31,        2004      ** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Real estate under  development (current)                        |       |                                                                                            | $          | 40,541                                                                                              |       |   |   | $ | 16,027 |   |   |
| Real estate  included in assets held for sale (see Note 9) |       |                                                                                            | 14,153     |                                                                                                |       |   | 21,874 |   |   |
| Real estate under  development (non-current)                    |       |                                                                                            | 135,475    |                                                                                                |       |   | 60,381 |   |   |
| Real estate held  for investment(1)                             |       |                                                                                            | 104,935    |                                                                                                |       |   | 122,703 |   |   |
|                                                            |       |                                                                                            | $          | 295,104                                                                                             | (2)        |   |   | $ | 220,985 | (2) |   |

----

(1)                 Netof accumulated depreciation of $1,510 and $802 at June 30, 2005, and December 31,2004, respectively.

(2)                 Includes$2,876 and $1,146 at June 30, 2005, and December 31, 2004,respectively, of lease intangibles and tenant origination costs, net ofaccumulated amortization.

In the six months ended June 30, 2004, thecompany recorded provisions for losses on real estate of $94 to increase theallowances on real estate held for sale to reduce the carrying value of assetsto fair value less cost to sell. This amount is included in general andadministrative expenses in the consolidated statement of income. No suchprovisions were recorded in 2005.

In the six months ended June 30, 2004, theCompany recorded writedowns for impairment of real estate (not classified asheld for sale at the time of such writedowns) totaling $578. Of this amount,$120 is included in discontinued operations in the consolidated statements ofincome in accordance with FAS 144. The remaining amount is included in generaland administrative expenses in the consolidated statements of income. Thewritedowns for impairment primarily relate to a vacant land parcel in a marketin which rental rates continued to decline and vacancy rates continued to increaseat the time of the writedown. The Company obtained market comparisons for theland parcel and determined that, based on those market comparisons, the valueof the land was impaired. There were no such writedowns for impairment in 2005.

In 2004, the Company sold a 150-acre land parcel to athird party for cash of $30,010. At the time of sale, a consolidated subsidiaryof the Company (other than the entity that sold the property) held a purchasecontract on seven acres of the 150-acre land parcel. As a result, the Companyrecorded the transaction related to the seven-acre parcel as a financingtransaction, rather than a sale. As of June 30, 2005, real estate andother assets held for sale includes $344 of real estate, and liabilitiesrelated to real estate and other assets held for sale includes $1,386 of notespayable, related to this seven-acre land parcel.

In 2003, the Company solda parcel of land for $1,750 of which $1,125 of the consideration received wasin the form of an interest-bearing note from the buyer. The Company retained aunilateral right to repurchase the property at any time through 2006, inaddition to maintaining the right to approve any plans for development on theproperty. If the Company exercises its repurchase option, the Company 

14

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**3.**   Real Estate(Continued)

wouldrepay the amount it received from the buyer, plus a return on the buyer’sinvestment. Because of the Company’s continuing involvement in and option torepurchase the property, the transaction was recorded as a financingtransaction rather than a sale. As of June 30, 2005, real estate and otherassets held for sale includes $1,408 of real estate and $3 of other currentassets, and liabilities related to real estate and other assets held for saleinclude $1,750 of notes payable and $211 of accrued interest, all related tothis parcel of land.

**4.**   MarketableSecurities

Thefollowing is a summary of marketable securities held by the Company at June 30,2005, all of which are classified as available for sale. The Company held nomarketable securities at December 31, 2004.
| ** **                                                            | ** ** | **Amortized        Cost      ** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair        Value      ** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| U.S. Treasury  securities and obligations of U.S. government agencies |       |                                                                                        | $          | 5,818                        |       |                          |       | $                                                                                                  | 72         |   |   |   | $ | (1 | ) |   |   | $ | 5,889 |   |   |
| Corporate debt  securities                                            |       |                                                                                        | 3,543      |                         |       |                          | 50         |                                                                                               |       |   | (4 | ) |   |   | 3,589 |   |   |
| Asset-backed  securities                                              |       |                                                                                        | 1,663      |                         |       |                          | 4          |                                                                                               |       |   | (2 | ) |   |   | 1,665 |   |   |
| Collateralized  mortgage obligations                                  |       |                                                                                        | 1,113      |                         |       |                          | 4          |                                                                                               |       |   | (2 | ) |   |   | 1,115 |   |   |
| Total debt securities                                                 |       |                                                                                        | 12,137     |                         |       |                          | 130        |                                                                                               |       |   | (9 | ) |   |   | 12,258 |   |   |
| Equity securities                                                     |       |                                                                                        | 5,658      |                         |       |                          | 257        |                                                                                               |       |   | (203 | ) |   |   | 5,712 |   |   |
| Total available  for sale securities                                  |       |                                                                                        | $          | 17,795                       |       |                          |       | $                                                                                                  | 387        |   |   |   | $ | (212 | ) |   |   | $ | 17,970 |   |   |

 

Thenet carrying value and estimated fair value of debt securities at June 30,2005, by contractual maturity, are shown below. Actual repayment dates maydiffer from contractual maturities because the issuers of the securities mayhave the right to prepay obligations without prepayment penalties.
| ** **                              | ** ** | **Amortized        Cost      ** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **Debt securities:**                    |       |                                                                                        |       |                           |       |   |   |   |   |
| Due in one year  or less                |       |                                                                                        | $          | 497                            |       |   |   | $ | 497 |   |   |
| Due after one  year through five years  |       |                                                                                        | 4,235      |                           |       |   | 4,243 |   |   |
| Due after five  years through ten years |       |                                                                                        | 4,129      |                           |       |   | 4,228 |   |   |
| Due after ten  years                    |       |                                                                                        | 500        |                           |       |   | 511 |   |   |
| Asset-backed  securities                |       |                                                                                        | 1,113      |                           |       |   | 1,115 |   |   |
| Collateralized  mortgage obligations    |       |                                                                                        | 1,663      |                           |       |   | 1,664 |   |   |
| Total debt  securities                  |       |                                                                                        | $          | 12,137                         |       |   |   | $ | 12,258 |   |   |

 

The Company recorded nosignificant realized gains or losses related to sales of marketable securitiesin the first half of 2005.

15

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**5.**   Investments inUnconsolidated Subsidiaries

Investmentsin unconsolidated subsidiaries consist of the following:
| ** **  | ** ** | **June 30,        2005      ** | ** ** | **December 31,        2004      ** | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Real estate |       |                                                                                            | $          | 40,135                                                                                              |       |   |   | $ | 39,829 |   |   |
| Other       |       |                                                                                            | 126,876    |                                                                                                |       |   | 34,261 |   |   |
|        |       |                                                                                            | $          | 167,011                                                                                             |       |   |   | $ | 74,090 |   |   |

 

In April 2005, the Company exercised its optionto acquire additional shares of Savills plc (“Savills”), a property servicesfirm headquartered in the United Kingdom and a leading provider of real estateservices in Europe, Asia-Pacific and Australia. The exercise of the optionresulted in the issuance of 5,243,229 shares by Savills at a price of 701.28pence per share, for a total cost of £36,770 ($70,392). The exercise pricerepresented a 20% premium to the average mid-market closing price of the sharesin trading on the London Stock Exchange for the five trading days preceding theexercise of the option. Preceding its exercise of the option, also in April 2005,the company acquired 1,677,970 of Savills’ Ordinary Shares in open market purchasesat an average price of 650.00 pence per share, having the effect of reducingthe number of shares purchasable under the option. The option exercise and themarket 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 Company is in the process of completing itspurchase price allocation of this additional ownership interest in Savills. Ofthe total purchase price, approximately $4,172 has been allocated to the valueof customer relationships, property and facilities management contracts andbacklog. This amount is being amortized over periods up to ten years. Theestimated difference between the carrying value of the investment and theamount of underlying equity in net assets of $66,193 will be evaluated forimpairment as part of the investment as a whole when evidence of a loss invalue occurs. Impairment charges would be recognized when losses in value areother than temporary.

The summarized financial information below does notinclude the results of Savills as Savills qualifies as a foreign privateissuer.

16

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**5.**   Investments inUnconsolidated Subsidiaries (Continued)

Summarized operatingresults for unconsolidated subsidiaries accounted for on the equity method areas follows:
| ** **     | ** ** | **For the Three Months  Ended June 30,**                | ** ** | **For the Six Months  Ended June 30,**                  | ** ** |
|----------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Total revenues |       |                                                                             | $          | 27,518                                                                           |       |   |   | $ | 19,395 |   |   |   | $ | 47,065 |   |   |   | $ | 76,331 |   |   |
| Total expenses |       |                                                                             | 21,137     |                                                                             |       |   | 17,198 |   |   |   | 38,901 |   |   |   | 36,371 |   |   |
| Net income     |       |                                                                             | $          | 6,381                                                                            |       |   |   | $ | 2,197 |   |   |   | $ | 8,164 |   |   |   | $ | 39,960 |   |   |

 

**6.**   Accrued Expenses

Accruedexpenses consist of the following:
| ** **                                                                                                          | ** ** | **June 30,**                                                                | ** ** | **December 31,**                                                            | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Payroll and  bonuses                                                                                                |       |                                                                             | $          | 33,869                                                                           |       |   |   | $ | 67,315 |   |   |
| Commissions                                                                                                         |       |                                                                             | 24,635     |                                                                             |       |   | 36,171 |   |   |
| Development costs                                                                                                   |       |                                                                             | 20,205     |                                                                             |       |   | 16,601 |   |   |
| Deferred income                                                                                                     |       |                                                                             | 14,445     |                                                                             |       |   | 13,160 |   |   |
| Interest                                                                                                            |       |                                                                             | 566        |                                                                             |       |   | 455 |   |   |
| Insurance                                                                                                           |       |                                                                             | 2,325      |                                                                             |       |   | 2,150 |   |   |
| Restructuring  charges (see Note 15)                                                                           |       |                                                                             | 1,699      |                                                                             |       |   | 1,902 |   |   |
| Other                                                                                                               |       |                                                                             | 12,792     |                                                                             |       |   | 11,229 |   |   |
|                                                                                                                |       |                                                                             | 110,536    |                                                                             |       |   | 148,983 |   |   |
| Less: Accrued  expenses included in liabilities related to real estate and other assets held  for sale (see Note 9) |       |                                                                             | 1,899      |                                                                             |       |   | 1,294 |   |   |
|                                                                                                                |       |                                                                             | $          | 108,637                                                                          |       |   |   | $ | 147,689 |   |   |

 

17

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**7.**   Long-Term Debt

Long-termdebt consists of the following:
| ** **                                                                                                  | ** ** | **June 30,**                                                                | ** ** | **December 31,**                                                            | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Borrowings under  $175,000 line of credit with a bank (the “Credit Facility”)                     |       |                                                                             | $          | 71,000                                                                           |       |   |   | $ | — |   |   |
| Borrowings under  $25,000 short-term revolving line of credit with a bank (the “Swing Line”)      |       |                                                                             | 4,500      |                                                                             |       |   | — |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       |                                                                             | 118        |                                                                             |       |   | — |   |   |
| Other                                                                                                       |       |                                                                             | 33         |                                                                             |       |   | 14 |   |   |
| Total long-term  debt                                                                                       |       |                                                                             | 75,651     |                                                                             |       |   | 14 |   |   |
| Less: Current  portion of long-term debt                                                                    |       |                                                                             | 4,629      |                                                                             |       |   | 6 |   |   |
|                                                                                                        |       |                                                                             | $          | 71,022                                                                           |       |   |   | $ | 8 |   |   |

 

During June 2005, the Company entered into theCredit Facility and the Company’s previous $150,000 line of credit wasterminated. The Company repaid borrowings outstanding under the previous lineof credit with proceeds from the Credit Facility. Under the Credit Facility,the Company can obtain loans, which are Base Rate Loans or Eurodollar RateLoans. Base Rate Loans bear interest at a base rate plus a margin up to 0.25%depending on the Company’s leverage ratio. The base rate is the higher of theprime lending rate or an average federal funds rate plus 0.5%. Eurodollar RateLoans bear interest at the Eurodollar rate plus a margin which ranges from1.75% to 2.0%, depending upon the Company’s leverage ratio. The Eurodollar rateis based on the British Bankers Association LIBOR rate. Interest is payable inperiods up to six months at the Company’s discretion. The interest rate forborrowings under the Credit Facility was 4.9% at June 30, 2005.

The shares of certain subsidiaries of the Company,accounting for at least 80% of Adjusted Gross EBITDA, as defined in the CreditFacility agreement, are pledged as security for the Credit Facility.

The Company is subject to various covenants associatedwith the Credit Facility, such as maintenance of minimum equity and liquidityand certain key financial data. In addition, the Company may not pay dividendsor make other distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization, plus, for theyear ending December 31, 2005 only, an amount equal to $20,000. There arealso certain restrictions on investments and acquisitions that can be made bythe Company. At June 30, 2005, the Company is in compliance with allcovenants of the Credit Facility.

The covenants associated with the Credit Facility andthe amount of the Company’s other borrowings and contingent liabilities mayhave the effect of limiting the credit available to the Company under theCredit Facility to an amount less than the $175,000 commitment. At June 30,2005, the Company has unused borrowing capacity of $88,595 (taking in 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) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**7.**   Long-Term Debt(Continued)

Under the Credit Facility, the Company pays aquarterly fee equal to 0.25% per annum of the unused commitment under the line.If a certain interest coverage ratio is not maintained, as defined in theagreement, the Credit Facility requires the Company to enter into one or moreinterest rate swap agreements for the Company’s indebtedness in excess of$30,000 ensuring the net interest is fixed.

The Swing Line is acomponent of the Credit Facility. Borrowings under the Swing Line mature fivebusiness days from the date drawn (no later than June 28, 2008) and bearinterest at a 30-day LIBOR-based rate (plus an applicable margin as defined inthe agreement). Borrowings under the Swing Line reduce borrowing capacity underthe Credit Facility.

**8.**   Notes Payable onReal Estate

TheCompany has loans secured by real estate consisting of the following:
| ** **                                                                                                                | ** ** | **June 30,**                                                                | ** ** | **December 31,**                                                            | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Current portion  of notes payable on real estate                                                                          |       |                                                                             | $          | 32,287                                                                           |       |   |   | $ | 14,193 |   |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 9) |       |                                                                             | 23,330     |                                                                             |       |   | 21,432 |   |   |
| Total notes  payable on real estate, current portion                                                                      |       |                                                                             | 55,617     |                                                                             |       |   | 35,625 |   |   |
| Notes payable on  real estate, non-current portion                                                                        |       |                                                                             | 155,437    |                                                                             |       |   | 114,079 |   |   |
| Total notes payable on  real estate                                                                                       |       |                                                                             | $          | 211,054                                                                          |       |   |   | $ | 149,704 |   |   |

 

Notes payable on real estate held for sale areincluded in liabilities related to real estate and other assets held for sale.Notes payable on real estate under development (current) are included incurrent portion of notes payable on real estate. Notes payable on real estateunder development (non-current) and real estate held for investment areclassified according to payment terms and maturity date.

At June 30, 2005, $9,997 of the current portionand $8,912 of the non-current portion of notes payable on real estate arerecourse to the Company (beyond being recourse to the single-purpose entitythat holds the real estate asset and is the obligor on the note payable). Withrespect to a project to which $3,322 of the current recourse obligationsrelate, the Company has an agreement to sell the project upon completion, theproceeds of which will be used to repay the related note payable.

The Company has aparticipating mortgage loan obligation related to a real estate projectclassified as real estate under development (non-current). The participatingmortgage loan is subordinate to a construction loan on the underlying project.The lender participates in net operating cash flow of the mortgaged real estateproject, if any, and capital proceeds, net of related expenses, upon the saleof the project, after payment of amounts due under the construction loan. Thelender receives 6% fixed interest on the outstanding balance of its note,compounded monthly, and participates in 35% to 80% of proceeds remaining afterthe construction loan is paid, based on reaching various internal rates ofreturn. The amount of the participating liability and the related debt discountare $11,335 and $3,459, respectively, at 

19

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**8.**   Notes Payable onReal Estate (Continued)

June 30,2005 and $10,030 and $4,894, respectively, at December 31, 2004. In thesix months ended June 30, 2005 and 2004, the Company amortized $2,742 and$2,710, respectively, of the debt discount, which has been capitalized to realestate under development (non-current).

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

Real estate and other assets held for sale includecompleted real estate projects or land for sale in their present condition thathave met all of the “held for sale” criteria of FAS 144 and other assetsdirectly related to such projects. Liabilities related to real estate and otherassets held for sale have been included as a single line item in the Company’sbalance sheet. In accordance with FAS 144, balances related to assetsclassified as held for sale at June 30, 2005, or sold in the six monthsended June 30, 2005, that were not classified as held for sale at December 31,2004, have been reclassified to real estate and other assets held for sale inthe Company’s balance sheet as of December 31, 2004 presented herein.

Real estate and otherassets held for sale and related liabilities are as follows:
| ** **                                                               | ** ** | **June 30,**                                                                | ** ** | **December 31,**                                                            | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| **Assets:**                                                              |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Notes and other receivables                                              |       |                                                                             | $          | 11,957                                                                           |       |   |   | $ | 1,099 |   |   |
| Real estate held for sale (see Note 3)                                   |       |                                                                             | 14,153     |                                                                             |       |   | 21,874 |   |   |
| Other current assets                                                     |       |                                                                             | 232        |                                                                             |       |   | 24 |   |   |
| Other assets                                                             |       |                                                                             | 64         |                                                                             |       |   | 111 |   |   |
| Total real estate  and other assets held for sale                        |       |                                                                             | 26,406     |                                                                             |       |   | 23,108 |   |   |
| **Liabilities:**                                                         |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Accrued expenses (see Note 6)                                            |       |                                                                             | 1,899      |                                                                             |       |   | 1,294 |   |   |
| Notes payable on real estate held for sale (see Note  8)                 |       |                                                                             | 23,330     |                                                                             |       |   | 21,432 |   |   |
| Other current liabilities                                                |       |                                                                             | —     |                                                                             |       |   | 10 |   |   |
| Total liabilities  related to real estate and other assets held for sale |       |                                                                             | 25,229     |                                                                             |       |   | 22,736 |   |   |
| **Net real estate and other  assets held for sale**                      |       |                                                                             | $          | 1,177                                                                            |       |   |   | $ | 372 |   |   |

 

20

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**10.**   Stockholders’Equity

Asummary of the Company’s stock option activity for the six months ended June 30,2005, is 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,  2004                        |       |                                                                                            | 896,135    |                                                                                                         |       |                                                                                                          | 3,004,925  |                                                                                                          |       |      | 1,921,135  |   |   |   | 144,621 |   |   | 5,966,816 |   |
| Granted                                        |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                      |       |                                                                                            | (229,143   | )                                                                                                            |       |                                                                                                          | (140,776   | )                                                                                                             |       |      | (199,472   | ) |   |   | — |   |   | (569,391 | ) |
| Forfeited                                      |       |                                                                                            | (52,821    | )                                                                                                            |       |                                                                                                          | (26,127    | )                                                                                                             |       |      | (12,056    | ) |   |   | — |   |   | (91,004 | ) |
| June 30,  2005                            |       |                                                                                            | 614,171    |                                                                                                         |       |                                                                                                          | 2,838,022  |                                                                                                          |       |      | 1,709,607  |   |   |   | 144,621 |   |   | 5,306,421 |   |
| **Options exercisable at  June 30, 2005** |       |                                                                                            | 614,171    |                                                                                                         |       |                                                                                                          | 2,578,815  |                                                                                                          |       |      | 1,709,607  |   |   |   | 144,621 |   |   | 5,047,214 |   |

 

**11.**   Gainon Disposition of Real Estate and Discontinued Operations

During the first half of2005, the Company recognized total gain on disposition of real estate(excluding discontinued operations) of $2,531. This gain was comprised of twosales of real estate projects with an aggregate net sales price of $2,337 and asettlement related to the estimated cost****to completeconstruction related to a previous period disposition. This gain also includeddeferred gain recognition of $178 related to dispositions in prior periods.During the first half of 2004, the Company sold four real estate projects foran aggregate net sales price of $15,595, resulting in an aggregate gain ondisposition of $3,993. The Company also recognized $338 of deferred gain fromprevious period dispositions.

The Company’s discontinuedoperations include the operations and gains on disposition of real estateprojects held for sale or sold subsequent to the adoption of FAS 144effective January 1, 2002, that are considered “components of an entity”as defined by FAS 144 and for which the Company does not have or expect tohave any significant involvement in the operations of the project after the disposal.The Company has certain real estate assets that are land parcels and constitutea component of an entity. From time to time, the Company disposes of these landparcels in smaller lots. An individual lot that is part of a larger land parceldoes not constitute a component of an entity within the meaning of paragraph 41of FAS 144 until it is either classified as held for sale in accordance withFAS 144 or sold. As required by FAS 144, certain revenues and expenses forthe three months ended March 31, 2005, and the three and six months ended June 30,2004 have been reclassified to conform to the presentation for the three monthsended June 30, 2005.

In the first six months of2005, the Company sold five real estate projects that were considered discontinuedoperations under FAS 144. The aggregate net sales price for these projectswas $28,522, and the Company recognized an aggregate gain on disposition of$1,962. In the first six months of June 30, 2004, the Company sold onereal estate project that was considered a discontinued operation under 

21

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

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

FAS 144.The net sales price for this project was $11,335, and the Company recognized again on disposition of $844, including interest forgiveness of $326. The gainon disposition related to these projects has been reported as discontinuedoperations, net of applicable income taxes, in the consolidated statements ofincome.

The components ofdiscontinued operations are as follows:
| ** **                                                       | ** ** | **For the Three Months  Ended June 30,**                            | ** **       | **For the Six Months  Ended June 30,**                  | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **       2005       ** | ** **       | **      2004      ** | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| **Revenues:**                                                    |       |                                                                                         |             |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Development and  construction                                    |       |                                                                                         | $  347 |                                                                             |       |   | $ 468 |   |   |   | $  580 |   |   |   | $  791 |   |   |
| Gain on  disposition of real estate                              |       |                                                                                         | 1,878            |                                                                             |       |   | — |   |   |   | 1,962 |   |   |   | 844 |   |   |
| Total Revenues                                                   |       |                                                                                         | 2,225            |                                                                             |       |   | 468 |   |   |   | 2,542 |   |   |   | 1,635 |   |   |
| **Expenses:**                                                    |       |                                                                                         |             |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries, wages,  and benefits                                   |       |                                                                                         | 39               |                                                                             |       |   | — |   |   |   | 43 |   |   |   | — |   |   |
| Commissions                                                      |       |                                                                                         | —           |                                                                             |       |   | — |   |   |   | — |   |   |   | 9 |   |   |
| General and  administrative                                      |       |                                                                                         | 281              |                                                                             |       |   | 386 |   |   |   | 606 |   |   |   | 601 |   |   |
| Depreciation and  amortization                                   |       |                                                                                         | 48               |                                                                             |       |   | 53 |   |   |   | 122 |   |   |   | 152 |   |   |
| Interest                                                         |       |                                                                                         | 245              |                                                                             |       |   | 95 |   |   |   | 458 |   |   |   | 266 |   |   |
| Total Expenses                                                   |       |                                                                                         | 613              |                                                                             |       |   | 534 |   |   |   | 1,229 |   |   |   | 1,028 |   |   |
| Operating income (loss)                                          |       |                                                                                         | 1,612            |                                                                             |       |   | (66 | ) |   |   | 1,313 |   |   |   | 607 |   |   |
| Interest and  other income                                       |       |                                                                                         | 8                |                                                                             |       |   | 3 |   |   |   | 20 |   |   |   | 6 |   |   |
| Income from  discontinued operations, before income taxes        |       |                                                                                         | 1,620            |                                                                             |       |   | (63 | ) |   |   | 1,333 |   |   |   | 613 |   |   |
| Income tax  (expense) benefit                                    |       |                                                                                         | (591             | )                                                                                |       |   | 21 |   |   |   | (481 | ) |   |   | (263 | ) |   |
| Income (loss) from  discontinued operations, net of income taxes |       |                                                                                         | $ 1,029     |                                                                             |       |   | $ (42 | ) |   |   | $  852 |   |   |   | $  350 |   |   |

 

**12.**   FinancialInstruments

The Company has enteredinto various interest rate agreements to manage market risks related to changesin interest rates, primarily in satisfaction of requirements under the Company’sCredit Facility. The Company’s participation in derivative transactions hasbeen limited to risk management purposes. Derivative instruments are not heldor issued for trading purposes.

In December 2004, theCompany entered into an interest rate cap agreement in order to limit itsinterest expense on a construction loan with a 30-day LIBOR-based floatinginterest rate related to a consolidated real estate project. The interest ratecap agreement has a notional amount of $5,073 at June 30, 2005, and theCompany will receive payments if the LIBOR-based interest rate exceeds 3.5%.The interest rate cap agreement has not been designated as an effective hedge,and, therefore, the interest rate cap agreement will be marked to market eachperiod with the change in fair market value recognized in 

22

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**12.**   Financial Instruments (Continued)

currentperiod earnings. The interest rate cap agreement expires on January 1,2006. Through June 30, 2005, amounts recorded by the Company related tothis interest rate cap agreement were not material.

Accounts receivable,accounts payable and accrued expenses and other liabilities are carried atamounts that reasonably approximate their fair values. The fair values of theCompany’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 $5,053 of real estate notes payable of itsunconsolidated subsidiaries, all of which is outstanding at June 30, 2005.These notes are secured by the underlying real estate and have maturity datesthrough December 2009.

The Company issued severaldebt repayment guarantees of others that are subject to the fair valueprovisions of FASB Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including DirectGuarantees of Indebtedness of Others* (“FIN 45”).

In 2004, the Companyissued a debt repayment guaranty of an unconsolidated subsidiary in conjunctionwith a $30,000 loan agreement. As part of this loan agreement, the Companyissued a repayment guaranty of up to 50% of the loan balance plus any accruedand unpaid interest. In accordance with the terms of the guaranty, at such timeas the principal balance has been reduced to $15,000 or less and a targetloan-to-value ratio has been reached, the Company’s guaranty is reduced to 25%of the loan balance. In exchange for the guaranty, the Company receives apriority return with respect to its capital contribution based on theoutstanding amount of principal on the loan. The Company estimates that itslikely exposure under the guaranty is not material and has determined that thepresent value of the priority return is the best estimate of the fair value ofthe guaranty under FIN 45. The Company initially recorded a liability offset byan increase in its investment in unconsolidated subsidiary balance of $1,886.The underlying note was paid down to $15,000 in the second quarter of 2005,resulting in a decrease in the Company’s guaranty. As a result of thisdecrease, the remaining liability balance is $472 at June 30, 2005.

In 2004, the Company alsoissued a $1,000 debt repayment guaranty on a $10,185 construction loan in orderto obtain a development fee contract and allow a third-party owner to obtainfinancing for a construction project. The guaranty expires upon projectcompletion and achievement of a specified leasing target. The third-party ownerhas agreed to transfer a separate parcel of land to the Company, should theCompany be required to perform under the guaranty. The loan matures in November 2009.The Company estimates that its likely exposure under the guaranty is notmaterial and has recorded the fair value of the guaranty in an amountequivalent to the consideration received, or $102. During 2004, the Companyissued several other debt repayment guarantees of unconsolidated subsidiariesthat are subject to the provisions of FIN 45. The Company estimates that itslikely exposure under these guarantees is not material. On this basis, theCompany estimates that the fair value of these guarantees is equivalent to theamount necessary to secure the guarantees using letters of credit from a bank,and the aggregate amount is nominal.

23

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

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

At June 30, 2005, theCompany has outstanding letters of credit totaling $23,502, including $11,596and $9,070 of which collateralize amounts recorded in other current liabilitiesand other liabilities, respectively. The letters of credit expire at varyingdates through June 2006.

In addition, the Companyhas numerous completion and budget guarantees relating to development projects.These guarantees are made with third-party owners in the normal course ofbusiness. Each of these guarantees requires the Company to complete constructionof the relevant project within a specified time frame and/or within a specifiedbudget, with the Company potentially being liable for costs to complete inexcess of such budget. However, the Company generally has “guaranteed maximumprice” contracts with reputable general contractors with respect to projectsfor which the Company provides these guarantees. These contracts are intendedto pass the budget risk to such contractors. Management does not expect toincur any material losses under these guarantees.

From time to time, theCompany acts as a general contractor with respect to construction projects. TheCompany does not consider these activities to be a material part of itsbusiness. In connection with these activities, the Company seeks to subcontractconstruction work for certain projects to reputable subcontractors. Shouldconstruction defects arise related to the underlying projects, the Companycould potentially be liable to the client for the costs to repair such defects,but the Company would generally look to the subcontractor that performed thework to remedy the defect. Management does not expect to incur material losseswith respect to construction defects.

As of June 30, 2005,the Company has made non-refundable earnest money deposits totaling $4,364 inconjunction with contracts to acquire approximately $191,403 of real estatefrom other entities.

TheCompany and one of its subsidiaries are defendants in a lawsuit styled* **Bank OneOklahoma, N.A., et al.*(the “Bank”) *v. TrammellCrow Services, Inc. and Trammell Crow Company*, No. 03 C3624, pending in the US District Court for the Northern District of Illinois,originally filed on April 2, 2003. The claims asserted by the plaintiffsrelate to a sale/leaseback transaction involving a property in Oklahoma Citypreviously owned by the Bank. The suit alleges breach of contract, breach offiduciary duty, negligent misrepresentation, fraudulent misrepresentation andfraudulent concealment against the Company and/or its subsidiary and alleges thatthe plaintiffs have been damaged in an unspecified amount in excess of $15,000.The plaintiffs seek to recover actual damages, punitive damages and reasonableattorneys’ fees. The suit is in the process of discovery, and no trial date hasbeen set. As of the date of this Form 10-Q, the outcome of the suitcannot be predicted with any certainty, and the Company cannot at this timeestimate an amount or range of potential loss in the event of an unfavorableoutcome. While the Company cannot predict with any certainty the outcome ofthis matter, the Company currently believes the plaintiffs’ claims are withoutmerit and is vigorously defending the lawsuit.

From time to time, theCompany is involved in other litigation matters that arise in the ordinary courseof its business, some of which involve claims for damages which are substantialin amount. The ultimate liability for these matters cannot be determined.However, based on the information currently available, the Company does notbelieve that the resolution of any such matters to which it is currently a 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

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

partywill have a material adverse effect on the Company’s results of operations,financial condition or liquidity.

**14.**   SegmentInformation

*Description of Services 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 andInvestment segment includes development activities performed on behalf ofinvestor and user clients on a fee basis, as well as development activitypursuant to which the Company takes an ownership position. The Development andInvestment segment also includes activities related to the Company’s operatingreal estate projects prior to disposition.

*Measurement of Segment Profit or Loss and SegmentAssets*

The Company evaluatesperformance and allocates resources among its two reportable segments based onincome before income taxes. The accounting policies of the reportable segmentsare the same as those described in the summary of significant accountingpolicies.

Virtually all of theCompany’s revenues are from clients located in the United States. For the threeand six months ended June 30, 2005, one individual client accounts for$26,802, or 13%, and $50,750, or 13%, respectively, of the Company’sconsolidated revenues. For the three and six months ended June 30, 2004,the same client accounted for $19,730, or 11%, and $36,224, or 11%,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) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**14.**   SegmentInformation (Continued)

Summarized financialinformation for reportable segments is as follows:
| ** **                                                                                                                                   | ** ** | **For the Three Months  Ended June 30,**                | ** **     | **For the Six Months  Ended June 30,**                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|----------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **      2005      ** | ** **     | **      2004      ** | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| **Global Services:**                                                                                                                         |       |                                                                             |           |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                                                                           |       |                                                                             | $ 202,573 |                                                                             |       |   | $ 169,941 |   |   |   | $ 371,789 |   |   |   | $ 319,659 |   |   |
| Costs and expenses(1)                                                                                                                        |       |                                                                             | 189,740        |                                                                             |       |   | 162,048 |   |   |   | 354,989 |   |   |   | 313,684 |   |   |
| Operating income                                                                                                                             |       |                                                                             | 12,833         |                                                                             |       |   | 7,893 |   |   |   | 16,800 |   |   |   | 5,975 |   |   |
| Interest and other income                                                                                                                    |       |                                                                             | 373            |                                                                             |       |   | 218 |   |   |   | 1,150 |   |   |   | 689 |   |   |
| Income from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries        |       |                                                                             | 13,206         |                                                                             |       |   | 8,111 |   |   |   | 17,950 |   |   |   | 6,664 |   |   |
| Minority interest, before  income taxes                                                                                                      |       |                                                                             | 353            |                                                                             |       |   | (17 | ) |   |   | 542 |   |   |   | (17 | ) |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 3,198          |                                                                             |       |   | 1,354 |   |   |   | 3,899 |   |   |   | 2,558 |   |   |
| Income from continuing  operations, before income taxes                                                                                      |       |                                                                             | 16,757         |                                                                             |       |   | 9,448 |   |   |   | 22,391 |   |   |   | 9,205 |   |   |
| Income from discontinued  operations, before income taxes                                                                                    |       |                                                                             | —         |                                                                             |       |   | — |   |   |   | — |   |   |   | 13 |   |   |
| Income before income  taxes                                                                                                                  |       |                                                                             | $ 16,757  |                                                                             |       |   | $ 9,448 |   |   |   | $ 22,391 |   |   |   | $ 9,218 |   |   |
| **Development and Investment:**                                                                                                              |       |                                                                             |           |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                                                                                               |       |                                                                             | $ 10,350  |                                                                             |       |   | $ 12,070 |   |   |   | $ 20,754 |   |   |   | $ 20,486 |   |   |
| Costs and expenses(1)                                                                                                                        |       |                                                                             | 18,921         |                                                                             |       |   | 15,075 |   |   |   | 36,384 |   |   |   | 29,743 |   |   |
| Operating loss                                                                                                                               |       |                                                                             | (8,571         | )                                                                                |       |   | (3,005 | ) |   |   | (15,630 | ) |   |   | (9,257 | ) |   |
| Interest and other income                                                                                                                    |       |                                                                             | 110            |                                                                             |       |   | 259 |   |   |   | 257 |   |   |   | 672 |   |   |
| Loss from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries          |       |                                                                             | (8,461         | )                                                                                |       |   | (2,746 | ) |   |   | (15,373 | ) |   |   | (8,585 | ) |   |
| Minority interest, before  income taxes                                                                                                      |       |                                                                             | 1,517          |                                                                             |       |   | (1,018 | ) |   |   | 4,543 |   |   |   | (1,078 | ) |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 1,385          |                                                                             |       |   | 78 |   |   |   | 3,244 |   |   |   | 9,160 |   |   |
| Loss from continuing  operations, before income taxes                                                                                        |       |                                                                             | (5,559         | )                                                                                |       |   | (3,686 | ) |   |   | (7,586 | ) |   |   | (503 | ) |   |
| Income (loss) from  discontinued operations, before income taxes                                                                             |       |                                                                             | 1,620          |                                                                             |       |   | (63 | ) |   |   | 1,333 |   |   |   | 600 |   |   |
| Income (loss) before  income taxes                                                                                                           |       |                                                                             | $ (3,939  | )                                                                                |       |   | $ (3,749 | ) |   |   | $ (6,253 | ) |   |   | $      97 |   |   |
| **Total:**                                                                                                                                   |       |                                                                             |           |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                                                                                               |       |                                                                             | $ 212,923 |                                                                             |       |   | $ 182,011 |   |   |   | $ 392,543 |   |   |   | $ 340,145 |   |   |
| Costs and expenses(1)                                                                                                                        |       |                                                                             | 208,661        |                                                                             |       |   | 177,123 |   |   |   | 391,373 |   |   |   | 343,427 |   |   |
| Operating income (loss)                                                                                                                      |       |                                                                             | 4,262          |                                                                             |       |   | 4,888 |   |   |   | 1,170 |   |   |   | (3,282 | ) |   |
| Interest and other income                                                                                                                    |       |                                                                             | 483            |                                                                             |       |   | 477 |   |   |   | 1,407 |   |   |   | 1,361 |   |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       |                                                                             | 4,745          |                                                                             |       |   | 5,365 |   |   |   | 2,577 |   |   |   | (1,921 | ) |   |
| Minority interest, before  income taxes                                                                                                      |       |                                                                             | 1,870          |                                                                             |       |   | (1,035 | ) |   |   | 5,085 |   |   |   | (1,095 | ) |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 4,583          |                                                                             |       |   | 1,432 |   |   |   | 7,143 |   |   |   | 11,718 |   |   |
| Income from continuing  operations, before income taxes                                                                                      |       |                                                                             | 11,198         |                                                                             |       |   | 5,762 |   |   |   | 14,805 |   |   |   | 8,702 |   |   |
| Income (loss) from  discontinued operations, before income taxes                                                                             |       |                                                                             | 1,620          |                                                                             |       |   | (63 | ) |   |   | 1,333 |   |   |   | 613 |   |   |
| Income before income  taxes                                                                                                                  |       |                                                                             | $ 12,818  |                                                                             |       |   | $ 5,699 |   |   |   | $ 16,138 |   |   |   | $ 9,315 |   |   |

----

(1)                 Costs and expenses for the three and six months ended June 30,2005, include non-cash compensation expense related to the amortization ofemployment contracts and unearned stock compensation of $1,937 and $3,437related to the Global Services segment and $424 and $1,065 related to the Developmentand Investment segment, respectively. Costs and expenses for the three and sixmonths ended June 30, 2004, include non-cash compensation expense relatedto the amortization of employment contracts and unearned stock compensation of$1,469 and $2,485 related to the Global Services segment and $658 and $1,133related to the Development and Investment segment, respectively.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 2005 (dollars in thousands, except per share data) (Unaudited)**

**14.**   Segment Information (Continued)
| ** **                  | ** ** | **June 30,**                                                    | ** ** | **December 31,**                                                | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                  | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| **Total Assets:**           | ** ** | ** **                                                           | ** ** |                                                                 | ** ** | ** ** |   |
| Global Services             |       | $                                                                    | 368,258    |                                                                 |       | $ | 319,464 | ** ** |   |
| Development and  Investment |       | 453,724                                                              |       |                                                                 | 429,486    | ** ** |   |
| Total consolidated  assets  |       | $                                                                    | 821,982    |                                                                 |       | $ | 748,950 | ** ** |   |

 

**15.**   RestructuringCharges

During 2001, the Companyannounced an internal reorganization of its business designed to consolidateall of the property and facilities management, brokerage and corporateadvisory, and construction and project management services delivered to bothuser and investor clients under a single leadership structure. As part of itsrestructuring plans, primarily during the fourth quarter of 2001, the Companyclosed several offices and identified offices with excess space that it intendsto sublease to third parties. The Company recorded restructuring chargesprimarily comprised of lease obligations, costs to sublease excess space(offset by estimated future sublease income) and miscellaneous furniture andequipment writeoffs. These accruals will be relieved over the remaining termsof the underlying leases through March 2012.

Activityrelated to the Company’s lease obligations and related costs included inrestructuring accruals in 2005 is as follows:
| Balance at  December 31, 2004 |   | $ 1,902 |   |
|------------------------------------|--------|--------------|--------|
| Cash payments                      |   | 203          |   |
| Balance at June 30,  2005     |   | $ 1,699 |   |

 

**16.**   SupplementalCash Flow Information

Supplementalcash flow information is summarized below:
| ** **                                       | ** ** | **Six Months Ended  June 30,**                        | ** **   |
|--------------------------------------------------|------------|----------------------------------------------------------------------|--------------|
| ** **                                       | ** ** | **     2005     ** | ** **   | **     2004     ** | ** ** |
| **Non-cash activities:**                         |       |                                                                 |         |   |   |   |   |   |   |
| Issuance of restricted stock, net of forfeitures |       |                                                                 | $ 5,669 |   |   |   | $ 8,235 |   |   |
| Capital lease  obligations                       |       |                                                                 | 3            |   |   |   | 658 |   |   |

 

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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.

**Overview**

Trammell Crow Company (the “Company”) is one of thelargest diversified commercial real estate service companies in the world. TheCompany delivers a comprehensive range of services to leading multinationalcorporations, institutional investors and other users of real estate services.In the United States, the Company is a leading provider of commercial propertyand facilities management services, commercial property brokerage andtransaction management services, commercial property development andconstruction services and project management services. In addition to its fullservice offices located throughout the United States, the Company has officesin Canada, Europe, Asia and Latin/South America focused on the delivery of realestate services to users of commercial real estate. The Company deliversbrokerage services outside the United States through strategic alliances withleading providers—in Europe and Asia, through Savills plc, (“Savills”) a leadingproperty services company based in the United Kingdom; and in Canada, throughJJ Barnicke, a leading Canadian real estate services provider. The Companydelivers four core services—building management services, brokerage services,project management services and development services—to both user and investorclients. The Company’s business is organized under two separate nationalleadership structures. The Global Services Group includes substantially all ofthe building management services, brokerage services, and project managementservices delivered to both user and investor clients. Substantially all of theCompany’s real estate development, capital markets and investment activitiesare conducted through the Company’s Development and Investment Group.

Within the Global Services segment, with approximately6,100 full-time equivalent (“FTE”) employees, the Company provides services touser clients, including multinational corporations and hospitals, who aretypically the primary occupants of the commercial properties with respect towhich services are performed, and investor clients who are not typically theprimary occupants of the commercial properties with respect to which servicesare performed. The building management services provided to user clientsconsist primarily of facilities management, which entails providingcomprehensive day-to-day occupancy related services, principally to largecorporations, healthcare systems and other users that occupy commercialfacilities in multiple locations. These services include administration andday-to-day maintenance and repair of client-occupied facilities.Brokerage services provided to user clients include corporate advisory servicessuch as portfolio management and tenant representation. Project management servicesprovided to user clients include facility planning and project management, suchas construction oversight, space planning, site consolidations, facilitiesdesign, and workplace moves, adds, and changes. The building managementservices provided to investor clients include property management servicesrelating to all aspects of building operations, tenant relations and oversightof building improvement processes. Brokerage services provided to investorclients include project leasing and investment sales services whereby theCompany advises buyers, sellers and landlords in connection with the leasingand sale of office, industrial and retail space, and land. Project managementservices provided to investor clients include construction management servicessuch as space planning and tenant finish and coordination.

Within the Development andInvestment segment, encompassing approximately 210 FTE employees, the Companyprovides development services to both investor and user clients—both thosepursuant to which the Company takes an ownership position in a project andthose pursuant to which the Company provides development services to others inexchange for fees. The Company provides comprehensive project developmentservices and acquires and disposes of commercial real estate projects. Thedevelopment services provided include financial planning, site acquisition,procurement of approvals and 

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permits,design and engineering coordination, construction bidding and management,tenant finish coordination, project closeout and project finance coordination.The Company will continue to focus its efforts in this area on risk-mitigatedopportunities for investor clients and fee development and build-to-suitprojects for user clients. From time to time, the Company may pursuedevelopment and investment activities, including opportunistic propertyacquisitions and new development, for its own account or on a co-investmentbasis. With an organization comprised of professionals dedicated fully todevelopment and investment activities, the Company is positioned to pursue andexecute new development business, particularly programmatic business with theCompany’s large investor clients, and exploit niche market opportunities.

**Resultsof Operations—Three and Six Months Ended June 30, 2005 Compared to Threeand Six Months Ended June 30, 2004**

In accordance withStatement of Financial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*(“FAS 144”),certain revenues and expenses for the three months ended March 31, 2005,and the three and six months ended June 30, 2004, have been reclassifiedto conform to the presentation for the three months ended June 30, 2005.As a result, certain balances differ from the amounts reported in previously fileddocuments. See *Income from Discontinued Operations, Net ofIncome Taxes*, below, for additional information.

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| ** **                                                                                                                                   | ** ** | **For the Six Months   Ended June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                                         | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                                   | ** ** | **($ in thousands)**                                   | ** ** |
| **REVENUES:**                                                                                                                                |       |                                                             |       |       |       |              |       |   |   |   |   |
| ***User Services:***                                                                                                                         |       |                                                             |       |       |       |              |       |   |   |   |   |
| Facilities management                                                                                                                        |       | $                                                                | 114,528    |       | $          | 101,312           |       | $ | 13,216 |   |   | 13.0 | % |   |
| Corporate advisory  services                                                                                                                 |       | 64,789                                                           |       | 56,278     |       | 8,511             |       |   | 15.1 | % |   |
| Project management  services                                                                                                                 |       | 57,287                                                           |       | 37,637     |       | 19,650            |       |   | 52.2 | % |   |
|                                                                                                                                         |       | 236,604                                                          |       | 195,227    |       | 41,377            |       |   | 21.2 | % |   |
| ***Investor Services:***                                                                                                                     |       |                                                             |       |       |       |              |       |   |   |   |   |
| Property management                                                                                                                          |       | 68,555                                                           |       | 69,324     |       | (769              | )          |   | (1.1 | )% |   |
| Brokerage                                                                                                                                    |       | 61,456                                                           |       | 50,859     |       | 10,597            |       |   | 20.8 | % |   |
| Construction management                                                                                                                      |       | 5,174                                                            |       | 4,061      |       | 1,113             |       |   | 27.4 | % |   |
|                                                                                                                                         |       | 135,185                                                          |       | 124,244    |       | 10,941            |       |   | 8.8 | % |   |
| Development and  construction                                                                                                                |       | 18,223                                                           |       | 16,343     |       | 1,880             |       |   | 11.5 | % |   |
|                                                                                                                                         |       | 390,012                                                          |       | 335,814    |       | 54,198            |       |   | 16.1 | % |   |
| Gain on disposition of  real estate                                                                                                          |       | 2,531                                                            |       | 4,331      |       | (1,800            | )          |   | (41.6 | )% |   |
| **TOTAL REVENUES**                                                                                                                           |       | 392,543                                                          |       | 340,145    |       | 52,398            |       |   | 15.4 | % |   |
| **COST  AND EXPENSES:**                                                                                                                      |       |                                                             |       |       |       |              |       |   |   |   |   |
| Salaries, wages  and benefits                                                                                                                |       | 258,559                                                          |       | 228,945    |       | 29,614            |       |   | 12.9 | % |   |
| Commissions                                                                                                                                  |       | 56,956                                                           |       | 47,995     |       | 8,961             |       |   | 18.7 | % |   |
| General and  administrative                                                                                                                  |       | 67,392                                                           |       | 58,651     |       | 8,741             |       |   | 14.9 | % |   |
| Depreciation and  amortization                                                                                                               |       | 5,244                                                            |       | 5,974      |       | (730              | )          |   | (12.2 | )% |   |
| Interest                                                                                                                                     |       | 3,222                                                            |       | 1,862      |       | 1,360             |       |   | 73.0 | % |   |
| **TOTAL  EXPENSES**                                                                                                                          |       | 391,373                                                          |       | 343,427    |       | 47,946            |       |   | 14.0 | % |   |
| Operating income  (loss)                                                                                                                     |       | 1,170                                                            |       | (3,282     | )          | 4,452             |       |   | 135.6 | % |   |
| Interest and  other income                                                                                                                   |       | 1,407                                                            |       | 1,361      |       | 46                |       |   | 3.4 | % |   |
| Income (loss)  from continuing operations before income taxes, minority interest and income  from investments in unconsolidated subsidiaries |       | 2,577                                                            |       | (1,921     | )          | 4,498             |       |   | 234.1 | % |   |
| Income tax  (expense) benefit                                                                                                                |       | (930                                                             | )          | 826        |       | (1,756            | )          |   | (212.6 | )% |   |
| Minority  interest, net of income taxes                                                                                                      |       | 3,251                                                            |       | (625       | )          | 3,876             |       |   | 620.2 | % |   |
| Income (loss)  from investments in unconsolidated subsidiaries, net of income taxes                                                          |       | 4,567                                                            |       | 6,683      |       | (2,116            | )          |   | (31.7 | )% |   |
| Income from  continuing operations                                                                                                           |       | 9,465                                                            |       | 4,963      |       | 4,502             |       |   | 90.7 | % |   |
| Income from  discontinued operations, net of income taxes                                                                                    |       | 852                                                              |       | 350        |       | 502               |       |   | 143.4 | % |   |
| **Net income**                                                                                                                               |       | $                                                                | 10,317     |       | $          | 5,313             |       | $ | 5,004 |   |   | 94.2 | % |   |

 

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| ** **                                                                                                                            | ** ** | **For the Three Months   Ended June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                                           | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** ** | **($ in thousands)**                                     | ** ** |
| **REVENUES:**                                                                                                                         |       |                                                               |       |       |       |              |       |   |   |   |   |
| ***User Services:***                                                                                                                  |       |                                                               |       |       |       |              |       |   |   |   |   |
| Facilities management                                                                                                                 |       | $                                                                  | 59,391     |       | $          | 50,556            |       | $ | 8,835 |   |   | 17.5 | % |   |
| Corporate advisory  services                                                                                                          |       | 40,116                                                             |       | 33,744     |       | 6,372             |       |   | 18.9 | % |   |
| Project management  services                                                                                                          |       | 31,963                                                             |       | 19,675     |       | 12,288            |       |   | 62.5 | % |   |
|                                                                                                                                  |       | 131,470                                                            |       | 103,975    |       | 27,495            |       |   | 26.4 | % |   |
| ***Investor  Services:***                                                                                                             |       |                                                               |       |       |       |              |       |   |   |   |   |
| Property management                                                                                                                   |       | 34,468                                                             |       | 34,762     |       | (294              | )          |   | (0.8 | )% |   |
| Brokerage                                                                                                                             |       | 33,676                                                             |       | 28,710     |       | 4,966             |       |   | 17.3 | % |   |
| Construction management                                                                                                               |       | 2,959                                                              |       | 2,343      |       | 616               |       |   | 26.3 | % |   |
|                                                                                                                                  |       | 71,103                                                             |       | 65,815     |       | 5,288             |       |   | 8.0 | % |   |
| Development and construction                                                                                                          |       | 9,387                                                              |       | 8,336      |       | 1,051             |       |   | 12.6 | % |   |
|                                                                                                                                  |       | 211,960                                                            |       | 178,126    |       | 33,834            |       |   | 19.0 | % |   |
| Gain on disposition of real estate                                                                                                    |       | 963                                                                |       | 3,885      |       | (2,922            | )          |   | (75.2 | )% |   |
| **TOTAL REVENUES**                                                                                                                    |       | 212,923                                                            |       | 182,011    |       | 30,912            |       |   | 17.0 | % |   |
| **COST  AND EXPENSES:**                                                                                                               |       |                                                               |       |       |       |              |       |   |   |   |   |
| Salaries, wages  and benefits                                                                                                         |       | 132,818                                                            |       | 112,793    |       | 20,025            |       |   | 17.8 | % |   |
| Commissions                                                                                                                           |       | 34,298                                                             |       | 27,982     |       | 6,316             |       |   | 22.6 | % |   |
| General and  administrative                                                                                                           |       | 36,794                                                             |       | 32,474     |       | 4,320             |       |   | 13.3 | % |   |
| Depreciation and  amortization                                                                                                        |       | 2,634                                                              |       | 2,816      |       | (182              | )          |   | (6.5 | )% |   |
| Interest                                                                                                                              |       | 2,117                                                              |       | 1,058      |       | 1,059             |       |   | 100.1 | % |   |
| **TOTAL  EXPENSES**                                                                                                                   |       | 208,661                                                            |       | 177,123    |       | 31,538            |       |   | 17.8 | % |   |
| Operating Income                                                                                                                      |       | 4,262                                                              |       | 4,888      |       | (626              | )          |   | (12.8 | )% |   |
| Interest and  other income                                                                                                            |       | 483                                                                |       | 477        |       | 6                 |       |   | 1.3 | % |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 4,745                                                              |       | 5,365      |       | (620              | )          |   | (11.6 | )% |   |
| Income tax  expense                                                                                                                   |       | (1,757                                                             | )          | (2,232     | )          | 475               |       |   | 21.3 | % |   |
| Minority interest,  net of income taxes                                                                                               |       | 1,263                                                              |       | (590       | )          | 1,853             |       |   | 314.1 | % |   |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                          |       | 2,984                                                              |       | 713        |       | 2,271             |       |   | 318.5 | % |   |
| Income from  continuing operations                                                                                                    |       | 7,235                                                              |       | 3,256      |       | 3,979             |       |   | 122.2 | % |   |
| Income (loss) from  discontinued operations, net of income taxes                                                                      |       | 1,029                                                              |       | (42        | )          | 1,071             |       |   | 2550.0 | % |   |
| **Net income**                                                                                                                        |       | $                                                                  | 8,264      |       | $          | 3,214             |       | $ | 5,050 |   |   | 157.1 | % |   |

 

***Revenues.  ***Facilitiesmanagement revenue increased in the second quarter and first half of 2005 fromcomparable periods in the prior year, primarily as a result of an expansion ofa client relationship in the second quarter of 2004 and the addition of severalnew customer relationships. Reimbursement of salaries, wages, benefits andout-of-pocket general and administrative costs, a component of facilitiesmanagement revenue, increased $8.4 million and $13.3 million in the three andsix months ended June 30, 2005, respectively, compared to the same periodsin 2004. The composition of facilities management revenue, including managementfees and reimbursements, can vary significantly from period to period based onthe terms of the underlying management agreements in effect each period.

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Corporate advisory services revenue increased for thesecond quarter and first half of 2005 primarily driven by increased commissionrevenues as compared to the same periods in the prior year. The increase is inpart the result of growth in the number of tenant representation brokers aspart of the Company’s focus on expanding its brokerage network. In addition,transaction volumes have increased, reflecting clients’ increased confidence inthe economic recovery.

The revenue growth in project management was theresult of the addition of new clients and the expansion of services provided toexisting clients (due to increases in clients’ portfolios, the scope of theCompany’s services required under certain outsourcing contracts and transactionvolumes). The slight decreases in property management revenue in the three andsix months ended June 30, 2005 were partially the result of decreasedsquare footage under management in 2005 as compared to 2004. The reduction insquare footage primarily resulted from sales of buildings in the Company’smanagement portfolio to REITs or other investors that self-manage theirproperties or use other service providers. In addition, some square footagedecreases resulted from clients taking services in-house or to other serviceproviders. These decreases were partially offset by additions to square footagerelated to new business.

The increases in brokerage revenue for the secondquarter and first half of 2005 from comparable periods in 2004 were driven byincreases in investment sales commissions, and to a lesser extent, projectleasing commissions. Real estate remains a favored asset class among investorsas a result of improving leasing fundamentals and relatively low interestrates. As a result, investment sale activity and the resulting commissionrevenue have increased.

Construction management revenue increased in the threeand six months ended June 30, 2005, as compared to the same periods in2004. Construction management revenue is generated from services includingspace planning and tenant finish coordination for investor clients inconjunction with property management and leasing assignments, and are directlyrelated to clients’ real estate demands. The increase in constructionmanagement revenue resulted from a higher volume of construction projects astenant leasing activity increased, reflecting increased confidence in theeconomic recovery.

The increase in development and construction revenuein the second quarter and first half of 2005 primarily resulted from anincrease in rental revenue due to acquisitions of operating real estateproperties subsequent to the second quarter of 2004. In addition, developmentfees increased in the second quarter and first half of 2005 as compared to sameperiods in 2004. Typically, the impact of increases and decreases in theCompany’s development starts and investments is not reflected in financialresults until later periods. The Company experienced an increase in developmentand construction revenue in 2005 as a consequence of development starts andinvestments trending up in 2004, with 2004 starts more than doubling those for 2003.These increases in development and construction revenue were partially offsetby a decrease in development incentive fees, largely due to the timing ofsignificant transactions in the second quarter and first half of 2004 ascompared to the same periods in 2005.

Historically, the Company primarily focused itscommercial real estate development business on office, industrial and retailprojects for investor clients. Increasingly, however, the Company has focusedon development for user clients, including corporations and those in thehealthcare sector. By expanding its focus on development for user clients,particularly those in the healthcare sector, the Company seeks to mitigate thecyclicality traditionally inherent in the commercial development business. Inaddition, through High Street Residential, a wholly-owned subsidiary of theCompany, the Company has expanded its focus to include development of mixed-usefacilities with a residential component, including condominium development andtransit-oriented development. The Company, mainly through certain of itsdiscretionary development and investment funds, is also directing its effortstoward acquisitions, including those acquisitions where opportunities exist toadd value through re-development or re-leasing.

The Company’s gain on disposition of real estatedecreased in the second quarter and first half of 2005 from comparable periodsin 2004. In the second quarter of 2005, the Company sold one real estate 

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project with a net salesprice of $1.5 million, resulting in a gain on disposition of $0.8 million, andrecognized deferred gain of $0.2 million relating to previous perioddispositions. In the second quarter of 2004, the Company sold three real estateprojects for an aggregate net sales price of $15.1 million, resulting in anaggregate gain on disposition of $3.8 million, and recognized deferred gain of$0.1 million relating to a previous period disposition. During the first halfof 2005, the Company recognized total gain on disposition of real estate of$2.5 million. This gain was comprised of sales of two real estate projects withan aggregate net sales price of $2.3 million and a settlement related to theestimated cost to complete construction related to a previous perioddisposition. In addition, this gain included deferred gain recognition of $0.2million relating to dispositions in prior periods. During the first half of2004, the Company sold four real estate projects for an aggregate net salesprice of $15.6 million, resulting in an aggregate gain on disposition of $4.0million, and recognized deferred gain of $0.3 million relating to a previousperiod disposition.

***Costsand Expenses.  ***Salaries, wages and benefitsexpense includes all compensation paid to Company employees other thanbrokerage commissions. As such, it includes salaries, benefits and annualincentive bonuses for employees whose compensation is reimbursed by clients (“reimbursedemployees”); salaries, benefits and annual incentive bonuses for employeeswhose compensation is not so reimbursed (“unreimbursed employees”); long-termincentive compensation associated with restricted stock grants to certainemployees; and transaction-related incentive compensation other thanbrokerage commissions, primarily paid in connection with development andinvestment transactions. The increases in the second quarter and first half of2005 from comparable periods in the prior year were primarily driven by growthin salaries, wages and benefits for reimbursed employees as the Companyincreased its facilities management and project management headcount to serviceclient expansions and the addition of new clients.

The increase in commission expense during the secondquarter and first half of 2005 was directly attributable to the increases inthe Company’s corporate advisory services and brokerage revenue discussedabove.

General and administrative expenses increased in thethree and six months ended June 30, 2005, as compared to the same periodsin 2004, partially due to increased client-reimbursed out-of-pocket general andadministrative expenses, largely driven by the growth in the Company’sfacilities management and project management service lines. In addition, theacquisition of several operating real estate properties subsequent to thesecond quarter of 2004 led to increased real estate operating expenses in 2005.These properties, which the Company plans to redevelop, lease and sell, includeacquisitions made through the Company’s fifth discretionary development andinvestment fund (“Fund V”).

Depreciation and amortization expenses decreased forthe second quarter and first half of 2005 from the second quarter and firsthalf of 2004. The Company has replaced many of its computer assets at a lowercost than the assets that were retired, which has reduced the Company’sdepreciation expense. In addition, several intangible asset balances related toacquired management contracts became fully amortized in 2004, which created adecrease in amortization expense in the second quarter and first half of 2005as compared to the same periods in 2004.

The increase in interest expense is primarily theresult of higher borrowings outstanding under notes payable on real estaterelated to operating real estate properties in the second quarter and firsthalf of 2005 as compared to the same periods in 2004. In addition, during thethree and six months ended June 30, 2005, the Company had higher averageoutstanding balances under its revolving line of credit as compared to the sameperiods in 2004, due to amounts drawn to fund the Company’s acquisition of anadditional ownership interest in Savills.

***MinorityInterest, Net of Income Taxes.  ***Minorityinterest fluctuated from expense in the second quarter and first half of 2004to income in the comparable periods in 2005. This change from expense to incomeprimarily relates to losses incurred by Fund V during the 2005 periods, whichare shared with 

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outside partners. Fund Vhas acquired several operating real estate properties since the second quarterof 2004 that have generated operating losses in the current period. The Companyplans to redevelop, lease and sell these properties. In addition, a portion ofthe 2005 income amounts relates to the minority interest owners’ share of feesearned by the Company related to certain consolidated real estate projects.

***Incomefrom Investments in Unconsolidated Subsidiaries, 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 transactions carried out by the underlyingunconsolidated subsidiaries. The overall increase in the second quarter of 2005as compared to the second quarter of 2004, primarily relates to the Company’spurchase of additional shares of Savills in the second quarter of 2005, whichincreased the Company’s ownership interest from approximately 10% to 19.6% ofthe outstanding stock of Savills. The decrease in income from investments inunconsolidated subsidiaries in the first half of 2005 as compared to the firsthalf of 2004 was primarily the result of significant income from anunconsolidated subsidiary that sold its building portfolio in the first quarterof 2004, in excess of such sales that occurred in 2005.

***Incomefrom Discontinued Operations, Net of Income Taxes.  ***Incomefrom discontinued operations includes the operations of real estate propertiesand gain on disposition of real estate properties held for sale or soldsubsequent to the adoption of FAS 144 effective January 1, 2002, thatwere considered components of an entity under FAS 144 and in which theCompany has not retained or does not expect to retain significant continuinginvolvement. Dispositions of real estate assets have been and will continue tobe a significant part of the Company’s activities and, as a result of applyingthe provisions of FAS 144, the Company expects a greater amount of theseactivities to be classified as discontinued operations in future periods asfewer asset dispositions will qualify for grandfathered treatment underFAS 144. During the second quarter of 2005, the Company sold four realestate projects that were considered discontinued operations for an aggregatenet sales price of $26.7 million, resulting in an aggregate gain on disposition(before income taxes) of $1.9 million. There were no sales that were consideredto be discontinued operations in the second quarter of 2004. In the first halfof 2005, the Company sold five real estate projects that were considereddiscontinued operations for an aggregate net sales price of $28.5 million,resulting in an aggregate gain on disposition (before income taxes) of $2.0 million.During the first half of 2004, the Company sold one real estate project thatwas considered a discontinued operation for a net sales price of $11.3 million.This sale resulted in an aggregate gain on disposition of real estate (beforeincome taxes) of $0.8 million, including interest forgiveness of $0.3 million.

***Net Income.  ******Net income increased due to thefluctuations in revenues and expenses described above, in addition to adecrease in the Company’s effective tax rate. The decrease in the effective taxrate was driven by the increase in the Company’s income from its investment inSavills, largely due to the Company’s increased ownership in Savills. Inaddition, the higher level of ownership of Savills will enable the Company totake advantage of certain foreign tax credits. The Company has also experiencedfavorable results from state tax planning.***

**QuarterlyResults of Operations and Seasonality**

The results of operationsfor any quarter are not necessarily indicative of results for any futureperiod. The Company’s revenues and net income during the fourth fiscal quarterhistorically have been somewhat greater than in each of the first three fiscalquarters, primarily because its clients have demonstrated a tendency to closetransactions toward the end of the fiscal year. The timing and introduction ofnew contracts, the disposition of investments in real estate assets, therecognition of incentive fees towards the 

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latterpart of the fiscal year as contractual targets are met and other factors mayalso cause quarterly fluctuations in the Company’s results of operations.

**Liquidity and Capital Resources**

The Company’s liquidity and capital resourcesrequirements include the funding of working capital needs, primarily costs incurredin providing services to its clients before collection of related billings; thefunding of capital investments, including the acquisition of or investments inother real estate service companies; the repurchase of its shares if authorizedby the Board of Directors; expenditures for real estate and payments on notespayable associated with its development and investment activities; andexpenditures related to upgrading the Company’s management information systems.The Company finances its operations with internally generated funds andborrowings under the Credit Facility (described below). The portion of theCompany’s development 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 $67.4million for the first six months of 2005, compared to $16.7 million for thesame period in 2004. Cash used in operating activities, excluding the change inreal estate and related borrowings, increased to $52.4 million for the firstsix months of 2005 as compared to $15.8 million for the same period of 2004.This increase in cash used is primarily due to greater incentive compensationand tax payments made during the first six months of 2005, on account of 2004activity as compared to such payments made during the same period in 2004. Inaddition, cash used in real estate activities, net of related borrowings, was$15.0 million during the first half of 2005, compared to $0.9 million forthe same period in 2004 as a result of increased real estate investmentactivity in 2005.

Net cash used in investing activities totaled $130.2million for the first six months of 2005, compared to $7.0 million for thefirst six months of 2004. This change is primarily due to an increase ininvestments in unconsolidated subsidiaries, net of distributions, to $86.3million in the first half of 2005 as compared to distributions from unconsolidatedsubsidiaries, net of contributions, of $10.4 million in the same period of2004. The increase in investments is attributable to the Company’s purchase ofadditional shares of Savills in the first six months of 2005. The Company alsopurchased $17.8 million in marketable securities in the Company’s wholly-ownedcaptive insurance company in the first six months of 2005, as compared to nosuch purchases in 2004. In addition, expenditures made in the first six monthsof 2005 related to real estate classified as “held for investment” were $21.0million during the first six months of 2005, as compared to $28.9 millionduring the first six months of 2004. These expenditures were offset by $0.04million of proceeds from the dispositions of real estate projects classified as“held for investment” at the time of disposition in accordance with FAS 144, ascompared to $14.9 million of such proceeds in 2004.

Net cash provided from financing activities totaled$80.1 million during the first six months of 2005 as compared to net cash usedin financing activities of $3.4 million during the same period of 2004. Theincrease in cash provided in 2005 is primarily due to borrowings, net ofprincipal debt payments, under the Company’s line of credit of $75.4 million,and compared to principal debt payments, net of borrowings, of $11.4 million inthe comparable 2004 period. The Company used the 2005 borrowings to fund itspurchase of additional shares of Savills in 2005. In addition, the Companyreceived proceeds from borrowings, net of payments, of $20.6 million on notespayable related to real estate held for investment as compared to net paymentsof $3.5 million in the same period of 2004. These increases in cash were offsetby the Company’s use of cash in 2005 to repurchase common stock, totaling $20.1million. Also, the Company made distributions, net of contributions, tominority interest holders of $2.5 million in the first half of 2005, comparedto $10.1 million of contributions received, net of distributions, in the firsthalf of 2004.

In June 2005, the Company obtained a$175.0 million revolving line of credit (the “Credit Facility”) arrangedby Bank of America, N.A., as the administrative agent, which replaced theCompany’s previous 

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$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 containsvarious covenants such as the maintenance of minimum equity, liquidity,revenues, interest coverage ratios and fixed charge ratios. The Credit Facilityalso includes restrictions on recourse indebtedness and total indebtedness,restrictions on liens and certain restrictions on investments and acquisitionsthat can be made by the Company. In addition, the Company may not paydividends, repurchase common shares, or make other distributions on account ofits common stock exceeding 50% of the previous year’s net income beforedepreciation and amortization, plus for the year ending December 31, 2005only, an amount equal to $20.0 million. The Credit Facility is guaranteed bycertain significant subsidiaries of the Company and is secured by a pledge of astock of such significant subsidiaries and a pledge of certain intercompanyindebtedness.

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 agreement, the Credit Facility requires theCompany to enter into one or more interest rate agreements for the Company’sfloating rate indebtedness in excess of $30.0 million (other thanconstruction loans under which interest is capitalized in accordance withaccounting principles generally accepted in the United States) ensuring the netinterest on such excess is fixed, capped or hedged.

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 3-dayLIBOR-based rate (plus an applicable margin as defined per the agreement).Borrowings under the Swing Line are unsecured and reduce borrowing capacityunder the Credit Facility.

At June 30, 2005, the Company had outstandingborrowings of $71.0 million under the Credit Facility and $4.5 million underthe Swing Line. The covenants contained in the Credit Facility and the amountof the Company’s other borrowings and contingent liabilities may have theeffect of limiting the borrowing capacity available to the Company under theCredit Facility to an amount less than the $175.0 million commitment. TheCompany’s unused borrowing capacity (taking into account letters of creditoutstanding) under the Credit Facility was $88.6 million at June 30,2005. Since many of the financial covenants in the Credit Facility aredependent on the Company’s “EBITDA,” as defined in the Credit Facilityagreement and calculated on a trailing four-quarter basis, a decline in theCompany’s overall operations could adversely impact the Company’s ability tocomply with these financial covenants and, in turn, the Company’s borrowingcapacity.

At June 30, 2005, the Company was in compliancewith all covenants of the Credit Facility. The Company expects to continue toborrow under the Credit Facility to finance future strategic acquisitions andinvestments, fund its co-investment activities and provide the Company with anadditional source of working capital.

In December 2004, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas a notional amount of $5.1 million at June 30, 2005, and the Companywill receive payments if the LIBOR-based interest rate exceeds 3.5%. Theinterest rate cap agreement has not been designated as an effective hedge, andtherefore the interest rate cap agreement will be marked to market each periodwith the change in fair market value recognized in 

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current period earnings.The interest rate cap agreement expires on January 1, 2006. Through June 30,2005, amounts recorded by the Company related to this interest rate capagreement were not material.

The Company does notanticipate paying any dividends in the foreseeable future. The Company believesthat funds generated from operations, together with existing cash and availablecredit under the Credit Facility and loans secured by underlying real estatewill be sufficient to finance its current operations, planned capitalexpenditure requirements, payment obligations for development purchases,investments in development and investment funds and programs, sharerepurchases, acquisitions of and investments in service companies, signingbonuses or loans for new employees and internal growth for the foreseeablefuture. The Company’s need, if any, to raise additional funds to meet itsworking capital and capital requirements will depend upon numerous factors,including the success and pace of implementation of its growth strategy. TheCompany regularly considers capital raising alternatives to be able to takeadvantage of available avenues to supplement its working capital, includingstrategic corporate partnerships or other alliances, bank borrowings and thesale of equity and/or debt securities.

**Off-balance Sheet Arrangements**

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 in the six months ended June 30,2005 or 2004. The Company has guaranteed a maximum of $5.1 million of suchnotes payable, all of which is outstanding at June 30, 2005. Paymentsrequired under these arrangements, if any, would generally result in anincrease in the Company’s investment in the underlying unconsolidatedsubsidiaries.

**Forward-Looking Statements**

Certain statementscontained or incorporated by reference in this Quarterly Report on Form 10-Q,including without limitation statements containing the words “believe,” “anticipate,”“forecast,” “will,” “may,” “expect,” “envision,” “project,” “budget,” “target(ing),”“estimate,” “could,” “should,” “would,” “conceivable,” “intend,” “possible,” “foresee,”“look(ing) for,” “look to” and words of similar import, are forward-lookingstatements within the meaning of the federal securities laws. Such forward-lookingstatements involve known and unknown risks, uncertainties and other matterswhich may cause the actual results, performance or achievements of the Companyor industry results to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such risks, uncertainties and other matters include, but are notlimited to (i) the timing of individual transactions, (ii) theability of the Company to identify, implement and maintain the benefit of costreduction measures and achieve economies of scale, (iii) the ability ofthe Company to compete effectively in the international arena, (iv) theability of the Company to retain its major clients and renew its contracts, (v) theability of the Company to attract new user and investor clients, (vi) 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,  (vii) theCompany’s ability to continue to pursue its growth strategy, (viii) theCompany’s ability to pursue strategic acquisitions on favorable terms andmanage challenges and issues commonly encountered as a result of thoseacquisitions,  (ix) the Company’s ability to compete in highlycompetitive national and local business lines, and (x) the Company’sability to attract and retain qualified personnel in all areas of its business(particularly senior management). In addition, the Company’s ability to achievecertain anticipated results will be subject to other factors affecting theCompany’s business that are beyond the Company’s control, including but notlimited to general economic conditions (including the cost and availability ofcapital for investment in real estate and clients’ willingness to make realestate commitments), the effect of government regulation on the conduct of theCompany’s business and the threat of terrorism and acts of war. Given theseuncertainties, readers 

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arecautioned not to place undue reliance on such forward-looking statements.The Company disclaims any obligation to update any such statements or publiclyannounce any updates or revisions to any of the forward-lookingstatements contained herein to reflect any change in the Company’s expectationwith regard thereto or any change in events, conditions, circumstances orassumptions underlying such statements. Reference is hereby made to thedisclosures contained under the heading “Risk Factors” in “Item 1.Business” of the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 16, 2005.

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

The Company’s primary market risk exposure is tochanges in interest rates. The Company is exposed to market risk related to itsCredit Facility and loans secured by real estate properties as discussed in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” and in Notes 7 and 8 to theCompany’s Condensed Consolidated Financial Statements. The Credit Facility andthe majority of the loans secured by real estate bear interest at variablerates and are subject to fluctuations in the market. During 2005, the Companyborrowed $75.5 million, net of payments, under the Credit Facility, primarilyto fund the Company’s acquisition of an additional ownership stake in Savills,which could further expose the Company to fluctuations in interest rates. Fromtime to time, the Company purchases interest rate agreements to hedge, cap orlock a portion, but not all, of its exposure to fluctuations in interest rates,and, as such, the effects of interest rate changes 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 Europe, Asia and Australia.Due to the increase in the Company’s ownership interest in Savills fromapproximately 10.0% to 19.6% in April 2005, the impact of fluctuations incurrency exchange rates may become more significant to the Company’s results ofoperations.

**ITEM4.****             ***Controls and Procedures*

As of the end of the period covered by this report,the Company carried out an evaluation under the supervision and with theparticipation of management, including its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures (as defined in 13a-15(e) of the Securities ExchangeAct of 1934 (the “Exchange Act”)). Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdesign and operation of the Company’s disclosure controls and procedures areeffective in ensuring that material information relating to the Company(including its consolidated subsidiaries) required to be included in theCompany’s periodic filings or submissions with the Securities and ExchangeCommission is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission. There were no changes in the Company’s internal control overfinancial reporting (as defined in Rule 13a-15(f) under theExchange Act) that occurred during the Company’s last fiscal quarter that havematerially affected or are reasonably likely to materially affect the Company’sinternal control over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM 1.**                *Legal Proceedings*

The Company and one of itssubsidiaries are defendants in a lawsuit styled *Bank OneOklahoma, N.A., et al.*(the “Bank”)*v. TrammellCrow Services, Inc. and Trammell Crow Company*, No. 03 C3624, pending in the US District Court for the Northern District of Illinois,originally filed on April 2, 2003. The claims asserted by the plaintiffsrelate to a sale/leaseback transaction involving a property in Oklahoma Citypreviously owned by the Bank. The suit alleges breach of contract, breach offiduciary duty, negligent misrepresentation, fraudulent misrepresentation andfraudulent concealment against the Company and/or its subsidiary and allegesthat the plaintiffs have been damaged in an unspecified amount in excess of$15.0 million. The plaintiffs seek to recover actual damages, punitivedamages and reasonable attorneys’ fees. The suit is in the process ofdiscovery, and no trial date has been set. As of the date of this Form 10-Q,the outcome of the suit cannot be predicted with any certainty, and the Companycannot at this time estimate an amount or range of potential loss in the eventof an unfavorable outcome. While the Company cannot predict with any certaintythe outcome of this matter, the Company currently believes the plaintiffs’claims are without merit and is vigorously defending the lawsuit.

From time to time, theCompany is involved in other litigation matters that arise in the ordinarycourse of its business, some of which involve claims for damages which aresubstantial in amount. The ultimate liability for these matters cannot bedetermined. However, based on the information currently available, the Companydoes not believe that the resolution of any such matters to which it iscurrently a party will have a material adverse effect on the Company’s resultsof operations, financial condition or liquidity.

**ITEM 2.**                *Unregistered Sales of Equity Securities and Use of Proceeds*

Purchasesunder the Company’s stock repurchase programs in the second quarter of 2005were as follows:
| **Period**                                          | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number   (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1,  2005—  April 30, 2005 |       |       | 430,842    |                                                 |       |                                             | $          | 20.67                                                                                                                            |       |                                                                                                                                                                                    |       | 430,842 | (1) |   |   | $ | — |   |   |
| May 1, 2005—  May 31, 2005      |       |       | —     |                                                 |       |                                             | —     |                                                                                                                             |       |                                                                                                                                                                                    | —     |   |   |   | — |   |   |
| June 1,  2005—  June 30, 2005   |       |       | —     |                                                 |       |                                             | —     |                                                                                                                             |       |                                                                                                                                                                                    | —     |   |   |   | — |   |   |
| Total                                               |       |       | 430,842    |                                                 |       |                                             | $          | 20.67                                                                                                                            |       |                                                                                                                                                                                    |       | 430,842 |   |   |   | $ | — |   |   |

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(1)                 Theshares were purchased pursuant to a $20 million share repurchase program thatwas publicly announced on March 1, 2005. The share repurchase program wascompleted on April 13, 2005.

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

At the AnnualMeeting of Stockholders held on May 18, 2005, the following proposals weresubmitted to stockholders with the following results:

1.                Electionof the individuals named below to serve as Class II Directors of theCompany until its Annual Meeting of Stockholders in 2008 and until theirrespective successors are duly elected and qualified or until their earlierdeath, resignation or removal from office.
| ** **        | ** ** | **Number of Shares** | ** ** |
|-------------------|------------|--------------------------------|------------|
| ** **        | ** ** | **For**                        | ** ** | **Withheld** | ** ** |
| James R. Erwin    |       | 32,446,989                     |       | 180,401 |   |
| Jeffrey M. Heller |       | 32,410,958                     |       | 216,432 |   |
| Michael A. Moses  |       | 31,903,375                     |       | 724,015 |   |

 

The following individuals are Class III Directorsof the Company, whose terms expire at the Company’s Annual Meeting ofStockholders in 2006:  William F. Concannon,Rowland T. Moriarty, and J. McDonald Williams. The following individualsare Class I Directors of the Company, whose terms expire at the Company’sAnnual Meeting of Stockholders in 2007: Curtis F. Feeny and Robert E. Sulentic.

2.                Approval of an amendmentto the Company’s Employee Stock Purchase Plan that increases the number ofshares of Common Stock that may be issued under the Employee Stock PurchasePlan by 1,000,000.
| ** **      | ** ** | **Number of Shares** | ** ** |
|-----------------|------------|--------------------------------|------------|
| For             |       |                           | 27,516,014 |   |   |
| Against         |       |                           | 1,295,970  |   |   |
| Abstain         |       |                           | 461,589    |   |   |
| Broker non-vote |       |                           | 3,353,817  |   |   |

 

3.                Ratification ofthe selection of Ernst & Young LLP as independent auditors of theCompany for the fiscal year ended December 31, 2005.
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
| For        |       |                           | 32,422,098 |   |   |
| Against    |       |                           | 199,472    |   |   |
| Abstain    |       |                           | 5,820      |   |   |

 

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**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)  | Second Amendment of Credit Agreement dated  April 22, 2005, between the Company and Bank of America, N.A.                                                                            |
| 10.2(7)  | Credit Agreement, dated June 28, 2005, among  the Company, Bank of America, N.A. as administrative agent, swing line lender  and issuing bank, and the other lender parties thereto. |
| 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)                 Previously filedas 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 on Form S-1/A(File Number 333-34859) filed with the Securities and ExchangeCommission on October 23, 1997, and incorporated herein by reference.

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on April 26, 2005, and incorporatedherein by reference.

(7)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on July 1, 2005, and 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: August 9,  2005 | * *              | * * |

 

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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)         |       | Second Amendment of Credit Agreement dated  April 22, 2005, between the Company and Bank of America, N.A.                                                                            |
| 10.2(7)         |       | Credit Agreement, dated June 28, 2005, among  the Company, Bank of America, N.A. as administrative agent, swing line lender  and issuing bank, and the other lender parties thereto. |
| 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 on Form S-1/A(File Number 333-34859) filed with the Securities and ExchangeCommission on October 23, 1997, and incorporated herein by reference.

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on April 26, 2005, and incorporatedherein by reference.

(7)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on July 1, 2005, and incorporatedherein by reference.

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