**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, 2006**

**Or**

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

**Forthe transition period from ***         * to *         *

**Commissionfile number 1-13531**

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**Trammell Crow Company**

(Exact name of registrantas specified in its charter)

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

 

**(214) 863-3000**

(Registrant’s telephonenumber, including area code)

**Not applicable**

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

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (CheckOne):  Large accelerated filer x  Accelerated filer o  Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

There were 36,066,775shares of the registrant’s common stock outstanding as of July 31, 2006.

 

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**TRAMMELL CROWCOMPANY AND SUBSIDIARIESINDEX**

|               | ** ** |                                                                                                                                                                    | ** ** | **Page  Number** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I.  |       | Financial  Information                                                                                                                                             |       | 3                |
| Item 1.       |       | Financial  Statements                                                                                                                                              |       | 3                |
|          |       | Condensed  Consolidated Balance Sheets as of June 30, 2006 (unaudited) and  December 31, 2005                                                            |       | 3                |
|          |       | Condensed  Consolidated Statements of Income for the three and six months ended  June 30, 2006 and 2005 (unaudited)                                           |       | 4                |
|          |       | Condensed  Consolidated Statements of Stockholders’ Equity for the six months ended  June 30, 2006 (unaudited) and the year ended December 31, 2005 |       | 5                |
|          |       | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2006 and 2005 (unaudited)                                                 |       | 6                |
|          |       | Condensed  Consolidated Statements of Comprehensive Income for the three and six months  ended June 30, 2006 and 2005 (unaudited)                        |       | 7                |
|          |       | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                                                  |       | 8                |
| Item 2.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                        |       | 30               |
| Item 3.       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                        |       | 42               |
| Item 4.       |       | Controls  and Procedures                                                                                                                                           |       | 42               |
| PART II. |       | Other  Information                                                                                                                                                 |       | 44               |
| Item 1.       |       | Legal  Proceedings                                                                                                                                                 |       | 44               |
| Item 2.       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                       |       | 44               |
| Item 4.       |       | Submission  of Matters to a Vote of Security Holders                                                                                                               |       | 44               |
| Item 6.       |       | Exhibits                                                                                                                                                           |       | 46               |

 

2

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.**                *Financial Statements*

**TRAMMELLCROW COMPANY AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share and per share data)**

| ** **                                                                                                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                 | ** ** | **(Unaudited)**   | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                                 | ** ** |              | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets                                                                                                                                                                                             |       |              |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                 |       |              | $          | 37,586                |       |   |   | $ | 76,919 |   |   |
| Restricted cash                                                                                                                                                                                            |       |              | 3,406      |                  |       |   | 1,416 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,720 in 2006 and  $3,235  in 2005                                                                                                        |       |              | 115,875    |                  |       |   | 127,784 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |              | 2,236      |                  |       |   | 2,146 |   |   |
| Notes and other  receivables                                                                                                                                                                               |       |              | 25,359     |                  |       |   | 16,303 |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |              | 3,860      |                  |       |   | 3,935 |   |   |
| Real estate under  development                                                                                                                                                                             |       |              | 196,894    |                  |       |   | 120,697 |   |   |
| Real estate and  other assets held for sale                                                                                                                                                                |       |              | 19,589     |                  |       |   | 39,543 |   |   |
| Marketable  securities                                                                                                                                                                                     |       |              | 1,961      |                  |       |   | 542 |   |   |
| Other current  assets                                                                                                                                                                                      |       |              | 36,200     |                  |       |   | 27,393 |   |   |
| Total current  assets                                                                                                                                                                                      |       |              | 442,966    |                  |       |   | 416,678 |   |   |
| Furniture and  equipment, net                                                                                                                                                                              |       |              | 19,885     |                  |       |   | 19,787 |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |              | 13,631     |                  |       |   | 16,270 |   |   |
| Real estate under  development                                                                                                                                                                             |       |              | 117,486    |                  |       |   | 108,849 |   |   |
| Real estate held  for investment                                                                                                                                                                           |       |              | 112,010    |                  |       |   | 88,787 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                                                |       |              | 190,465    |                  |       |   | 175,411 |   |   |
| Goodwill, net                                                                                                                                                                                              |       |              | 75,245     |                  |       |   | 75,239 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |              | 7,021      |                  |       |   | 7,458 |   |   |
| Marketable securities                                                                                                                                                                                      |       |              | 17,388     |                  |       |   | 18,089 |   |   |
| Other assets                                                                                                                                                                                               |       |              | 27,224     |                  |       |   | 21,599 |   |   |
|                                                                                                                                                                                                       |       |              | $          | 1,023,321             |       |   |   | $ | 948,167 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                             | ** ** |              | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities                                                                                                                                                                                        |       |              |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                           |       |              | $          | 33,387                |       |   |   | $ | 31,698 |   |   |
| Accrued expenses                                                                                                                                                                                           |       |              | 121,254    |                  |       |   | 155,597 |   |   |
| Income taxes  payable                                                                                                                                                                                      |       |              | 2,798      |                  |       |   | 16,313 |   |   |
| Current portion of  long-term debt                                                                                                                                                                         |       |              | 2,664      |                  |       |   | 1,302 |   |   |
| Current portion of  notes payable on real estate                                                                                                                                                           |       |              | 200,099    |                  |       |   | 124,682 |   |   |
| Liabilities  related to real estate and other assets held for sale                                                                                                                                         |       |              | 12,506     |                  |       |   | 26,930 |   |   |
| Other current  liabilities                                                                                                                                                                                 |       |              | 6,752      |                  |       |   | 5,948 |   |   |
| Total current  liabilities                                                                                                                                                                                 |       |              | 379,460    |                  |       |   | 362,470 |   |   |
| Long-term debt,  less current portion                                                                                                                                                                      |       |              | 85,041     |                  |       |   | 35,034 |   |   |
| Notes payable on  real estate, less current portion                                                                                                                                                        |       |              | 122,968    |                  |       |   | 106,216 |   |   |
| Other liabilities                                                                                                                                                                                          |       |              | 15,285     |                  |       |   | 13,448 |   |   |
| Total liabilities                                                                                                                                                                                          |       |              | 602,754    |                  |       |   | 517,168 |   |   |
| Minority interest                                                                                                                                                                                          |       |              | 35,491     |                  |       |   | 29,528 |   |   |
| Stockholders’ equity                                                                                                                                                                                  |       |              |       |                  |       |   |   |   |   |
| Preferred stock;  $0.01 par value; 30,000,000 shares authorized; none issued or outstanding                                                                                                                |       |              | —     |                  |       |   | — |   |   |
| Common stock;  $0.01 par value; 100,000,000 shares authorized; 37,903,058 shares issued and  35,994,810 shares outstanding in 2006 and 37,903,058 shares issued and  36,040,317 shares outstanding in 2005 |       |              | 379        |                  |       |   | 379 |   |   |
| Paid-in capital                                                                                                                                                                                            |       |              | 182,821    |                  |       |   | 205,084 |   |   |
| Retained earnings                                                                                                                                                                                          |       |              | 250,241    |                  |       |   | 240,887 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                    |       |              | 4,161      |                  |       |   | 1,713 |   |   |
| Less: Treasury  stock                                                                                                                                                                                      |       |              | (52,526    | )                     |       |   | (32,776 | ) |   |
|          Unearned  stock compensation, net                                                                                                                         |       |              | —     |                  |       |   | (13,816 | ) |   |
| Total  stockholders’ equity                                                                                                                                                                           |       |              | 385,076    |                  |       |   | 401,471 |   |   |
|                                                                                                                                                                                                       |       |              | $          | 1,023,321             |       |   |   | $ | 948,167 |   |   |

 

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** | ** **   | **For the Six Months** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                                                                                                            | ** **   | **Ended June 30,**            | ** **   | **Ended June 30,**          | ** **   |
| ** **                                                                                                                            | ** **   | **2006**                                | ** **   | **2005**                              | ** **   | **2006** | ** ** | **2005** | ** ** |
| **REVENUES**                                                                                                                          | ** **   | ** **                              | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| ***User Services:***                                                                                                                  | *** *** | *** ***                            | *** *** | *** ***                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| Facilities management                                                                                                                 |         | $                                       | 66,166       |                                  | $            | 59,391 |   | $ | 131,200 |   | $ | 114,528 |   |
| Corporate advisory services                                                                                                           |         | 51,824                                  |         | 40,116                                |         | 97,657 |   | 64,789 |   |
| Project management services                                                                                                           |         | 33,783                                  |         | 31,963                                |         | 63,462 |   | 57,287 |   |
|                                                                                                                                  |         | 151,773                                 |         | 131,470                               |         | 292,319 |   | 236,604 |   |
| ***Investor Services:***                                                                                                              | *** *** | *** ***                            | *** *** | *** ***                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| Property management                                                                                                                   |         | 32,939                                  |         | 34,468                                |         | 66,791 |   | 68,555 |   |
| Brokerage                                                                                                                             |         | 40,751                                  |         | 33,676                                |         | 71,511 |   | 61,456 |   |
| Construction management                                                                                                               |         | 2,998                                   |         | 2,959                                 |         | 6,010 |   | 5,174 |   |
|                                                                                                                                  |         | 76,688                                  |         | 71,103                                |         | 144,312 |   | 135,185 |   |
| Development and construction                                                                                                          |         | 11,524                                  |         | 8,510                                 |         | 20,374 |   | 16,347 |   |
|                                                                                                                                  |         | 239,985                                 |         | 211,083                               |         | 457,005 |   | 388,136 |   |
| Gain on disposition of real estate                                                                                                    |         | 2,168                                   |         | 906                                   |         | 3,238 |   | 2,474 |   |
| **TOTAL REVENUES**                                                                                                                    |         | 242,153                                 |         | 211,989                               |         | 460,243 |   | 390,610 |   |
| **COSTS  AND EXPENSES**                                                                                                               | ** **   | ** **                              | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages and benefits                                                                                                          |         | 145,261                                 |         | 132,730                               |         | 291,351 |   | 258,441 |   |
| Commissions                                                                                                                           |         | 42,069                                  |         | 34,298                                |         | 76,208 |   | 56,956 |   |
| General and administrative                                                                                                            |         | 43,292                                  |         | 35,963                                |         | 80,393 |   | 65,987 |   |
| Depreciation and amortization                                                                                                         |         | 2,951                                   |         | 2,526                                 |         | 5,651 |   | 4,925 |   |
| Interest                                                                                                                              |         | 2,580                                   |         | 1,669                                 |         | 4,078 |   | 2,349 |   |
| **TOTAL EXPENSES**                                                                                                                    |         | 236,153                                 |         | 207,186                               |         | 457,681 |   | 388,658 |   |
| Operating income                                                                                                                      |         | 6,000                                   |         | 4,803                                 |         | 2,562 |   | 1,952 |   |
| Interest and other income                                                                                                             |         | 1,081                                   |         | 481                                   |         | 1,950 |   | 1,402 |   |
| Income from continuing operations before income  taxes, minority interest and income from investments in unconsolidated  subsidiaries |         | 7,081                                   |         | 5,284                                 |         | 4,512 |   | 3,354 |   |
| Income tax expense                                                                                                                    |         | (2,782                                  | )            | (1,947                                | )            | (1,780 | ) | (1,210 | ) |
| Minority interest, net of income tax expense of $233,  $607, $86 and $1,834                                                           |         | 363                                     |         | 1,263                                 |         | 132 |   | 3,251 |   |
| Income from investments in unconsolidated  subsidiaries, net of income tax expense of $2,571, $1,599, $3,955 and  $2,576         |         | 3,939                                   |         | 2,984                                 |         | 6,106 |   | 4,567 |   |
| Income from continuing operations                                                                                                     |         | 8,601                                   |         | 7,584                                 |         | 8,970 |   | 9,962 |   |
| Income from discontinued operations, net of income  tax expense of $137, $401, $1,610 and $201                                        |         | 181                                     |         | 680                                   |         | 2,486 |   | 355 |   |
| Income before cumulative effect of a change in  accounting principle                                                                  |         | 8,782                                   |         | 8,264                                 |         | 11,456 |   | 10,317 |   |
| Cumulative effect of a change in accounting  principle, net of income tax expense of $646                                             |         | —                                  |         | —                                |         | 1,011 |   | — |   |
| Net income                                                                                                                            |         | $                                       | 8,782        |                                  | $            | 8,264 |   | $ | 12,467 |   | $ | 10,317 |   |
| **Basic  earnings per share:**                                                                                                        | ** **   | ** **                              | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| Income from continuing operations                                                                                                     |         | $                                       | 0.24         |                                  | $            | 0.23 |   | $ | 0.26 |   | $ | 0.30 |   |
| Income from discontinued operations                                                                                                   |         | 0.01                                    |         | 0.02                                  |         | 0.07 |   | 0.01 |   |
| Cumulative effect of a change in accounting principle                                                                                 |         | 0.00                                    |         | 0.00                                  |         | 0.03 |   | 0.00 |   |
| Net income                                                                                                                            |         | $                                       | 0.25         |                                  | $            | 0.25 |   | $ | 0.36 |   | $ | 0.31 |   |
| Basic weighted-average common shares outstanding:                                                                                     |         | 34,519,683                              |         | 33,422,946                            |         | 34,443,884 |   | 33,555,988 |   |
| **Diluted  earnings per share:**                                                                                                      | ** **   | ** **                              | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| Income from continuing operations                                                                                                     |         | $                                       | 0.24         |                                  | $            | 0.21 |   | $ | 0.24 |   | $ | 0.28 |   |
| Income from discontinued operations                                                                                                   |         | 0.00                                    |         | 0.02                                  |         | 0.07 |   | 0.01 |   |
| Cumulative effect of a change in accounting principle                                                                                 |         | 0.00                                    |         | 0.00                                  |         | 0.03 |   | 0.00 |   |
| Net income                                                                                                                            |         | $                                       | 0.24         |                                  | $            | 0.23 |   | $ | 0.34 |   | $ | 0.29 |   |
| Diluted  weighted-average common shares outstanding:                                                                                  |         | 36,753,346                              |         | 36,053,250                            |         | 36,829,966 |   | 36,097,902 |   |

 

See accompanying notes.

4

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYSix Months Ended June 30, 2006 (Unaudited) and Year EndedDecember 31, 2005 (Note 1)(in thousands, except share data)**
| ** **                                                                           | ** ** | ** **   | ** ** | **Common  Stock Par  Value** | ** ** | **Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Unearned  Stock  Compensation** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|-----------------------------------|------------|----------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|-----------|------------|
| **Common Shares**                                                               |
| **Issued**                                                                           | ** ** | **Treasury** |
| Balance at  January 1, 2005                                                     |       | 37,902,998   |       | 2,297,991                         |       |                 | $          | 379                    |       |                                          | $          | 196,314             |       |                              | $          | 190,252   |       |   |   | $ | 2,043 |   |   |   | $ | (36,921 | ) |   |   | $ | (11,117 | ) |   | $ | 340,950 |   |
| Net income                                                                           |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | 59,407     |                              |       |      | —     |   |   |   | — |   |   |   | — |   |   | 59,407 |   |
| Stock-based  compensation                                                            |       | 60           |       | (1,405,392                        | )          |                 | —     |                   |       | 8,770                                         |       |                | (8,772     | )                                 |       |      | —     |   |   |   | 24,195 |   |   |   | (2,699 | ) |   | 21,494 |   |
| Stock repurchase                                                                     |       | —       |       | 970,142                           |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | —     |   |   |   | (20,050 | ) |   |   | — |   |   | (20,050 | ) |
| Foreign currency  translation adjustment, net of tax                                 |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | (475       | ) |   |   | — |   |   |   | — |   |   | (475 | ) |
| Net unrealized  holding gains/(losses) on available for sale securities, net of  tax |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | 145        |   |   |   | — |   |   |   | — |   |   | 145 |   |
| Balance at  December 31, 2005                                                   |       | 37,903,058   |       | 1,862,741                         |       |                 | 379        |                   |       | 205,084                                       |       |                | 240,887    |                              |       |      | 1,713      |   |   |   | (32,776 | ) |   |   | (13,816 | ) |   | 401,471 |   |
| Net income                                                                           |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | 12,467     |                              |       |      | —     |   |   |   | — |   |   |   | — |   |   | 12,467 |   |
| Cumulative effect  of a change in accounting principle                               |       | —       |       | —                            |       |                 | —     |                   |       | (15,473                                       | )          |                | —     |                              |       |      | —     |   |   |   | — |   |   |   | 13,816 |   |   | (1,657 | ) |
| Stock-based  compensation                                                            |       | —       |       | (1,441,993                        | )          |                 | —     |                   |       | (6,790                                        | )          |                | (3,113     | )                                 |       |      | —     |   |   |   | 30,370 |   |   |   | — |   |   | 20,467 |   |
| Stock repurchase                                                                     |       | —       |       | 1,487,500                         |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | —     |   |   |   | (50,120 | ) |   |   | — |   |   | (50,120 | ) |
| Foreign currency  translation adjustment, net of tax                                 |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | 2,578      |   |   |   | — |   |   |   | — |   |   | 2,578 |   |
| Net unrealized  holding gains/(losses) on available for sale securities, net of  tax |       | —       |       | —                            |       |                 | —     |                   |       | —                                        |       |                | —     |                              |       |      | (130       | ) |   |   | — |   |   |   | — |   |   | (130 | ) |
| Balance at  June 30, 2006                                                       |       | 37,903,058   |       | 1,908,248                         |       |                 | $          | 379                    |       |                                          | $          | 182,821             |       |                              | $          | 250,241   |       |   |   | $ | 4,161 |   |   |   | $ | (52,526 | ) |   |   | $ | — |   |   | $ | 385,076 |   |

 

See accompanying notes.

5

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

| ** **                                                          | ** ** | **For the  Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                                    | ** ** | **2005** | ** ** |
| **Operating activities**                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Cash flows from earnings:                                           |       |                                                        |       |   |   |
| Net Income                                                          |       | $                                                           | 12,467     |   | $ | 10,317 |   |
| Reconciliation of net income to net cash provided by  earnings:     |       |                                                        |       |   |   |
| Depreciation and  amortization                                      |       | 5,651                                                       |       | 5,366 |   |
| Stock-based  compensation expense                                   |       | 4,355                                                       |       | 3,172 |   |
| Cumulative effect  of a change in accounting principle              |       | (1,657                                                      | )          | — |   |
| Amortization of employment  contracts                               |       | 1,610                                                       |       | 1,330 |   |
| Amortization of  contract intangibles                               |       | 549                                                         |       | 1,172 |   |
| Bad debt expense                                                    |       | 212                                                         |       | 67 |   |
| Provision for real  estate impairment                               |       | 425                                                         |       | — |   |
| Gain on  disposition of real estate held for investment             |       | (93                                                         | )          | (44 | ) |
| Minority interest                                                   |       | 608                                                         |       | (5,085 | ) |
| Deferred income  tax provision                                      |       | 1,160                                                       |       | 1,004 |   |
| Income from  investments in unconsolidated subsidiaries             |       | (10,061                                                     | )          | (7,143 | ) |
| Distributions of  earnings from unconsolidated subsidiaries         |       | 4,550                                                       |       | 4,006 |   |
| Net cash provided by  earnings                                      |       | 19,776                                                      |       | 14,162 |   |
| Changes in operating assets and liabilities:                        |       |                                                        |       |   |   |
| Restricted cash                                                     |       | (1,990                                                      | )          | 3,764 |   |
| Accounts  receivable                                                |       | 14,934                                                      |       | 6,117 |   |
| Receivables from  affiliates                                        |       | 347                                                         |       | (6,023 | ) |
| Notes receivable  and other assets                                  |       | (34,179                                                     | )          | (13,201 | ) |
| Marketable  securities                                              |       | (600                                                        | )          | — |   |
| Real estate held  for sale and under development                    |       | (59,670                                                     | )          | (53,019 | ) |
| Notes payable on  real estate held for sale                         |       | 42,108                                                      |       | 38,008 |   |
| Accounts payable  and accrued expenses                              |       | (31,542                                                     | )          | (36,643 | ) |
| Income taxes  payable                                               |       | (14,254                                                     | )          | (19,451 | ) |
| Other liabilities                                                   |       | 2,523                                                       |       | 2,033 |   |
| Net cash flows from  changes in working capital                     |       | (82,323                                                     | )          | (78,415 | ) |
| Net cash used in  operating activities                              |       | (62,547                                                     | )          | (64,253 | ) |
| **Investing activities**                                            |       |                                                        |       |   |   |
| Expenditures for  furniture and equipment                           |       | (4,102                                                      | )          | (5,164 | ) |
| Proceeds from  sales and maturities of marketable securities        |       | 3,754                                                       |       | 1,516 |   |
| Payment for  purchase of marketable securities                      |       | (4,085                                                      | )          | (19,311 | ) |
| Additions to real  estate held for investment                       |       | (15,331                                                     | )          | (21,047 | ) |
| Net proceeds from  disposition of real estate held for investment   |       | 529                                                         |       | 44 |   |
| Investments in  unconsolidated subsidiaries                         |       | (10,330                                                     | )          | (100,255 | ) |
| Distributions from  unconsolidated subsidiaries                     |       | 4,960                                                       |       | 9,971 |   |
| Net cash used in  investing activities                              |       | (24,605                                                     | )          | (134,246 | ) |
| **Financing activities**                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Principal payments  on long-term debt and capital lease obligations |       | (92,952                                                     | )          | (78,332 | ) |
| Proceeds from  long-term debt                                       |       | 144,321                                                     |       | 153,693 |   |
| Contributions from  minority interest                               |       | 4,306                                                       |       | 9,053 |   |
| Distributions to  minority interest                                 |       | (2,729                                                      | )          | (11,581 | ) |
| Proceeds from  notes payable on real estate held for investment     |       | 23,999                                                      |       | 24,090 |   |
| Payments on notes  payable on real estate held for investment       |       | (112                                                        | )          | (3,490 | ) |
| Proceeds from  exercise of stock options                            |       | 17,828                                                      |       | 5,213 |   |
| Excess tax  benefits from stock-based compensation                  |       | 1,728                                                       |       | 812 |   |
| Proceeds from  issuance of common stock                             |       | 1,550                                                       |       | 1,503 |   |
| Purchase of common  stock                                           |       | (50,120                                                     | )          | (20,050 | ) |
| Net cash provided  by financing activities                          |       | 47,819                                                      |       | 80,911 |   |
| Net decrease in  cash and cash equivalents                          |       | (39,333                                                     | )          | (117,588 | ) |
| Cash and cash  equivalents, beginning of period                     |       | 76,919                                                      |       | 163,637 |   |
| Cash and cash  equivalents, end of period                           |       | $                                                           | 37,586     |   | $ | 46,049 |   |

 

See accompanying notes.

6

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**TRAMMELL CROW 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,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                                      | ** ** | **2005**                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                                          |       | $                                                             | 8,782      |                                                        | $          | 8,264 |   | $ | 12,467 |   | $ | 10,317 |   |
| Other  comprehensive income:                                                        |       |                                                          |       |                                                        |       |   |   |   |   |
| Foreign currency translation adjustments                                            |       | 4,030                                                         |       | 943                                                         |       | 4,215 |   | 925 |   |
| Tax expense                                                                         |       | (1,563                                                        | )          | (341                                                        | )          | (1,637 | ) | (334 | ) |
| Net foreign currency translation adjustments, net of  tax                           |       | 2,467                                                         |       | 602                                                         |       | 2,578 |   | 591 |   |
| Net unrealized holding gains (losses) on available  for sale securities             |       | (296                                                          | )          | 333                                                         |       | (213 | ) | 175 |   |
| Tax (expense) benefit                                                               |       | 114                                                           |       | (127                                                        | )          | 83 |   | (80 | ) |
| Net unrealized holding gains (losses) on available  for sale securities, net of tax |       | (182                                                          | )          | 206                                                         |       | (130 | ) | 95 |   |
| Total other comprehensive income                                                    |       | 2,285                                                         |       | 808                                                         |       | 2,448 |   | 686 |   |
| Comprehensive income                                                                |       | $                                                             | 11,067     |                                                        | $          | 9,072 |   | $ | 14,915 |   | $ | 11,003 |   |

 

See accompanying notes.

7

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

**1.   General**

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

The Company 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 (often in 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, 2005, and certain revenuesand expenses for the three months ended March 31, 2006, and the three andsix months ended June 30, 2005, were reclassified to conform to thepresentation at and for the three months ended June 30, 2006 (see Notes 8and 11). As a result, certain balances differ from the amounts reported inpreviously filed documents. Also, certain distributions from unconsolidatedsubsidiaries in the six months ended June 30, 2005 were reclassified inthe Company’s consolidated statements of cash flows. Therefore, cash flows fromoperating activities and investing activities differ from previously fileddocuments. These reclassifications had no impact on the Company’s consolidatedbalance sheets, statements of operations or earnings per share amounts.

*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.

*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 

8

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

**1.**   General (Continued)

purposesand the amounts used for federal and state income tax purposes, and aremeasured using the enacted tax rates and laws that are expected to be in effectwhen the differences reverse.

*Earnings Per Share*

Theweighted-average common shares outstanding used to calculate diluted earningsper share reflect the dilutive effect of common stock equivalents, includingunvested restricted stock and options to purchase shares of common stock. Dilutedweighted-average common shares outstanding included the following:

| ** **                                              | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                              | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic weighted-average  common shares outstanding       |       | 34,519,683                              |       | 33,422,946                            |       | 34,443,884 |   | 33,555,988 |   |
| Dilutive effect of common  stock equivalents            |       | 2,233,663                               |       | 2,630,304                             |       | 2,386,082 |   | 2,541,914 |   |
| Diluted weighted-average common shares outstanding |       | 36,753,346                              |       | 36,053,250                            |       | 36,829,966 |   | 36,097,902 |   |

 

*Non-Controlling Interests in Consolidated Limited LifeSubsidiaries*

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 classify non-controllinginterests in consolidated limited life subsidiaries as liabilities adjusted totheir settlement values in the Company’s consolidated financial statements. In November 2003,the FASB indefinitely deferred application of the measurement and recognitionprovisions (but not the disclosure requirements) of FAS 150 with respect tothese non-controlling interests. As of June 30, 2006, the estimatedsettlement value of non-controlling interests in the Company’s consolidatedlimited life subsidiaries was $4,520, as compared to book value (included inminority interest on the Company’s consolidated balance sheet) of $4,728.

*Effect of Adopting New Accounting Pronouncements*

*Consolidation*

In June 2005, theFASB ratified the consensus of the Emerging Issues Task Force (“EITF”) 04-5,*Determining Whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights* (“EITF 04-5”),which states that the general partner in a limited partnership is presumed tocontrol that limited partnership. That presumption may be overcome if thelimited partners have either (1) the substantive ability-either by a singlelimited partner or

9

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

**1.**   General (Continued)

througha simple majority vote-to dissolve (liquidate) the limited partnership orotherwise remove the general partner without cause or (2) substantiveparticipating rights. Substantive participating rights provide the limitedpartners with the ability to effectively participate in significant decisionsthat would be expected to be made in the ordinary course of the limitedpartnership’s business and thereby preclude the general partner from exercisingunilateral control over the partnership.

Theeffective date for applying the guidance in EITF 04-5 to the Company’sgeneral partner interests was June 29, 2005, for all new limitedpartnerships or limited partnerships amended after that date, and January 1,2006, for all other limited partnerships. In the first quarter of 2006, theCompany completed its evaluation of the impact of EITF 04-5 for all ofits general partner interests existing prior to June 29, 2005. As a resultof this evaluation, the Company consolidated two real estate partnerships thathad previously been accounted for using the equity method. These consolidationsas of January 1, 2006 did not impact net income, net income per share orstockholders’ equity, but did result in the following non-cash changes to theCompany’s consolidated balance sheet:

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

 

*Stock-Based Compensation*

On December 16, 2004,the FASB issued Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment* (“FAS 123R”),which is a revision of Statement of Financial Accounting Standards No. 123,*Accounting for Stock-Based Compensation*(“FAS 123”). Generally, the approach in FAS 123R is similar to the approachdescribed in FAS 123. However, FAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative.

Prior to adoption of FAS123R, the Company elected to use the intrinsic method under AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*(“APB 25”), to account for its stock-basedcompensation arrangements (see Note 9 for further discussion on the Company’sstock-based compensation plans). Compensation expense for stock options wasrecognized to the extent the market 

10

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

**1.**   General (Continued)

price ofthe underlying stock on the date of grant exceeded the exercise price of theoption. The Company recognized compensation expense related to restricted stockgrants over the vesting period of the underlying grant in an amount equal tothe fair market value of the Company’s stock on the date of grant. Nocompensation expense was recognized related to the difference between theemployee’s cost and the market value of stock purchased under the Company’semployee stock purchase plan.

The Company adopted FAS123R effective January 1, 2006 using the modified-prospective transitionmethod, and results for prior periods were not adjusted. Under this method, theCompany recognizes compensation cost for both unvested stock-based awards outstandingat January 1, 2006 (based on the grant-date fair value determined in accordancewith FAS 123) and stock-based awards made subsequent to January 1, 2006(based on the grant-date fair value determined in accordance with FAS 123R). Forawards with pro rata vesting, the Company recognizes compensation expense usingthe accelerated expense attribution method described in FASB Interpretation No. 28,*Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*.

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

FAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow aspreviously required. This requirement reduces net operating cash flows andincreases net financing cash flows. The amount of financing cash flowsrecognized for such excess tax deductions related to the exercise of stockoptions and vesting of restricted stock was $1,728 and $812 for the six monthsended June 30, 2006 and 2005, respectively.

11

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

**1.**   General (Continued)

Pro forma informationregarding net income and net income per share for the three and six monthsended June 30, 2005, shown in the table below, was determined as if theCompany had applied the fair value recognition provisions of FAS 123 prior to January 1,2006.

| ** **                                                                                                                              | ** ** | **For the Three Months  Ended June 30, 2005** | ** ** | **For the Six Months  Ended June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Net income, as reported                                                                                                                 |       |                                                                        | $          | 8,264                                                                     |       |   |   | $ | 10,317 |   |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       |                                                                        | 967        |                                                                      |       |   | 2,028 |   |   |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       |                                                                        | 1,133      |                                                                      |       |   | 2,926 |   |   |
| Pro forma net income                                                                                                                    |       |                                                                        | $          | 8,098                                                                     |       |   |   | $ | 9,419 |   |   |
| Net income per share:                                                                                                                   |       |                                                                        |       |                                                                      |       |   |   |   |   |
| Basic—as reported                                                                                                                  |       |                                                                        | $          | 0.25                                                                      |       |   |   | $ | 0.31 |   |   |
| Basic—pro forma                                                                                                                    |       |                                                                        | $          | 0.24                                                                      |       |   |   | $ | 0.28 |   |   |
| Net income per share:                                                                                                                   |       |                                                                        |       |                                                                      |       |   |   |   |   |
| Diluted—as reported                                                                                                                |       |                                                                        | $          | 0.23                                                                      |       |   |   | $ | 0.29 |   |   |
| Diluted—pro forma                                                                                                                  |       |                                                                        | $          | 0.22                                                                      |       |   |   | $ | 0.26 |   |   |

 

The Company typicallyissues shares related to stock-based compensation plans from its treasury. InFebruary 2006, the Company received authorization from its Board ofDirectors to repurchase up to $50,000 of its common stock from time to time inopen market purchases or privately negotiated transactions. In June 2006,the Company completed its $50,000 share repurchase program. A total of1,487,500 shares were repurchased at an average price of $33.61 per share.

*IncomeTaxes*

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

 

12

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

**1.   General(Continued)**

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

**2.   VariableInterest Entities**

In June 2006, the Company was involved in theformation of a limited partnership established to acquire land and developresidential and retail projects. The limited partnership, through its twowholly-owned subsidiaries, acquired land and executed a loan to finance theentire project. No equity was contributed by the owners of the entity. Theentity’s note payable balance of $38,305 is non-recourse to the Company and iscollateralized by the underlying real estate. The Company and other partners ofthe limited partnership may be required to make equity contributions to theentity to fund certain cost overruns and upgrades to project plans from theoriginal project budget agreed to by the partners. Based upon the Company’sevaluation, this entity is a variable interest entity (“VIE”) under FASBInterpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities* (“FIN 46R”). However, based upon itsevaluation, the Company is not the primary beneficiary of the entity. As of June 30,2006, the Company cannot estimate its maximum exposure to loss, but believesthat its exposure under this arrangement to loss is not material.

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 automotive. 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 VIE. As of June 30, 2006, theCompany had $3,045 recorded in restricted cash and $316 recorded in marketablesecurities (non-current) that are held by the VIE and serve as collateral forthe VIE’s obligations to the insurance carriers.

In 2005, the Company restructured a consolidatedentity established to develop an office building by admitting a majorityinterest partner. Based upon its evaluation at this reconsideration event, theCompany consolidated this entity as the primary beneficiary of a VIE. Theentity’s note payable balance of $33,845 at June 30, 2006, is non-recourseto the Company and is collateralized by the underlying real estate project.

13

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

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

In 2005, the Company acquired $110,000 of tax creditsthrough a program enacted by the Community Renewal Tax Relief Act of 2000. Thisprogram creates tax credits for equity investments in Community DevelopmentEntities (“CDEs”). The CDEs make qualified loans or equity investments toQualified Active Low-Income Community Businesses. Also in 2005, the Companyobtained 0% to 0.01% managing interests in various CDEs established to makethese loans and investments. The CDEs’ equity used to fund the loans andinvestments was contributed by its 99.98% to 100% third-party investor membersor through loans from qualified lenders. Through June 30, 2006, the CDEshave made qualified loans totaling approximately $75,870 and qualified equityinvestments of $4,951. The Company has determined that each of these CDEs is aVIE. However, based upon its evaluation, the Company is not the primarybeneficiary of the entities. The Company believes that its maximum exposure toloss as a result of its involvement with these VIEs is not material. Additionally,in 2005, the Company obtained a 49% membership interest in a related entitythat acts as the administrative member performing loan servicing and taxmatters for the CDEs. Based upon the Company’s evaluation, this entity is alsoa VIE since the entity’s equity was funded from up-front fees received from theCDEs. However, based upon its evaluation, the Company is not the primarybeneficiary of the entity. The Company believes that its maximum exposure toloss as a result of its involvement with this VIE is not material.

In 2004, the Company issued a budget guaranty relatingto a development project. Under the budget guaranty, the Company is responsiblefor all costs in excess of an approved budget of approximately $35,500. TheCompany was involved in the design of the underlying entity and has determinedthat its budget guaranty represents a variable interest in a VIE for which theCompany is not the primary beneficiary. The Company cannot estimate its actualmaximum exposure to loss as a result of its involvement with this VIE because thebudget guaranty is unlimited. However, based on the Company’s experience ofminimal payments under similar arrangements and the existence of a guaranteedmaximum price contract between the general contractor and the owner of theproject that mitigates the Company’s risk, the Company believes that itsexposure to loss is not material.

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

14

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

**3.**   Real Estate

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

| ** **                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Real estate under  development (current)                        |       | $                 | 196,894    |                  |       | $ | 120,697 |   |   |
| Real estate  included in assets held for sale (see Note 8) |       | 18,985            |       |                  | 39,280     |   |   |
| Real estate under  development (non-current)                    |       | 117,486           |       |                  | 108,849    |   |   |
| Real estate held  for investment(1)                             |       | 112,010           |       |                  | 88,787     |   |   |
|                                                            |       | $                 | 445,375    | (2)                   |       | $ | 357,613 | (2) |   |

----

(1)                 Netof accumulated depreciation of $5,482 and $2,075****atJune 30, 2006, and December 31, 2005, respectively.

(2)                 Includesbalances for lease intangibles and tenant origination costs of $(1,800) and$1,573 at June 30, 2006, and $(1,627) and $1,833 at December 31,2005, respectively. The Company records lease intangibles and tenantorigination costs upon acquiring buildings with in-place leases. The balancesare shown net of amortization (recorded as an increase to or a reduction ofrental income for lease intangibles and as amortization expense for tenantorigination costs).

In 2003, the Company sold a parcel of land for $1,750 ofwhich $1,125 of the consideration received was in the form of aninterest-bearing note from the buyer. The Company retained a unilateral rightto repurchase the property at any time through 2006, in addition to maintainingthe right to approve any plans for development on the property. If the Companyexercises its repurchase option, the Company would repay the amount it receivedfrom the buyer, plus a return on the buyer’s investment. Because of the Company’scontinuing involvement in and option to repurchase the property, thetransaction was recorded as a financing transaction rather than a sale. As of June 30,2006, real estate under development (non-current) included $1,887 andcurrent portion of notes payable on real estate included $1,750 related to thisparcel of land.

15

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

**3.**   Real Estate (Continued)

In thesecond quarter of 2006, the Company consolidated an operating real estateproject that had previously been accounted for under the equity method. TheCompany is the general partner of the partnership. The Company reassessed theaccounting treatment of the entity as required under EITF 04-5 anddetermined that the limited partners lacked the substantive participatingrights necessary to overcome the presumption of control by the general partner.As a result of this consolidation, the Company recorded the following non-cashchanges in its consolidated balance sheet:
| **ASSETS**                                                     | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| Accounts receivable                                            |       | $          | 21         |   |
| Real estate                                                    |       | 7,401      |       |
| Investments in unconsolidated subsidiaries                     |       | (88        | )          |
| Other current assets                                           |       | 457        |       |
| Other assets                                                   |       | —     |       |
| Net non-cash  change in assets                                 |       | $          | 7,791      |   |
| **LIABILITIES**                                                | ** ** | ** ** | ** ** |
| Notes payable on real estate                                   |       | $          | 5,626      |   |
| Accrued expenses                                               |       | 126        |       |
| Other current liabilities                                      |       | 39         |       |
| Net non-cash  change in liabilities                            |       | 5,791      |       |
| Minority interest                                              |       | 2,057      |       |
| Cash from  consolidation of previously unconsolidated entities |       | $          | 57         |   |

 

**4.   Investments inUnconsolidated Subsidiaries**

Investmentsin unconsolidated subsidiaries consisted of the following:

| ** **  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------|------------|-------------------|------------|-----------------------|------------|
| ** **  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Real estate |       | $                 | 50,866     |                  |       | $ | 44,496 |   |   |
| Other       |       | 139,599           |       |                  | 130,915    |   |   |
|        |       | $                 | 190,465    |                  |       | $ | 175,411 |   |   |

 

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 10,486,458 shares by Savills at a price of 350.64pence 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 3,355,940 of Savills’ Ordinary Shares in open market purchasesat an average price of 325.00 pence per share, having the effect of reducingthe 

16

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

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

number of sharespurchasable under the option. The option exercise and the market purchasetogether increased the Company’s ownership stake to approximately 19.6% ofSavills’ Ordinary Shares then outstanding. The aggregate cost of the marketpurchases and the shares issued upon exercise of the option was $91,272. Thepurchases were funded by borrowings under the Company’s line of credit. Theinvestment is classified as an “other” investment in the table above. Thenumber of shares and per share prices related to Savills have been adjusted forSavills’ two-for-one stock split in May 2006.

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

The summarized financialinformation below does not include the results of Savills because Savillsqualifies as a foreign private issuer. Summarized operating results for other unconsolidatedsubsidiaries accounted for on the equity method were as follows:

| ** **     | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Total revenues |       | $                                                                 | 35,859     |                                                            | $          | 27,518 |   | $ | 59,880 |   | $ | 47,065 |   |
| Total expenses |       | 32,177                                                            |       | 21,137                                                          |       | 54,763 |   | 38,901 |   |
| Net income     |       | $                                                                 | 3,682      |                                                            | $          | 6,381 |   | $ | 5,117 |   | $ | 8,164 |   |

 

**5.**   AccruedExpenses

Accruedexpenses consisted of the following:

| ** **                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Payroll and bonuses                                                                                                 |       | $                 | 38,189     |                  |       | $ | 68,683 |   |   |
| Commissions                                                                                                         |       | 26,203            |       |                  | 34,449     |   |   |
| Development costs                                                                                                   |       | 25,604            |       |                  | 24,016     |   |   |
| Deferred income                                                                                                     |       | 15,212            |       |                  | 13,193     |   |   |
| Interest                                                                                                            |       | 1,156             |       |                  | 398        |   |   |
| Insurance                                                                                                           |       | 1,962             |       |                  | 2,144      |   |   |
| Restructuring charges                                                                                               |       | 1,461             |       |                  | 1,810      |   |   |
| Other                                                                                                               |       | 13,720            |       |                  | 12,574     |   |   |
|                                                                                                                |       | 123,507           |       |                  | 157,267    |   |   |
| Less: Accrued expenses  included in liabilities related to real estate and other assets held for sale  (see Note 8) |       | 2,253             |       |                  | 1,670      |   |   |
|                                                                                                                |       | $                 | 121,254    |                  |       | $ | 155,597 |   |   |

 

17

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

**6.**   Long-TermDebt

Long-termdebt consisted of the following:

| ** **                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Borrowings under  $175,000 line of credit with a bank (the “Credit Facility”)                     |       | $                 | 85,000     |                  |       | $ | 35,000 |   |   |
| Borrowings under  $25,000 short-term revolving line of credit with a bank (the “Swing Line”)      |       | 2,500             |       |                  | —     |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       | 143               |       |                  | 1,286      |   |   |
| Other                                                                                                       |       | 60                |       |                  | 50         |   |   |
| Total long-term  debt                                                                                       |       | 87,705            |       |                  | 36,336     |   |   |
| Less: Current  portion of long-term debt                                                                    |       | 2,664             |       |                  | 1,302      |   |   |
|                                                                                                        |       | $                 | 85,041     |                  |       | $ | 35,034 |   |   |

 

The interest rate for borrowings under the CreditFacility was 7.1% and 4.9% at June 30, 2006 and 2005, respectively. Theinterest rate for borrowings under the Swing Line was 7.1% and 5.1% at June 30,2006 and 2005, respectively.

The Company is subject to various covenants associatedwith the Credit Facility, such as maintenance of minimum net worth andliquidity and certain key financial data. There are also certain restrictionson investments and acquisitions that can be made by the Company. In addition,the Company may not pay dividends or make other distributions on account of itscommon stock exceeding 50% of the previous year’s net income beforedepreciation and amortization. In February 2006, the Company amended itsCredit Facility to allow for additional repurchases or other distributions onaccount of its common stock in an amount up to $100,000 through December 31,2006 and to reduce the minimum required net worth covenant. At June 30, 2006,the Company was in compliance with all covenants of the Credit Facility.

The covenants associatedwith the Credit Facility and the amount of the Company’s other borrowings andcontingent liabilities may have the effect of limiting the credit available tothe Company under the Credit Facility to an amount less than the $175,000commitment. At June 30, 2006, the Company had unused borrowing capacity of$81,467 (taking into account borrowings and letters of credit outstanding)under its Credit Facility. Borrowings under the Swing Line are unsecured andreduce borrowing capacity under the Credit Facility.

18

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

**7.   Notes Payable onReal Estate**

TheCompany had loans (the majority of which were construction loans) secured byreal estate, which consisted of the following:

| ** **                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Current portion  of notes payable on real estate                                                                          |       | $                 | 200,099    |                  |       | $ | 124,682 |   |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 8) |       | 10,253            |       |                  | 25,260     |   |   |
| Total notes  payable on real estate, current portion                                                                      |       | 210,352           |       |                  | 149,942    |   |   |
| Notes payable on  real estate, non-current portion                                                                        |       | 122,968           |       |                  | 106,216    |   |   |
| Total notes payable on  real estate                                                                                       |       | $                 | 333,320    |                  |       | $ | 256,158 |   |   |

 

At June 30, 2006, $15,568 of the current portionand $4,931 of the non-current portion of notes payable on real estate arerecourse to the Company (beyond being recourse to the single-purpose entitythat held the real estate asset and was the obligor on the note payable). Withrespect to a project to which $3,322 of the current recourse obligationsrelated, 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. The participating mortgage loan issubordinate to a construction loan on the underlying project. The mortgagelender 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 was $14,475 and $12,809, at June 30,2006 and December 31, 2005, respectively. The related debt discount wasfully amortized at June 30, 2006 and $1,835 at December 31, 2005. Duringthe six months ended June 30, 2006 and 2005, the Company amortized $3,501and $2,742, respectively, of the debt discount, which has been capitalized toreal estate under development.

**8.**   RealEstate and Other 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’sconsolidated balance sheet. In accordance with FAS 144, balances related toassets classified as held for sale at June 30, 2006, or sold in the sixmonths ended June 30, 2006, that were not classified as held for sale at December 31,2005, were reclassified to real estate and other assets held for sale in theCompany’s consolidated balance sheet as of December 31, 2005.

19

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

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

Real estate and otherassets held for sale and related liabilities were as follows:

| ** **                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Assets:**                                                              | ** ** | ** **        | ** ** |                  | ** ** | ** ** |   |
| Real estate held for sale (see Note 3)                                   |       | $                 | 18,985     |                  |       | $ | 39,280 | ** ** |   |
| Other current assets                                                     |       | 604               |       |                  | 78         | ** ** |   |
| Other assets                                                             |       | —            |       |                  | 185        | ** ** |   |
| Total real estate  and other assets held for sale                        |       | 19,589            |       |                  | 39,543     | ** ** |   |
| **Liabilities:**                                                         | ** ** | ** **        | ** ** |                  | ** ** | ** ** |   |
| Accrued expenses (see Note 5)                                            |       | 2,253             |       |                  | 1,670      | ** ** |   |
| Notes payable on real estate held for sale (see Note  7)                 |       | 10,253            |       |                  | 25,260     | ** ** |   |
| Total liabilities related to real estate and other  assets held for sale |       | 12,506            |       |                  | 26,930     | ** ** |   |
| **Net real estate and other assets  held for sale**                      |       | $                 | 7,083      |                  |       | $ | 12,613 | ** ** |   |

 

**9.   Stock-BasedCompensation**

The Company has two share-based compensation plans andan employee stock purchase plan, which are described below. For the six monthsended June 30, 2006 and 2005, the Company recognized total stock-basedcompensation expense of $4,355 and $3,172, with a related income tax benefitrealized of $1,711 and $1,246, respectively**.**The Companytypically issues shares related to stock-based compensation plans from itstreasury.

Under the Trammell Crow Company 1997 Option Plan (the “AssumedOption Plan”), the Company issued options to purchase 2,423,769 shares of theCompany’s common stock at an exercise price of $3.85 per share. Alloptions available under the Assumed Option Plan were granted on August 1,1997. The options vested at the closing of the Company’s initial publicoffering on December 1, 1997, and became exercisable 30 days after thatdate. The options expire 10 years from the date of grant and are not contingenton continued employment with the Company. The fair value for these options wasestimated at the date of grant using the Black-Scholes option pricing model. AtJune 30, 2006, common shares reserved for future issuance under theAssumed Option Plan totaled 239,217.

The Trammell Crow Long-Term Incentive Plan (the “Long-TermPlan”) provides for the issuance of up to 8,634,878 shares of common stock. Optionsto acquire shares of common stock granted by the Company under the Long-TermPlan have exercise prices equal to the fair market value of the common stock onthe date of grant and expire seven to ten years from the date of grant.

Except for options granted to members of the Board ofDirectors and options granted in connection with acquisitions of real estateservice companies, options vest over periods ranging from three to five years,and generally have partial vesting on anniversaries of the grant date. TheCompany has not granted any options since 2003.

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

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

The Long-Term Plan also provides for the awards ofStock Appreciation Rights, Restricted Stock and Performance Units. TheRestricted Stock that has been issued under this plan vests over periods of upto five years from the date of grant. No Stock Appreciation Rights have beengranted by the Company as of June 30, 2006. As of June 30, 2006, theCompany had outstanding performance units representing the right to receive, atthe election of the grantee, an aggregate of up to 34,424 shares of the Company’scommon stock or cash in the amount equal to the fair market value of suchshares of common stock on the distribution date or dates.

At June 30, 2006, common shares reserved forfuture issuance under the Long-Term Plan totaled 4,063,542 shares, of which745,328 common shares were available for future awards.

The Company has also established the Trammell CrowCompany Employee Stock Purchase Plan (the “ESPP”). Employees may elect to havebi-weekly payroll deductions of 1% to 10% of gross earnings, which is used topurchase, on a semi-annual basis, stock of the Company at a 15% discount frommarket value, which is established on the date of issuance. The ESPP isavailable to all employees and requires a twelve-month holding period for stockpurchased under the plan. The Company has reserved 3,000,000 shares of commonstock for issuance under the ESPP, of which 2,131,606 had been issued through June 30,2006. For the six months ended June 30, 2006, activity related to the ESPPplan was not material.

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

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

The Company’s stock optionactivity for the six months ended June 30, 2006, was as follows:

| ** **                                                | ** ** | **Exercise Price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise price  of $9.74 to  $14.50 (at  market price  at grant date)** | ** ** | **Exercise price  of $14.51 to  $22.75 (at  market price  at grant date)** | ** ** | **Exercise price  of $22.76 to  $36.00 (at  market price  at grant date)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| **Options outstanding:**                             |       |                                                                                            |       |                                                                                                         |       |                                                                                                          |       |                                                                                                          |       |      |       |   |   |   |   |   |   |   |   |
| December 31,  2005                                   |       |                                                                                            | 412,255    |                                                                                                         |       |                                                                                                          | 2,740,586  |                                                                                                          |       |      | 1,588,380  |   |   |   | 144,621 |   |   | 4,885,842 |   |
| Granted                                                   |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                                 |       |                                                                                            | (155,369   | )                                                                                                            |       |                                                                                                          | (647,277   | )                                                                                                             |       |      | (437,674   | ) |   |   | (47,648 | ) |   | (1,287,968 | ) |
| Forfeited                                                 |       |                                                                                            | (17,669    | )                                                                                                            |       |                                                                                                          | (5,879     | )                                                                                                             |       |      | (5,319     | ) |   |   | (4,076 | ) |   | (32,943 | ) |
| June 30, 2006                                        |       |                                                                                            | 239,217    |                                                                                                         |       |                                                                                                          | 2,087,430  |                                                                                                          |       |      | 1,145,387  |   |   |   | 92,897 |   |   | 3,564,931 |   |
| **Weighted-average exercise price of options:** | ** ** |                                                                                            |       |                                                                                                         |       |                                                                                                          |       |                                                                                                          |       |      |       |   |   |   |   |   | ** ** | ** ** | ** ** |
| Granted                                                   |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   |   |   |
| Exercised                                                 |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                          |       | $                                                                                                             | 11.54      |      |       |   | $ | 17.65 |   |   |   | $ | 28.63 |   |   |   |   |
| Forfeited                                                 |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                          |       | $                                                                                                             | 12.59      |      |       |   | $ | 17.61 |   |   |   | $ | 29.44 |   |   |   |   |
| Outstanding at  June 30, 2006                   |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                          |       | $                                                                                                             | 11.88      |      |       |   | $ | 17.75 |   |   |   | $ | 28.64 |   |   |   |   |
| Weighted-average  fair value of options granted      |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   |   |   |
| Weighted-average  remaining contractual life              |       |                                                                                            | 1.1 years  |                                                                                                         |       |                                                                                                          | 2.9 years  |                                                                                                          |       |      | 2.2 years  |   |   |   | 1.7 years |   |   |   |   |
| **Options  exercisable:**                                 | ** ** |                                                                                            |       |                                                                                                         |       |                                                                                                          |       |                                                                                                          |       |      |       |   |   |   |   |   | ** ** | ** ** | ** ** |
| Number of options                                         |       |                                                                                            | 239,217    |                                                                                                         |       |                                                                                                          | 2,071,181  |                                                                                                          |       |      | 1,145,387  |   |   |   | 92,897 |   |   | 3,548,682 |   |
| Weighted-average exercise  price                          |       |                                                                                            | $          | 3.85                                                                                                         |       |                                                                                                          |       | $                                                                                                             | 11.89      |      |       |   | $ | 17.75 |   |   |   | $ | 28.64 |   |   |   |   |

 

As of June 30, 2006, the aggregate intrinsic valueof stock options outstanding was $76,675. The aggregate intrinsic value ofexercisable stock options as of June 30, 2006 was $76,261. During the sixmonths ended June 30, 2006, the total intrinsic value of options exercisedwas $28,012. The amount of the tax benefit realized related to those exercisesfor the same period was $1,803.

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

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

The Company’s restrictedstock activity for the six months ended June 30, 2006, was as follows:

| ** **                        | ** ** | **Shares** | ** ** | **Weighted average  grant-date fair  value per share** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|
| **Restricted Stock outstanding:** | ** ** | ** ** | ** ** |                                                                       | ** ** | ** ** |   |
| December 31,  2005           |       | 1,857,151  |       |                                                                       | $          | 13.61 | ** ** |   |
| Granted                           |       | 219,213    |       |                                                                       | 36.58      | ** ** |   |
| Vested                            |       | (352,144   | )          |                                                                       | 10.49      | ** ** |   |
| Forfeited                         |       | (137,464   | )          |                                                                       | 11.06      | ** ** |   |
| June 30, 2006                |       | 1,586,756  |       |                                                                       | $          | 17.69 | ** ** |   |

 

As of June 30,2006, the total compensation cost related to unvested restricted stock awardsnot yet recognized was $14,322, net of expected forfeitures, and theweighted-average period over which these awards are expected to be recognizedwas 2.7 years. The total fair value of restricted stock that vested during thefirst six months of 2006 was $16,542.

**10.   DeferredCompensation Plan**

Effective January 1,2006, the Company established a non-qualified deferred compensation plan for certainkey employees of the Company through a rabbi trust. A portion of the eligibleemployees’ compensation can be directed into the plan. In accordance with EITF97-14, *Accounting for Deferred CompensationArrangements Where Amounts Are Held in a Rabbi Trust and Invested*,assets of the rabbi trust are consolidated by the Company. The Company haselected to account for the investments as trading securities, in accordancewith Statement of Financial Accounting Standards No. 115, *Accounting for Certain Investments in Debt and Equity Securities.*As a result, investments are marked to market through the statement of income,with an offsetting increase in the deferred compensation liability. Noinvestments in the rabbi trust can consist of the Company’s stock. Theinvestments are included in current marketable securities and a deferredcompensation liability is included in other current liabilities on the Company’sconsolidated balance sheet. The investment balance and the deferredcompensation liability were both $600 at June 30, 2006.

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

During the first six months of 2006, the Company soldfive real estate projects (excluding those accounted for as discontinuedoperations) for an aggregate net sales price of $7,184,****resultingin an aggregate gain on disposition of****$3,076. TheCompany also recognized $162 of deferred gain from previous period dispositions.During the first six months of 2005, the Company recognized total gain ondisposition of real estate (excluding those accounted for as discontinuedoperations) of $2,474. This gain comprised two sales of real estate projectswith an aggregate net sales price of $1,615 and a settlement related to theestimated cost****to complete construction relatedto a previous period disposition. This gain also included deferred gainrecognition of $178 related to dispositions in prior periods.

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

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

The Company’s income from discontinued operationsconsists of the operations and gains on disposition of real estate projectsheld for sale or sold subsequent to the adoption of FAS 144, effective January 1,2002, that are considered “components of an entity” as defined by FAS 144 andfor which the Company does not have or expect to have any significantinvolvement in the operations of the project after the disposal. As required byFAS 144, certain revenues and expenses for the three months ended March 31,2006 and the three and six months ended June 30, 2005 have beenreclassified to conform to the presentation for the three months ended June 30,2006.

In the first six months of 2006, the Company sold fourreal estate projects that were considered discontinued operations under FAS 144.The aggregate net sales price for these projects was $23,569, and the Companyrecognized an aggregate gain on disposition of $5,069. In the first six monthsof 2005, the Company sold five real estate projects that were considered adiscontinued operation under FAS 144. The aggregate net sales price for theseprojects was $29,244, and the Company recognized an aggregate gain ondisposition of $2,019. The gain on disposition related to these projects hasbeen reported as discontinued operations, net of applicable income taxes, inthe consolidated statements of income.

Thecomponents of discontinued operations were as follows:

| ** **                                                     | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **   2006   **                      | ** ** | **   2005   **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues**                                                   | ** ** |                                                              | ** ** | ** **                                                      |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Development and  construction                                  |       |                                                              | $          | 56                                                              |       |   |   | $ | 1,225 |   |   | $ | 56 |   | $ | 2,457 |   |
| Gain on  disposition of real estate                            |       |                                                              | 188        |                                                            |       |   | 1,935 |   |   | 5,069 |   | 2,019 |   |
| Total Revenues                                                 |       |                                                              | 244        |                                                            |       |   | 3,160 |   |   | 5,125 |   | 4,476 |   |
| **Costs  and Expenses**                                        | ** ** |                                                              | ** ** | ** **                                                      |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages,  and benefits                                 |       |                                                              | —     |                                                            |       |   | 127 |   |   | 3 |   | 161 |   |
| Commissions                                                    |       |                                                              | —     |                                                            |       |   | — |   |   | 306 |   | — |   |
| General and  administrative                                    |       |                                                              | 65         |                                                            |       |   | 1,112 |   |   | 178 |   | 2,012 |   |
| Depreciation and  amortization                                 |       |                                                              | —     |                                                            |       |   | 156 |   |   | — |   | 441 |   |
| Interest                                                       |       |                                                              | —     |                                                            |       |   | 692 |   |   | — |   | 1,331 |   |
| Total Expenses                                                 |       |                                                              | 65         |                                                            |       |   | 2,088 |   |   | 487 |   | 3,945 |   |
| Operating income                                               |       |                                                              | 179        |                                                            |       |   | 1,072 |   |   | 4,638 |   | 531 |   |
| Interest and  other income                                     |       |                                                              | 139        |                                                            |       |   | 9 |   |   | 284 |   | 25 |   |
| Income from  discontinued operations, before income taxes |       |                                                              | 318        |                                                            |       |   | 1,081 |   |   | 4,922 |   | 556 |   |
| Income tax  expense                                            |       |                                                              | (137       | )                                                               |       |   | (401 | ) |   | (1,610 | ) | (201 | ) |
| Minority interest                                              |       |                                                              | —     |                                                            |       |   | — |   |   | (826 | ) | — |   |
| Income from discontinued  operations, net of income taxes |       |                                                              | $          | 181                                                             |       |   |   | $ | 680 |   |   | $ | 2,486 |   | $ | 355 |   |

 

24

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

**12.   FinancialInstruments**

The Company’s participation in derivative transactionshas been limited to risk management purposes. Derivative instruments are notheld or issued for trading purposes. From time to time, the Company enters intointerest rate cap agreements in order to limit its interest expense on theCredit Facility or on certain construction loans related to consolidated realestate projects. These interest rate cap agreements are not designated aseffective hedges and therefore are marked to market each period with the changein fair market value recognized in current period earnings.

In the first six months of 2005, the Company had suchagreements with a notional amount of $5,073 and the Company was to receivepayments if the 30-day LIBOR-based floating interest rate exceeded 3.5%. Theseagreements expired or terminated prior to 2006. The amounts recorded in 2005related to these agreements were not material. In addition, at June 30,2006, the Company held two such agreements with notional amounts of $25,650 and$18,500 and under both agreements, the Company receives payments if the 30-dayLIBOR-based floating interest rate exceeds 5.5%. These agreements expire on January 2,2008 and April 1, 2009. Through June 30, 2006, amounts recordedrelated to these interest rate cap agreements 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 guaranteed repayment of a maximum of$7,038 of real estate notes payable of its unconsolidated subsidiaries, ofwhich $7,002 was outstanding at June 30, 2006. These notes are secured bythe underlying real estate projects and have maturity dates through December 2009.

In 2004, the Company issued a debt repayment guarantyof an unconsolidated subsidiary in conjunction with a $30,000 loan agreement. Aspart of this loan agreement, the Company issued a repayment guaranty of up to50% of the loan balance plus any accrued and unpaid interest. In accordance withthe terms of the guaranty, at such time as the principal balance has beenreduced to $15,000 or less and a target loan-to-value ratio has been reached,the Company’s guaranty is reduced to 25% of the loan balance. In exchange forthe guaranty, the Company receives a priority return with respect to itscapital contribution based on the outstanding amount of principal on the loan. TheCompany estimates that its likely exposure under the guaranty is not materialand has determined that the present value of the priority return is the bestestimate of the fair value of the guaranty under FASB Interpretation No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Direct Guarantees of Indebtedness of Others*(“FIN 45”). The Company initially recorded a liability offset by an increase inits investment in unconsolidated subsidiary balance of $1,886. The underlyingnote was paid down to $15,000 in the second quarter of 2005, resulting in adecrease in the Company’s guaranty. As a result, the Company decreased theliability balance, with a corresponding decrease to the investment balance. Theliability balance was $472 at June 30, 2006.

25

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

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

In 2004, the Company also issued a $1,000 debtrepayment guaranty on a $10,185 construction loan in order to obtain adevelopment fee contract and allow a third-party owner to obtain financing fora construction project. The guaranty expires upon project completion andachievement of a specified leasing target. The third-party owner has agreed totransfer a separate parcel of land to the Company, should the Company berequired 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.

The Company issued several other debt repaymentguarantees of unconsolidated subsidiaries that are subject to the provisions ofFIN 45. The Company estimates that its likely exposure under these guaranteesis not material. On this basis, the Company estimates that the fair value ofthese guarantees is equivalent to the amount necessary to secure the guaranteesusing letters of credit from a bank, and the aggregate amount is nominal.

At June 30, 2006, the Company had outstandingletters of credit totaling $20,722, including $2,992, $2,266 and $12,423 ofwhich collateralize amounts recorded in accrued expenses, other currentliabilities and other liabilities, respectively. The letters of credit expireat varying dates through March 2007.

In addition, at June 30, 2006, the Company hadnumerous completion and budget guarantees relating to development projects. Theseguarantees are made with third-party owners in the normal course of business. Eachof these guarantees requires the Company to complete construction of therelevant project within a specified time frame and/or within a specified budget,with the Company potentially being liable for costs to complete in excess ofsuch budget. However, the Company generally has “guaranteed maximum price”contracts with reputable general contractors with respect to projects for whichthe Company provides these guarantees. These contracts are intended to pass thebudget risk to such contractors. Management does not expect to incur anymaterial losses under these guarantees.

From time to time, the Company acts as a generalcontractor with respect to construction projects. The Company does not considerthese activities to be a material part of its business. In connection withthese activities, the Company seeks to subcontract construction work forcertain projects to reputable subcontractors. Should construction defects ariserelated to the underlying projects, the Company could potentially be liable tothe client for the costs to repair such defects, but the Company wouldgenerally look to the subcontractor that performed the work to remedy thedefect. Management does not expect to incur material losses with respect toconstruction defects.

As of June 30, 2006, the Company had madenon-refundable earnest money deposits totaling $6,891 in conjunction withcontracts to acquire approximately $196,325 of real estate from other entities.

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

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

**14.   SegmentInformation**

*Description ofServices by Segment*

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

*Measurement ofSegment Profit or Loss and Segment Assets*

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

*Factors Management Usedto Identify the Company’s Reportable Segments*

The Company’s reportable segments are defined by thenature of the service provided and activities conducted. Because developmentservices require specialized knowledge, the Company’s organizational structureallows the group of individuals with specialized knowledge and experience indevelopment activities to perform these services with greater focus through theCompany’s Development and Investment segment. The organizational structure ofthe Global Services segment allows the Company to leverage resources inspecific geographic areas, as non-development services provided to user andinvestor clients often require similar expertise.

During the six months ended June 30, 2006 and2005, approximately 95% and 96%, respectively, of the Company’s revenues werefrom clients located in the United States. For the three and six months ended June 30,2006, one individual client accounted for $27,559 (11%) and $54,306 (12%),respectively, of the Company’s consolidated revenues. For the three and sixmonths ended June 30, 2005, the same client accounted for $26,802 (13%)and $50,750 (13%), respectively, of the Company’s consolidated revenues. Revenuesfrom this client are included primarily in the Company’s Global Servicessegment.

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

**14.**   Segment Information (Continued)

Summarizedfinancial information for reportable segments was as follows:

| ** **                                                                                                                            | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Global Services:**                                                                                                                  | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                        |       | $                                                                 | 228,461    |                                                            | $          | 202,573 |   | $ | 436,674 |   | $ | 371,789 |   |
| Costs and expenses                                                                                                                    |       | 214,029                                                           |       | 189,740                                                         |       | 416,655 |   | 354,989 |   |
| Operating income                                                                                                                      |       | 14,432                                                            |       | 12,833                                                          |       | 20,019 |   | 16,800 |   |
| Interest and other income                                                                                                             |       | 656                                                               |       | 373                                                             |       | 1,340 |   | 1,150 |   |
| Income from continuing operations before income taxes,  minority interest and income from investments in unconsolidated subsidiaries  |       | 15,088                                                            |       | 13,206                                                          |       | 21,359 |   | 17,950 |   |
| Minority interest, before income taxes                                                                                                |       | 153                                                               |       | 353                                                             |       | 279 |   | 542 |   |
| Income from investments in unconsolidated  subsidiaries, before income taxes                                                          |       | 5,151                                                             |       | 3,198                                                           |       | 7,981 |   | 3,899 |   |
| Income from continuing operations, before income  taxes                                                                               |       | 20,392                                                            |       | 16,757                                                          |       | 29,619 |   | 22,391 |   |
| Income from discontinued operations, before income  taxes                                                                             |       | —                                                            |       | —                                                          |       | 464 |   | — |   |
| Income before cumulative effect of a change in  accounting principle                                                                  |       | 20,392                                                            |       | 16,757                                                          |       | 30,083 |   | 22,391 |   |
| Cumulative effect of a change in accounting  principle, before income taxes                                                           |       | —                                                            |       | —                                                          |       | 984 |   | — |   |
| Income before income taxes                                                                                                            |       | $                                                                 | 20,392     |                                                            | $          | 16,757 |   | $ | 31,067 |   | $ | 22,391 |   |
| **Development  and Investment:**                                                                                                      | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                        |       | $                                                                 | 13,692     |                                                            | $          | 9,416 |   | $ | 23,569 |   | $ | 18,821 |   |
| Costs and expenses                                                                                                                    |       | 22,124                                                            |       | 17,446                                                          |       | 41,026 |   | 33,669 |   |
| Operating loss                                                                                                                        |       | (8,432                                                            | )          | (8,030                                                          | )          | (17,457 | ) | (14,848 | ) |
| Interest and other income                                                                                                             |       | 425                                                               |       | 108                                                             |       | 610 |   | 252 |   |
| Loss from continuing operations before income taxes,  minority interest and income from investments in unconsolidated subsidiaries    |       | (8,007                                                            | )          | (7,922                                                          | )          | (16,847 | ) | (14,596 | ) |
| Minority interest, before income taxes                                                                                                |       | 443                                                               |       | 1,517                                                           |       | (61 | ) | 4,543 |   |
| Income from investments in unconsolidated  subsidiaries, before income taxes                                                          |       | 1,359                                                             |       | 1,385                                                           |       | 2,080 |   | 3,244 |   |
| Loss from continuing operations, before income taxes                                                                                  |       | (6,205                                                            | )          | (5,020                                                          | )          | (14,828 | ) | (6,809 | ) |
| Income from discontinued operations, before income  taxes                                                                             |       | 318                                                               |       | 1,081                                                           |       | 3,632 |   | 556 |   |
| Loss before cumulative effect of a change in  accounting principle                                                                    |       | (5,887                                                            | )          | (3,939                                                          | )          | (11,196 | ) | (6,253 | ) |
| Cumulative effect of a change in accounting  principle, before income taxes                                                           |       | —                                                            |       | —                                                          |       | 673 |   | — |   |
| Loss before income taxes                                                                                                              |       | $                                                                 | (5,887     | )                                                               | $          | (3,939 | ) | $ | (10,523 | ) | $ | (6,253 | ) |
| **Total:**                                                                                                                            | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                        |       | $                                                                 | 242,153    |                                                            | $          | 211,989 |   | $ | 460,243 |   | $ | 390,610 |   |
| Costs and expenses                                                                                                                    |       | 236,153                                                           |       | 207,186                                                         |       | 457,681 |   | 388,658 |   |
| Operating income                                                                                                                      |       | 6,000                                                             |       | 4,803                                                           |       | 2,562 |   | 1,952 |   |
| Interest and other income                                                                                                             |       | 1,081                                                             |       | 481                                                             |       | 1,950 |   | 1,402 |   |
| Income from continuing operations before income  taxes, minority interest and income from investments in unconsolidated  subsidiaries |       | 7,081                                                             |       | 5,284                                                           |       | 4,512 |   | 3,354 |   |
| Minority interest, before income taxes                                                                                                |       | 596                                                               |       | 1,870                                                           |       | 218 |   | 5,085 |   |
| Income from investments in unconsolidated  subsidiaries, before income taxes                                                          |       | 6,510                                                             |       | 4,583                                                           |       | 10,061 |   | 7,143 |   |
| Income from continuing operations, before income  taxes                                                                               |       | 14,187                                                            |       | 11,737                                                          |       | 14,791 |   | 15,582 |   |
| Income from discontinued operations, before income  taxes                                                                             |       | 318                                                               |       | 1,081                                                           |       | 4,096 |   | 556 |   |
| Income before cumulative effect of a change in  accounting principle                                                                  |       | 14,505                                                            |       | 12,818                                                          |       | 18,887 |   | 16,138 |   |
| Cumulative effect of a change in accounting  principle, before income taxes                                                           |       | —                                                            |       | —                                                          |       | 1,657 |   | — |   |
| Income before  income taxes                                                                                                           |       | $                                                                 | 14,505     |                                                            | $          | 12,818 |   | $ | 20,544 |   | $ | 16,138 |   |

 

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

**14.**   Segment Information (Continued)

| ** **                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Total Assets:**           | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Global Services             |       | $                       | 444,933    |                        |       | $ | 434,712 | ** ** |   |
| Development and  Investment |       | 578,388                 |       |                        | 513,455    | ** ** |   |
| Total consolidated  assets  |       | $                       | 1,023,321  |                        |       | $ | 948,167 | ** ** |   |

 

**15.**   Supplemental Cash Flow Information

Supplementalcash flow information is summarized below:

| ** **                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Non-cash activities:**                          |       |                                          |       |   |   |
| Issuance of  restricted stock, net of forfeitures |       | $                                             | 3,566      |   | $ | 5,669 |   |
|                                                   |            |                                               |            |  |  |  |  |

 

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**ITEM 2.**                *Management’s Discussion and Analysis of FinancialCondition and Results of Operations*

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

**Business Overview**

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

Services provided to user clients by the Company’sGlobal Services group, which has approximately 6,600 employees, consist ofcorporate advisory services, project management and facilities management. Corporateadvisory services are brokerage and brokerage-related services that includeprimarily tenant representation brokerage services, as well as othertransaction or portfolio services such as acquisition/disposition brokerage,lease administration and lease audits. Project management services includefacility planning, construction oversight, space planning, site consolidations,multi-location expansion programs, facilities design, signage conversions,portfolio-wide operational refits and upgrades, and workplace moves, adds andchanges. Facilities management services are building management services thatinclude administration and day-to-day operation, maintenance and repair ofclient-occupied facilities, office services, and call center services.

Services provided to investor clients by the Company’sGlobal Services group consist of brokerage, construction management andproperty management. Brokerage services include project leasing (when theCompany is engaged as the owner’s leasing agent for renewals, expansions andleasing of vacant space in investor-owned properties) and capital markets(investment sales and capital sourcing) services. Construction managementservices are project management services that primarily include space planningand tenant finish coordination, typically in conjunction with propertymanagement and leasing assignments. Property management services are buildingmanagement services that include all aspects of building operations,maintenance and repair, tenant relations and oversight of building improvementprocesses.

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

The Development andInvestment group, with approximately 250 employees, provides developmentservices to users and investors and pursues opportunistic but risk-mitigateddevelopment and investment in commercial real estate across a wide spectrum ofproduct types, including industrial, office and retail properties; healthcarefacilities of all types (medical office buildings, hospitals and ambulatorysurgery centers); higher education facilities, including student housing; andresidential/mixed-use projects. The Company acts as the general manager of thedevelopment process, providing services that are vital in all 

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

**Financial Overview**

***ConsolidatedResults.***   The Company’s net income for thesecond quarter and first half of 2006 was up 6% and 21% from the second quarterand first half of 2005, from $8.3 million and $10.3 million to $8.8 million and$12.5 million, respectively. Global Services segment profit growth waspartially offset by the increased year-to-date Development and Investment loss.The increased Development and Investment loss is attributable to costsassociated with the significant increase in project activity. The Company’sdiluted earnings per share for the second quarter and first half of 2006 was$0.24 and $0.34, up from $0.23 and $0.29 reported for the second quarter andfirst half of 2005, respectively. Consolidated revenues increased $30.2 million(14%) and $69.6 million (18%) for the second quarter and first half of 2006 ascompared to the same periods of 2005, respectively.

In February 2006, the Company receivedauthorization from its Board of Directors to repurchase up to $50.0 million ofits common stock from time to time in open market purchases or privatelynegotiated transactions. In June 2006, the Company completed its $50.0million share repurchase program. A total of 1,487,500 shares were repurchasedat an average price of $33.61 per share.

***SegmentPerformance.  ***The Global Services segmentincome before income taxes increased 39% from $22.4 million in the first halfof 2005 to $31.1 million in the first half of 2006. Revenues for this segmentincreased 17%, from $371.8 million in the first half of 2005 to $436.7 millionin the first half of 2006. Increases in all of the user services revenues lines(facilities management up 15%, corporate advisory services up 51% and projectmanagement up 11%) contributed to the increase in income before income taxes,as did the 16% increase in brokerage revenues from investor customers. Therevenue increases reflect the impact of the Company’s success in winning newoutsourcing business-both through new contract awards and expansions withexisting customers-and its continued efforts to grow its brokerage business.

The Development andInvestment segment posted a loss before income taxes of $10.5 million in thefirst half of 2006 as compared to a $6.3 million loss in the first half of 2005.Segment operating expenses increased 22%, from $33.7 million in the first halfof 2005 to $41.0 million in the first half of 2006. The increase reflectsinvestments in additional personnel to drive and support growth and increasesin real estate operating expense, interest, and depreciation and amortizationassociated with increased real estate development and investment activity.

**Results of Operations—Three and Six Months Ended June 30,2006 Compared to Three and Six Months Ended June 30,2005**

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, 2006and for the three and six months ended June 30, 2005, have beenreclassified to conform to the presentation for the three months ended June 30,2006. As a result, certain balances differ from the amounts reported inpreviously filed documents. See *Income from DiscontinuedOperations, Net of Income Taxes*, below, for additional information.

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| ** **                                                                                                                            | ** **   | **For the Six Months  Ended June 30,** | ** **   | ** **   | ** **   | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------------------------|--------------|--------------|--------------|-------------------|------------|
| ** **                                                                                                                            | ** **   | **2006**                                                        | ** **   | **2005**     | ** **   | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** **   | **($ in thousands)**                                  | ** **   |
| **REVENUES:**                                                                                                                         | ** **   | ** **                                                      | ** **   | ** **   | ** **   | ** **        |       |   | ** ** | ** ** |   |
| ***User  Services:***                                                                                                                 | *** *** | *** ***                                                    | *** *** | *** *** | *** *** | *** ***      |       | * * | *** *** | *** *** | * * |
| Facilities management                                                                                                                 |         | $                                                               | 131,200      |         | $            | 114,528           |       | $ | 16,672 |   |   | 14.6 | % |   |
| Corporate advisory services                                                                                                           |         | 97,657                                                          |         | 64,789       |         | 32,868            |       |   | 50.7 | % |   |
| Project management services                                                                                                           |         | 63,462                                                          |         | 57,287       |         | 6,175             |       |   | 10.8 | % |   |
|                                                                                                                                  |         | 292,319                                                         |         | 236,604      |         | 55,715            |       |   | 23.5 | % |   |
| ***Investor Services:***                                                                                                              | *** *** | *** ***                                                    | *** *** | *** *** | *** *** | *** ***      |       | * * | *** *** | *** *** | * * |
| Property management                                                                                                                   |         | 66,791                                                          |         | 68,555       |         | (1,764            | )          |   | (2.6 | )% |   |
| Brokerage                                                                                                                             |         | 71,511                                                          |         | 61,456       |         | 10,055            |       |   | 16.4 | % |   |
| Construction management                                                                                                               |         | 6,010                                                           |         | 5,174        |         | 836               |       |   | 16.2 | % |   |
|                                                                                                                                  |         | 144,312                                                         |         | 135,185      |         | 9,127             |       |   | 6.8 | % |   |
| Development and construction                                                                                                          |         | 20,374                                                          |         | 16,347       |         | 4,027             |       |   | 24.6 | % |   |
|                                                                                                                                  |         | 457,005                                                         |         | 388,136      |         | 68,869            |       |   | 17.7 | % |   |
| Gain on disposition of real estate                                                                                                    |         | 3,238                                                           |         | 2,474        |         | 764               |       |   | 30.9 | % |   |
| **TOTAL REVENUES**                                                                                                                    |         | 460,243                                                         |         | 390,610      |         | 69,633            |       |   | 17.8 | % |   |
| **COST AND EXPENSES:**                                                                                                                | ** **   | ** **                                                      | ** **   | ** **   | ** **   | ** **        |       |   | ** ** | ** ** |   |
| Salaries, wages and benefits                                                                                                          |         | 291,351                                                         |         | 258,441      |         | 32,910            |       |   | 12.7 | % |   |
| Commissions                                                                                                                           |         | 76,208                                                          |         | 56,956       |         | 19,252            |       |   | 33.8 | % |   |
| General and administrative                                                                                                            |         | 80,393                                                          |         | 65,987       |         | 14,406            |       |   | 21.8 | % |   |
| Depreciation and amortization                                                                                                         |         | 5,651                                                           |         | 4,925        |         | 726               |       |   | 14.7 | % |   |
| Interest                                                                                                                              |         | 4,078                                                           |         | 2,349        |         | 1,729             |       |   | 73.6 | % |   |
| **TOTAL EXPENSES**                                                                                                                    |         | 457,681                                                         |         | 388,658      |         | 69,023            |       |   | 17.8 | % |   |
| Operating income                                                                                                                      |         | 2,562                                                           |         | 1,952        |         | 610               |       |   | 31.3 | % |   |
| Interest and other income                                                                                                             |         | 1,950                                                           |         | 1,402        |         | 548               |       |   | 39.1 | % |   |
| Income from continuing operations before income  taxes, minority interest and income from investments in unconsolidated  subsidiaries |         | 4,512                                                           |         | 3,354        |         | 1,158             |       |   | 34.5 | % |   |
| Income tax expense                                                                                                                    |         | (1,780                                                          | )            | (1,210       | )            | (570              | )          |   | (47.1 | )% |   |
| Minority interest, net of income taxes                                                                                                |         | 132                                                             |         | 3,251        |         | (3,119            | )          |   | (95.9 | )% |   |
| Income from investments in unconsolidated  subsidiaries, net of income taxes                                                          |         | 6,106                                                           |         | 4,567        |         | 1,539             |       |   | 33.7 | % |   |
| Income from continuing operations                                                                                                     |         | 8,970                                                           |         | 9,962        |         | (992              | )          |   | (10.0 | )% |   |
| Income from discontinued operations, net of income  taxes                                                                             |         | 2,486                                                           |         | 355          |         | 2,131             |       |   | 600.3 | % |   |
| Income before cumulative effect of a change in  accounting principle                                                             |         | 11,456                                                          |         | 10,317       |         | 1,139             |       |   | 11.0 | % |   |
| Cumulative effect of a change in accounting  principle, net of income taxes                                                      |         | 1,011                                                           |         | —       |         | 1,011             |       |   | 0.0 | % |   |
| **Net  income**                                                                                                                       |         | $                                                               | 12,467       |         | $            | 10,317            |       | $ | 2,150 |   |   | 20.8 | % |   |

 

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| ** **                                                                                                                          | ** **   | **For the Three Months  Ended June 30,** | ** **   | ** **   | ** **   | ** **        | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|--------------|--------------|-------------------|--------------|
| ** **                                                                                                                          | ** **   | **2006**                                                          | ** **   | **2005**     | ** **   | **$ Change** | ** **   | **% Change** | ** ** |
| ** **                                                                                                                          | ** **   | **($ in thousands)**                                    | ** **   |
| **REVENUES:**                                                                                                                       | ** **   | ** **                                                        | ** **   | ** **   | ** **   | ** **        | ** **   |   | ** ** | ** ** |   |
| ***User  Services:***                                                                                                               | *** *** | *** ***                                                      | *** *** | *** *** | *** *** | *** ***      | *** *** | * * | *** *** | *** *** | * * |
| Facilities  management                                                                                                              |         | $                                                                 | 66,166       |         | $            | 59,391            |         | $ | 6,775 |   |   | 11.4 | % |   |
| Corporate  advisory services                                                                                                        |         | 51,824                                                            |         | 40,116       |         | 11,708            |         |   | 29.2 | % |   |
| Project  management services                                                                                                        |         | 33,783                                                            |         | 31,963       |         | 1,820             |         |   | 5.7 | % |   |
|                                                                                                                                |         | 151,773                                                           |         | 131,470      |         | 20,303            |         |   | 15.4 | % |   |
| ***Investor  Services:***                                                                                                           | *** *** | *** ***                                                      | *** *** | *** *** | *** *** | *** ***      | *** *** | * * | *** *** | *** *** | * * |
| Property  management                                                                                                                |         | 32,939                                                            |         | 34,468       |         | (1,529            | )            |   | (4.4 | )% |   |
| Brokerage                                                                                                                           |         | 40,751                                                            |         | 33,676       |         | 7,075             |         |   | 21.0 | % |   |
| Construction  management                                                                                                            |         | 2,998                                                             |         | 2,959        |         | 39                |         |   | 1.3 | % |   |
|                                                                                                                                |         | 76,688                                                            |         | 71,103       |         | 5,585             |         |   | 7.9 | % |   |
| Development and  construction                                                                                                       |         | 11,524                                                            |         | 8,510        |         | 3,014             |         |   | 35.4 | % |   |
|                                                                                                                                |         | 239,985                                                           |         | 211,083      |         | 28,902            |         |   | 13.7 | % |   |
| Gain on  disposition of real estate                                                                                                 |         | 2,168                                                             |         | 906          |         | 1,262             |         |   | 139.3 | % |   |
| **TOTAL  REVENUES**                                                                                                                 |         | 242,153                                                           |         | 211,989      |         | 30,164            |         |   | 14.2 | % |   |
| **COST  AND EXPENSES:**                                                                                                             | ** **   | ** **                                                        | ** **   | ** **   | ** **   | ** **        | ** **   |   | ** ** | ** ** |   |
| Salaries, wages  and benefits                                                                                                       |         | 145,261                                                           |         | 132,730      |         | 12,531            |         |   | 9.4 | % |   |
| Commissions                                                                                                                         |         | 42,069                                                            |         | 34,298       |         | 7,771             |         |   | 22.7 | % |   |
| General and  administrative                                                                                                         |         | 43,292                                                            |         | 35,963       |         | 7,329             |         |   | 20.4 | % |   |
| Depreciation and  amortization                                                                                                      |         | 2,951                                                             |         | 2,526        |         | 425               |         |   | 16.8 | % |   |
| Interest                                                                                                                            |         | 2,580                                                             |         | 1,669        |         | 911               |         |   | 54.6 | % |   |
| **TOTAL  EXPENSES**                                                                                                                 |         | 236,153                                                           |         | 207,186      |         | 28,967            |         |   | 14.0 | % |   |
| Operating income                                                                                                                    |         | 6,000                                                             |         | 4,803        |         | 1,197             |         |   | 24.9 | % |   |
| Interest and  other income                                                                                                          |         | 1,081                                                             |         | 481          |         | 600               |         |   | 124.7 | % |   |
| Loss from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |         | 7,081                                                             |         | 5,284        |         | 1,797             |         |   | 34.0 | % |   |
| Income tax  expense                                                                                                                 |         | (2,782                                                            | )            | (1,947       | )            | (835              | )            |   | (42.9 | )% |   |
| Minority  interest, net of income taxes                                                                                             |         | 363                                                               |         | 1,263        |         | (900              | )            |   | (71.3 | )% |   |
| Income from  investments in unconsolidated  subsidiaries, net of income taxes                                                       |         | 3,939                                                             |         | 2,984        |         | 955               |         |   | 32.0 | % |   |
| Income from  continuing operations                                                                                                  |         | 8,601                                                             |         | 7,584        |         | 1,017             |         |   | 13.4 | % |   |
| Income from  discontinued operations, net of income taxes                                                                           |         | 181                                                               |         | 680          |         | (499              | )            |   | (73.4 | )% |   |
| Income before  cumulative effect of a change in accounting principle                                                                |         | 8,782                                                             |         | 8,264        |         | 518               |         |   | 6.3 | % |   |
| Cumulative effect  of a change in accounting principle, net of income taxes                                                         |         | —                                                            |         | —       |         | —            |         |   | 0.0 | % |   |
| **Net income**                                                                                                                      |         | $                                                                 | 8,782        |         | $            | 8,264             |         | $ | 518 |   |   | 6.3 | % |   |

 

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***Revenues.******  ***Facilitiesmanagement revenue increased from the second quarter and first half of 2005 tothe second quarter and first half of 2006. This increase is primarily theresult of the addition of several new customers as well as the expansion ofexisting client relationships subsequent to the second quarter of 2005.Reimbursement of salaries, wages, benefits and out-of-pocket general andadministrative costs, a component of facilities management revenue, comprisedthe substantial majority of the revenue increases from 2005. The composition offacilities management revenue, including management fees and reimbursements,can vary significantly from period to period based on the terms of theunderlying management agreements in effect each period.

Corporate advisory services revenue increased for thesecond quarter and first half of 2006 over the second quarter and first half of2005, driven largely by increases in commissions generated from tenantrepresentation transactions. The increase in commission revenues was in partthe result of an increase in the number of tenant representation brokers as theCompany has focused on expanding its brokerage network. In addition,transaction volumes have increased as clients continue to show a willingness tomake real estate commitments.

The 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 under certain outsourcing contracts and transaction volume).

Property management revenue decreased for the threeand six months ended June 30, 2006 as compared to the same periods in 2005.Square footage under management decreased slightly, primarily due to sales ofbuildings in the Company’s management portfolio to real estate investmenttrusts (“REITs”) or other investors that self-manage their properties or useother service providers. In addition, some square footage decreases resultedfrom existing clients taking services in-house or to other service providers. Thesedecreases were partially offset by additions to square footage related to newbusiness.

Brokerage revenue increased in the second quarter andfirst half of 2006 from the same periods in 2005, primarily due to increases inproject leasing commissions. Project leasing increased due to improving marketfundamentals, such as decreasing vacancies and increasing rents in certainmarkets. Investment sales revenues also increased slightly as real estateremains a favored asset class among certain investors as a result of improvingleasing fundamentals and relatively low interest rates.

Construction management revenue increased for thesecond quarter and first half of 2006 over the second quarter and first half of2005. 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 tenants’ real estate demands. The increase in constructionmanagement revenue resulted from a higher volume of construction projects astenant leasing activity increased and is consistent with the increase in projectleasing revenue.

Development and construction revenue increased in thesecond quarter and first half of 2006 as compared to the same periods of 2005,driven in part by an increase in development fees driven by higher activitylevels. In addition, development and construction revenue also increased due tohigher rental revenue from acquisitions of operating real estate properties.

Through approximately 1990, the Company focused itscommercial real estate development business on office, industrial and retailprojects primarily for investor clients. Since that time, the Company hasexpanded its focus to include other types of commercial development anddevelopment for user clients. National initiative teams source development andacquisition opportunities with both user and investor clients in healthcare,higher education, on-airport distribution and residential/mixed-use, andinitiative personnel support local development teams in the execution of the resultingprojects. By expanding its focus to include development for user clients and inthese initiatives, particularly those in the healthcare sector, the Companyseeks to mitigate the cyclicality traditionally inherent in the commercialdevelopment 

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business. The Companyseeks to establish funds and programs with capital partners and to channelincreasing amounts of development and investment activity into those funds andprograms. The Company’s in-process inventory of projects has grown to $4.8billion at June 30, 2006, up from $3.3 billion at June 30, 2005.

The Company’s gain on disposition of real estateincreased in the second quarter and first half of 2006 as compared to thesecond quarter and first half of 2005. In the second quarter of 2006, theCompany sold two real estate projects with an aggregate net sales price of $5.1million, resulting in an aggregate gain on disposition of $2.2 million. In thesecond quarter of 2005, the Company sold one real estate project with a netsales price of $0.8 million and recognized a gain of $0.7 million on thedisposition along with a deferred gain of $0.2 million relating to previousperiod dispositions. During the first half of 2006, the Company sold five realestate projects with an aggregate net sales price of $7.2 million, resulting inan aggregate gain on disposition of $3.1 million and recognized a deferred gainof $0.1 million relating to previous period dispositions. During the first halfof 2005, the Company recognized a total gain on disposition of real estate of$2.5 million. This gain comprised the sale of two real estate projects with anaggregate net sales price of $1.6 million and a settlement related to theestimated cost to complete construction related to a previous perioddisposition. This gain also included deferred gain recognition of $0.2 millionrelated to dispositions in prior periods.

In addition, Development and Investment income isgenerated from investments in unconsolidated subsidiaries and from theoperation and/or disposition of real estate classified as “discontinuedoperations.” The impact of Development and Investment project sales accountedfor as income from the Company’s unconsolidated subsidiaries or as income fromdiscontinued operations is a regular part of, and can contribute significantlyto, Development and Investment results in any given period. See *Income from Investments in Unconsolidated Subsidiaries, Net of IncomeTaxes*and *Income from DiscontinuedOperations, Net of Income Taxes*, below, for additional information.

***Costs and Expenses.******  ***Salaries,wages and benefits expense includes all compensation paid to Company employeesother than brokerage commissions. As such, it includes salaries, benefits andannual incentive bonuses for employees whose compensation is reimbursed by clients(“reimbursed employees”); salaries, benefits and annual incentive bonuses foremployees whose compensation is not so reimbursed (“unreimbursed employees”);long-term incentive compensation associated with stock-based awards to certainemployees; and transaction-related incentive compensation other than brokeragecommissions, primarily paid in connection with development and investmenttransactions, including those transactions recorded as income from discontinuedoperations. Salaries, wages and benefits expense for both reimbursed andunreimbursed employees increased in the second quarter and first half of 2006from the second quarter and first half of 2005. Salaries,****wagesand benefits for reimbursed employees grew as the Company increased its facilitiesmanagement and project management headcount to service client expansions andnew clients. The increased expense for unreimbursed employees resulted from anincrease in personnel to support the Company’s overall growth. In addition, theCompany experienced a sharp increase of $4.1 million in employee medical costsin the first quarter of 2006 as compared to the first quarter of 2005. Thefirst quarter 2006 increase was unusual based on the Company’s historicalexperience. The increase moderated in the second quarter and was more in linewith expectations and prior year experience. The Company is self-insured foremployee medical costs with third-party stop-loss insurance for largeindividual claims.

The increase in commission expense during the secondquarter and first half of 2006 was directly attributable to the increases inthe Company’s corporate advisory services and brokerage revenue discussedabove.

General and administrative expenses increased in thesecond quarter and first six months of 2006 as compared to the same periods of2005, due in part to increased client-reimbursed out-of-pocket general 

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and administrativeexpenses, associated with growth in the Company’s facilities management andproject management service lines. The 2006 increase is also due in part to anincrease in unreimbursed expenses including legal and professional fees andtravel and entertainment. In addition, the acquisition of several operatingreal estate properties has led to increased real estate operating expenses in2006. These properties, which the Company plans to redevelop, lease and sell,include acquisitions made through the Company’s fifth discretionary developmentand investment fund (“Fund V”).

Depreciation and amortization expenses remainedrelatively flat in the second quarter and first six months of 2006 as comparedto the second quarter and first half of 2005. Interest expense increased in thesecond quarter and first half of 2006, partially as a result of higheroutstanding balances and interest rates under the Company’s revolving line ofcredit as compared to the second quarter and first half of 2005 and an increasein notes payable related to operating real estate properties in 2006 ascompared to 2005. The higher balances under the Credit Facility were incurredto fund the Company’s acquisition of an additional ownership interest inSavills in the second quarter of 2005, as well as to fund the Company’s 2006stock repurchases and additional real estate investments.

***Minority Interest,Net of Income Taxes.******  ***Minorityinterest income decreased from the second quarter and first half of 2005 to thesecond quarter and first half of 2006. This decrease is due in part to expenserecognized in 2006 related to a gain on disposition of a consolidated realestate project, which was shared with outside partners. In addition, a portionof the second quarter and first half of 2005 income relates to the minorityinterest owners’ share of fees earned by the Company related to certain realestate projects.

***Income fromInvestments 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 the business and transactions carried out by theunderlying unconsolidated subsidiaries. The increase in income from investmentsin unconsolidated subsidiaries in the second quarter and first six months of2006 as compared to the same periods of 2005 reflects, among other things, theCompany’s increased investment in Savills (made in April 2005). For thesecond quarter and first half of 2006, income from investments inunconsolidated subsidiaries also includes the Company’s share of the operatingresults of Trammell Crow Meghraj, the Company’s Indian affiliate (investmentmade in October 2005) and of Trammell Crow Company Krombach Partners, theaffiliate through which the Company provides services in the St. Louis area(formed in October 2005). The increase in income from 2005 to 2006 waspartially offset by the income from a building sale by an unconsolidatedsubsidiary in 2005.

***Income fromDiscontinued Operations, Net of Income Taxes.******  ***Incomefrom discontinued operations consists of the operations of real estateproperties and gain on disposition of real estate properties held for sale orsold, that were considered components of an entity under FAS 144 and in whichthe Company had not retained or did not expect to retain significant continuinginvolvement. Dispositions of real estate assets have been and continue to be asignificant part of the Company’s activities and, as a result of applying theprovisions of FAS 144, the Company expects a significant amount of theseactivities to be classified as discontinued operations in future periods. Becausegains on sale of real estate projects accounted for as income from discontinuedoperations give rise to indirect costs, such as incentive and othercompensation expense of Development and Investment segment personnel andfund-level minority interest associated with the gains, the portion of theCompany’s net income attributable to sales of real estate projects wassignificantly less than the amount shown as income from discontinued operations.During the second quarter of 2006, the Company sold one real estate projectthat was considered discontinued operations for a net sales price of $0.8million, resulting in a gain on disposition (before income taxes) of $0.2million. The Company sold four real estate projects in the second quarter of2005 

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that were considereddiscontinued operations for a net sales price of $27.4 million, resulting in anaggregate gain on disposition (before income taxes) of $1.9 million.

In the first half of 2006, the Company sold four realestate projects that were considered discontinued operations for an aggregatenet sales price of $23.6 million, resulting in an aggregate gain on disposition(before income taxes) of $5.1 million. During the first half of 2005, theCompany sold five real estate projects that were considered discontinuedoperations for an aggregate net sales price of $29.2 million, resulting in anaggregate gain on disposition (before income taxes) of $2.0 million.

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

***Net Income.******  ******Net income increased due to thefluctuations in revenues and expenses described above. In addition, net incomefor the second quarter and first half of 2006 was adversely impacted due to anincrease in the Company’s effective income tax rate.***

**New AccountingPronouncements**

The Company adopted FAS123R effective January 1, 2006, using the modified-prospective transitionmethod, and results for prior periods were not adjusted. Prior to adoption ofFAS 123R, the Company elected to use the intrinsic method under AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*, to account for its stock-based compensationarrangements. Compensation expense for stock options was recognized to theextent the market price of the underlying stock on the date of grant exceededthe exercise price of the option. The Company recognized compensation expenserelated to restricted stock grants over the vesting period of the underlyingaward in an amount equal to the fair market value of the Company’s stock on thedate of grant. No compensation expense was recognized related to the differencebetween the employee’s cost and the market value of stock purchased under theCompany’s employee stock purchase plan.

FAS 123R requires allstock-based awards to employees to be recognized in the income statement basedon their fair values. FAS 123R also requires the Company to estimateforfeitures of share-based payments upon grant and to reevaluate this estimateduring the requisite service period. Prior to the adoption of FAS 123R, theCompany’s policy had been to reverse expense related to forfeitures ofrestricted stock as they occurred. See *Cumulative Effect of aChange in Accounting Principle, Net of Income Taxes*. All otherimpacts of adopting FAS 123R to the Company’s consolidated statement of incomeand net income per share were not material.

For the six months ended June 30,2006 and 2005, the Company recognized total stock-based compensation expense of$4.4 million and $3.2 million with a related income tax benefit realized of$1.7 million and $1.2 million, respectively.

As of June 30, 2006,the total compensation cost related to unvested restricted stock awards not yetrecognized was $14.3 million, net of expected forfeitures, and theweighted-average period over which these awards are expected to be recognizedwas 2.7 years.

In June 2006, the FASBissued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the Company’s 

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consolidatedfinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes* (“FAS 109”). FIN 48 prescribes arecognition threshold and measurement attribute for the financial recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 creates a two-step process in evaluating a tax position. Thefirst step, recognition, requires the Company to determine whether it is morelikely than not that a tax position will be sustained upon examination,including resolution of any related appeals or litigation, based on thetechnical merits of the position. The second step, measurement, states that atax position that meets the more likely than not recognition threshold shouldbe measured to determine the amount of benefit to be recognized in theCompany’s consolidated financial statements with the tax position measured atthe largest amount of benefit that is greater than 50 percent likely of beingrealized upon ultimate settlement.

Upon initial adoption, alltax positions should be reviewed and only positions that meet the“more-likely-than-not” recognition threshold may be recognized or continue tobe recognized. The cumulative effect of applying FIN 48 shall be reported as anadjustment to the opening balance of retained earnings (or other appropriatecomponents of equity or net assets). The amount of the cumulative adjustment isthe difference between the net assets and liabilities recognized prior to theadoption of FIN 48 and the net assets and liabilities recognized as a result ofapplying FIN 48. FIN 48 is effective for fiscal years beginning after December15, 2006. The Company has not yet determined the impact of FIN 48 on itsconsolidated financial statements.

**Quarterly Results of Operations and Seasonality**

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

**Liquidity andCapital Resources**

The Company’s liquidityand capital resources requirements include the funding of working capitalneeds, primarily costs incurred in providing services to its clients beforecollection of related billings; the funding of capital investments, includingthe acquisition of or investments in other real estate service companies; therepurchase of its shares if authorized by the Board of Directors; expendituresfor real estate and payments on notes payable associated with its developmentand investment activities; and expenditures related to upgrading the Company’smanagement information systems. The Company finances its operations withinternally generated funds and borrowings under the Credit Facility (describedbelow). The portion of the Company’s development and investment business thatincludes the acquisition and development of real estate is financed with loanssecured by underlying real estate, external equity, internal sources of funds,or a combination thereof.

Net cash used in operatingactivities totaled $62.6 million for the first six months of 2006, compared to$64.3 million in the first six months of 2005. This decrease in cash used was inpart due to greater collections of accounts receivable in the first half of2006 as compared to the first half of 2005. Also, the change in receivablesfrom affiliates was a reduction of $0.3 million in 2006, as compared to anincrease of $6.0 million in 2005, due to amounts loaned to an unconsolidatedsubsidiary in 2005. In addition, there was a decrease in income tax payments inthe first half of 2006 on account of 2005 activity, as compared to suchpayments in the first half of 2005 on account of 2004 activity, primarily dueto the timing of payments made for each period. Cash used also decreased due tohigher levels of accounts payable and accrued liabilities, due to the Company’sgrowth in 2006. These cash inflows were partially offset by an increase in thenotes receivables in the first half of 2006 related to higher amounts loaned bythe Company with regard to real 

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estateprojects. Also, there was an increase in restricted cash in 2006, primarily dueto an increase in cash that is restricted for use by the Company’s consolidatedinsurance company to pay insurance premiums to third-party insurance companies.In addition, cash used in real estate activities, net of related borrowings,was $17.6 million in the first half of 2006, compared to $15.0 million for thesame period of 2005 as a result of increased real estate investment activity inthe first half of 2006.

Net cash used in investingactivities totaled $24.6 million for the first six months of 2006, compared to$134.2 million for the first six months of 2005. This decrease in cash used isprimarily due to a decrease in investments in unconsolidated subsidiaries, netof distributions, to $5.3 million for the first six months of 2006 as comparedto $90.3 million in the same period of 2005. The 2005 contributions primarilyrelated to the Company’s additional investment in Savills. In addition, cashused decreased due to the Company’s wholly-owned captive insurance companymaking purchases, net of sales proceeds, of $0.3 million in marketablesecurities in 2006, as compared to net purchases of $17.8 million in 2005. Also,expenditures made in 2006 related to real estate classified as “held forinvestment” were $15.3 million compared to $21.0 million in 2005.

Net cash provided byfinancing activities totaled $47.8 million during the first six months of 2006as compared to $80.9 million during the same period of 2005. The decrease incash provided in 2006 is in part due to borrowings, net of principal debtpayments, under the Company’s line of credit of $52.5 million, compared toborrowings, net of principal debt payments, of $75.5 million in the comparable2005 period. The Company used the 2006 borrowings to fund its purchase ofshares of its own stock, and income tax and incentive payments on account of2005 results. The Company used the 2005 borrowings to fund its purchase ofadditional shares of Savills in 2005. In addition, the Company receivedproceeds from the exercise of employee stock options of $17.8 million in 2006,as compared to $5.2 million in 2005. Also contributing to the increase in cashwas an increase in proceeds from borrowings, net of payments, of $23.9 millionon notes payable related to real estate held for investment as compared to$20.6 million in the same period of 2005. In addition, the Company receivedcontributions from, net of distributions to, minority interest holders of $1.6million in 2006, compared to distributions, net of contributions, of $2.5million in 2005. Also, the Company repurchased shares of its own stock totaling$50.0 million in the first half of 2006, as compared to $20.0 million of stockrepurchases in the comparable period in 2005.

In June 2005, theCompany obtained a $175.0 million revolving line of credit (the “CreditFacility”) arranged by Bank of America, N.A., as the administrative agent,which replaced the Company’s previous $150.0 million revolving line of credit. TheCompany can obtain loans under the terms of the Credit Facility, which are BaseRate Loans or Eurodollar Rate Loans. Base Rate Loans bear interest at a baserate plus a margin up to 0.25% depending on the Company’s leverage ratio. Thebase rate is the higher of the prime lending rate or an average federal fundsrate plus 0.5%. Eurodollar Rate Loans bear interest at the Eurodollar rate plusa margin, which ranges from 1.75% to 2.0%, depending upon the Company’sleverage ratio. The Eurodollar rate is based on the British Bankers AssociationLIBOR rate.

TheCredit Facility contains various covenants such as the maintenance of minimumequity, liquidity, revenues, interest coverage ratios and fixed charge ratios. TheCredit Facility also includes restrictions on recourse indebtedness and totalindebtedness, restrictions on liens and certain restrictions on investments andacquisitions that can be made by the Company. In addition, the Company may notpay dividends, repurchase common shares, or make other distributions on accountof its common stock exceeding 50% of the previous year’s net income beforedepreciation and amortization. In February 2006, the Company amended itsCredit Facility to allow for repurchases or other distributions on account ofits common stock in an amount up to $100.0 million through December 31,2006 and to reduce the minimum required net worth covenant. The Credit Facilityis guaranteed by certain significant subsidiaries of the Company and is securedby a pledge of a stock of such significant subsidiaries and a pledge of certainintercompany indebtedness.

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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 than certainconstruction loans) ensuring the net interest on such excess is fixed, capped orhedged.

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

At June 30, 2006, the Company had outstandingborrowings of $85.0 million under the Credit Facility and $2.5 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 borrowings and lettersof credit outstanding) under the Credit Facility was $81.5 million at June 30,2006. Since many of the financial covenants in the Credit Facility aredependent on the Company’s earnings before interest, taxes, depreciation andamortization, “EBITDA,” as defined in the Credit Facility agreement andcalculated on a trailing four-quarter basis, a decline in the Company’s overalloperations could adversely impact the Company’s ability to comply with thesefinancial covenants and, in turn, the Company’s borrowing capacity.

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

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

In February 2006, theCompany announced that its Board of Directors had authorized the purchase of upto $50.0 million of its common stock from time to time in open market purchasesor in privately negotiated transactions. The repurchase of shares is intendedto be accretive to future earnings per share for holders who retain theirshares. The Company’s intent with respect to its stock repurchase programs isto reserve the repurchased shares for issuance in connection with the Company’sequity-based incentive 

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plans,as well as for other corporate purposes. In June 2006, the Companycompleted its $50.0 million share repurchase program. A total of 1,487,500shares were repurchased at an average price of $33.61 per share.

**Off-balanceSheet 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 during the six months ended June 30,2006 or 2005. The Company has guaranteed a maximum of $7.04 million of suchnotes payable, of which $7.00 million was outstanding at June 30, 2006. Paymentsrequired under these arrangements, if any, could be indicative of impairment inthe Company’s investments in the underlying unconsolidated subsidiaries andtherefore could result in additional expense to the Company.

**Forward-LookingStatements**

Certain statementscontained or incorporated by reference in this Quarterly Report on Form 10-Q,including without limitation statements containing the words “believe,” “anticipate,”“attainable,” “forecast,” “will,” “may,” “expect(ation),” “envision,” “project,”“budget,” “objective,” “goal,” “target(ing),” “estimate,” “could,” “should,” “would,”“conceivable,” “intend,” “possible,” “prospects,” “forsee,” “look(ing) for,” “lookto” and words of similar import, are forward-looking statements within themeaning of the federal securities laws. Such forward-looking statements involveknown and unknown risks, uncertainties and other matters which may cause theactual results, performance or achievements of the Company or industry resultsto be materially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such risks,uncertainties and other matters include, but are not limited to:

·       theability of the Company to retain its major clients and renew its contracts,

·       theability of the Company to attract new user and investor clients,

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

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

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

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

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

·       thetiming of individual transactions,

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

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

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

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

·       theeffect of government regulation on the conduct of the Company’s business, and

·       thethreat of terrorism and acts of war.

Given these uncertainties,readers are cautioned not to place undue reliance on such forward-lookingstatements. The Company disclaims any obligation to update any such statementsor publicly announce 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 in “Item 1A. Risk Factors” of the Company’s AnnualReport on Form 10-K filed with the Securities and ExchangeCommission on March 15, 2006.

**ITEM 3.****               ***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 6 and 7 to the Company’sCondensed Consolidated Financial Statements. The Credit Facility and themajority of the loans secured by real estate bear interest at variable ratesand are subject to fluctuations in the market. During the first six months of2006, the Company’s borrowings under the Credit Facility increased $52.5million (net of principal debt payments) primarily to fund incentivecompensation and income tax payments, investment in real estate and repurchasesof its common stock. From time to time, the Company purchases interest rateagreements to hedge, cap or lock a portion, but not all, of its exposure tofluctuations in interest rates, and, as such, the effects of interest ratechanges may be limited.

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

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

The Company accounts for its interest in Savills onthe equity method. See footnote 6, “Investment in UnconsolidatedSubsidiaries.”  For the year ended December 31,2005, the Company’s share of Savills’ income from continuing operations beforeincome taxes represented approximately 22% of the Company’s income from continuingoperations before income taxes, calculated in accordance with Rule 1-02(w) ofRegulation S-X. As this exceeds the 20% threshold under Rule 3-09 ofRegulation S-X, the Company was required to file Savills’ audited financialstatements on a Form 10-K/A by June 29, 2006. The Companybelieves that the use of income from continuing operations as the measure ofrecurring income by which Savills’ significance is calculated overstatesSavills’ significance because the Company’s income from continuing operationsdoes not include a category of income that is routinely generated by sales ofproperties created through its development operations-“income from discontinuedoperations” that is categorized as such solely as a result of the applicationof FAS 144. If this type of recurring income from property sales transactionswere included as income from continuing operations, Savills would haveaccounted for approximately 16% of the Company’s 2005 recurring income(measured on this basis), and 

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the filing of Savills’ financialstatements would not have been required. Nonetheless, because the Company’sshare of Savills’ 2005 income from continuing operations calculated inaccordance with Rule 1-02(w) of Regulation S-X exceeded the 20%threshold, the Company requested Savills to take the actions required of it tofacilitate the Company’s filing of Savills’ audited financial statements on a Form 10-K/Aby June 29, 2006. Savills refused to take such actions. While  the Company was unable to file the requiredfinancial statements, Savills did provide the Company with all informationrequired to properly account for its interest in Savills (which information wasreflected in the Company’s 2005 10-K) and the Company did file a Form 10-K/Ato provide certain information regarding Savills, including summarizedunaudited financial information of Savills as of December 31, 2005 and2004, and for the years then ended and to provide a reference to where Savills’full audited financial statements may be viewed or obtained. The Company willbe unable to determine if it is required to file Savills’ audited financialstatements with respect to the 2006 calendar year until the year has ended andthe Company and Savills have finalized their full year financial results. If sorequired, the Company will seek Savills’ cooperation in taking the actionsrequired of it to facilitate the Company’s filing of Savills’ audited financialstatements, but the Company has no contractual or other right to requireSavills to so cooperate and, accordingly, gives no assurances that the Company’sefforts will be successful. The result of this circumstance is that, basedsolely on the Company’s inability to provide the financial statements ofSavills, the Company was not in compliance with Section 13(a) of the SecuritiesExchange Act of 1934 with respect to its 10-K/A filing. The primaryeffect of this non-compliance is that the Company may be limited in its abilityto effect registered sales of its securities until it can comply with therequirement to file Savills’ financial statements, or the requirement ceases toapply to the Company. The Company has not sought to effect registered sale ofits securities since 1999, other than in connection with its employee benefitplans.

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 solely on the Company’s inability toprovide the financial statements of Savills described above (and no otheraspects of the Company’s disclosure controls and procedures), the ChiefExecutive Officer and Chief Financial Officer concluded  that the Company’s design and operation ofthe Company’s disclosure controls and procedures were ineffective in ensuringthat all information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic filings orsubmissions with the Securities and Exchange Commission is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. There were no changes in theCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that occurred during the Company’s last fiscal quarter thathave materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LegalProceedings

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

**ITEM 2.**                UnregisteredSales of Equity Securities and Use of Proceeds

Purchases under the Company’s stock repurchase programduring the second quarter of 2006 were 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**(1) | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares that  May Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1,  2006 - April 30, 2006 |       |       | 123,100    |                                         |       |                                         | $          | 35.00                                                                                                                               |       |                                                                                                                                                                              |       | 123,100 |   |   |   | $ | 16,875,000 |   |   |
| May 1, 2006  - May 31, 2006     |       |       | 34,700     |                                         |       |                                         | $          | 34.73                                                                                                                               |       |                                                                                                                                                                              |       | 34,700 |   |   |   | $ | 15,670,000 |   |   |
| June 1, 2006  - June 30, 2006   |       |       | 467,700    |                                         |       |                                         | $          | 33.50                                                                                                                               |       |                                                                                                                                                                              |       | 467,700 |   |   |   | $ | 0 |   |   |
| Total                                     |       |       | 625,500    |                                         |       |                                         | $          | 33.86                                                                                                                               |       |                                                                                                                                                                              |       | 625,500 |   |   |   |   |   |   |

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(1)             OnFebruary 22, 2006, the Company announced that its Board of Directors hadauthorized it to repurchase up to $50.0 million of its common stock from timeto time in open market purchases or in privately negotiated transactions. TheCompany completed its $50.0 million repurchase program in June 2006.

***ITEM 4.******               *Submission of Matters to a Vote ofSecurity Holders**

At the Annual Meeting of Stockholders held on May 17,2006, the following proposals were submitted to stockholders with the followingresults:

1.                 Election of theindividuals named below to serve as Class III Directors of the Companyuntil its Annual Meeting of Stockholders in 2009 and until their respectivesuccessors are duly elected and qualified or until their earlier death,resignation or removal from office.

| ** **            | ** ** | **Number of Shares** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **For**                        | ** ** | **Withheld** | ** ** |
| William F.  Concannon |       | 29,887,512                     |       | 1,264,755 |   |
| Rowland T.  Moriarty  |       | 29,899,820                     |       | 1,252,447 |   |
| J. McDonald Williams  |       | 29,891,451                     |       | 1,260,816 |   |

 

The following individuals are Class I Directorsof the Company, whose terms expire at the Company’s Annual Meeting ofStockholders in 2007: Curtis F. Feeny and Robert E. Sulentic. The followingindividuals are Class II Directors of the Company, whose terms expire atthe Company’s Annual Meeting of Stockholders in 2008: James R. Erwin, JeffreyM. Heller and Michael A. Moses.

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2.                 Ratificationof the selection of Ernst & Young LLP as the Company’s independentregistered public accounting firm for the year ended December 31, 2006.

| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
| For        |       |                           | 30,911,560 |   |   |
| Against    |       |                           | 247,802    |   |   |
| Abstain    |       |                           | 1,305      |   |   |

 

 

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

(2)                 Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and ExchangeCommission on August 11, 2000, and incorporated herein by reference.

(3)                 Previously filed as an exhibit to theCompany’s Form 10-K filed with the Securities and ExchangeCommission on March 31, 2003, and incorporated herein by reference.

(4)                 Previously filed as Exhibit 3.2.3to the Company’s Form 10-K filed with the Securities and ExchangeCommission on March 15, 2004, and incorporated herein by reference.

(5)                 Previously filed as Exhibit 4.1to the Company’s Registration Statement on Form S-1/A (File Number 333-34859)filed with the Securities and Exchange Commission on October 23, 1997, andincorporated herein 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, 2006 |                  |   |

 

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**Exhibit Index**

| Exhibit  Number | ** ** | ** **                                                                                                                                                                   | ** ** | **Description** |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(1)          |       | Certificate of  Incorporation of the Company                                                                                                                                 |
| 3.2(1)          |       | Bylaws of the Company                                                                                                                                                        |
| 3.2.1(2)        |       | First Amendment to the  Bylaws of the Company                                                                                                                                |
| 3.2.1(3)        |       | Second Amendment to the  Bylaws of the Company                                                                                                                               |
| 3.2.1(4)        |       | Third Amendment to the  Bylaws of the Company                                                                                                                                |
| 4.1(5)          |       | Form of Certificate  for Shares of Common Stock of the Company                                                                                                          |
| 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 (FileNumber 333-34859) filed with the Securities and Exchange Commissionon September 3, 1997, and incorporated herein by reference.

(2)                 Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and Exchange Commission on August 11,2000, and incorporated herein by reference.

(3)                 Previously filed as an exhibit to theCompany’s Form 10-K filed with the Securities and Exchange Commission on March 31,2003, and incorporated herein by reference.

(4)                 Previously filed as Exhibit 3.2.3to the Company’s Form 10-K filed with the Securities and ExchangeCommission on March 15, 2004, and incorporated herein by reference.

(5)                 Previously filed as Exhibit 4.1to the Company’s Registration Statement on Form S-1/A (File Number 333-34859)filed with the Securities and Exchange Commission on October 23, 1997, andincorporated herein by reference.

 

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