**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

**(Mark One)**

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

**Forthe quarterly period ended September 30, 2004**

**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

(State or other jurisdiction of  incorporation or organization) | **75-2721454**

(IRS Employer  Identification No.) |
|---------------------------------------------------------------------------|----------------------------------------------------|
| **2001  Ross Avenue  Suite 3400  Dallas, Texas**                     | **75201**                                          |
| (Address of principal executive offices)                                  | (Zip Code)                                         |

 

**(214) 863-3000**

(Registrant’s telephonenumber, including area code)

**Not applicable**

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

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

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

There were 35,537,394shares of the registrant’s common stock outstanding as of November 1,2004.

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES**

**INDEX**
|               | ** **                                                                                                                                                               | ** ** | **Page  Number** |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I.  | Financial Information                                                                                                                                                    |       | 3                |   |
| Item 1.       | Financial Statements                                                                                                                                                     |       | 3                |   |
|          | Condensed  Consolidated Balance Sheets as of September 30, 2004 (unaudited)  and December 31, 2003                                                             |       | 3                |   |
|          | Condensed  Consolidated Statements of Income for the three and nine months ended September 30,  2004 and 2003 (unaudited)                                           |       | 4                |   |
|          | Condensed  Consolidated Statements of Stockholders’ Equity for the nine months ended  September 30, 2004 (unaudited) and the year ended December 31, 2003 |       | 5                |   |
|          | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2004 and 2003 (unaudited)                                                 |       | 6                |   |
|          | Condensed  Consolidated Statements of Comprehensive Income for the three and nine months  ended September 30, 2004 and 2003 (unaudited)                             |       | 7                |   |
|          | Notes to Condensed Consolidated  Financial Statements (unaudited)                                                                                                        |       | 8                |   |
| Item  2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                              |       | 26               |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                              |       | 35               |   |
| Item 4.       | Controls and  Procedures                                                                                                                                                 |       | 36               |   |
| PART II. | Other Information                                                                                                                                                        |       | 37               |   |
| Item 1.       | Legal Proceedings                                                                                                                                                        |       | 37               |   |
| Item 6.       | Exhibits                                                                                                                                                                 |       | 38               |   |

 

2

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.**   *Financial Statements*

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS(in thousands, except share and per share data)**
| ** **                                                                                                                                                                                                 | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **(Unaudited)**              | ** ** | **(Note 1)**           | ** ** |
| **ASSETS**                                                                                                                                                                                                 |       |                         |       |                        |       |   |   |   |   |
| Current assets                                                                                                                                                                                             |       |                         |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                 |       |                         | $          | 95,751                      |       |   |   | $ | 105,616 |   |   |
| Restricted cash                                                                                                                                                                                            |       |                         | 6,337      |                        |       |   | 7,647 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,745 in 2004 and  $3,886 in 2003                                                                                                         |       |                         | 91,480     |                        |       |   | 97,479 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |                         | 2,817      |                        |       |   | 1,593 |   |   |
| Notes and other  receivables                                                                                                                                                                               |       |                         | 5,693      |                        |       |   | 9,784 |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |                         | 3,620      |                        |       |   | 3,754 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                         | 38,058     |                        |       |   | 44,580 |   |   |
| Real estate and  other assets held for sale                                                                                                                                                                |       |                         | 47,686     |                        |       |   | 73,920 |   |   |
| Other current  assets                                                                                                                                                                                      |       |                         | 18,643     |                        |       |   | 21,048 |   |   |
| Total current  assets                                                                                                                                                                                      |       |                         | 310,085    |                        |       |   | 365,421 |   |   |
| Furniture and  equipment, net                                                                                                                                                                              |       |                         | 19,585     |                        |       |   | 21,305 |   |   |
| Deferred income  taxes                                                                                                                                                                                     |       |                         | 19,537     |                        |       |   | 19,898 |   |   |
| Real estate under  development                                                                                                                                                                             |       |                         | 56,515     |                        |       |   | 6,345 |   |   |
| Real estate held  for investment                                                                                                                                                                           |       |                         | 112,522    |                        |       |   | 44,536 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                                                |       |                         | 71,799     |                        |       |   | 65,025 |   |   |
| Goodwill, net                                                                                                                                                                                              |       |                         | 74,349     |                        |       |   | 74,346 |   |   |
| Receivables from  affiliates                                                                                                                                                                               |       |                         | 18,263     |                        |       |   | 14,485 |   |   |
| Other assets                                                                                                                                                                                               |       |                         | 17,173     |                        |       |   | 18,765 |   |   |
|                                                                                                                                                                                                       |       |                         | $          | 699,828                     |       |   |   | $ | 630,126 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                             |       |                         |       |                        |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                        |       |                         |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                           |       |                         | $          | 24,508                      |       |   |   | $ | 16,183 |   |   |
| Accrued expenses                                                                                                                                                                                           |       |                         | 108,936    |                        |       |   | 114,315 |   |   |
| Payables to  affiliates                                                                                                                                                                                    |       |                         | 2          |                        |       |   | 104 |   |   |
| Income taxes  payable                                                                                                                                                                                      |       |                         | 2,136      |                        |       |   | 7,468 |   |   |
| Current portion of  long-term debt                                                                                                                                                                         |       |                         | 221        |                        |       |   | 1,081 |   |   |
| Current portion of  capital lease obligations                                                                                                                                                              |       |                         | 400        |                        |       |   | 1,297 |   |   |
| Current portion of  notes payable on real estate                                                                                                                                                           |       |                         | 28,541     |                        |       |   | 49,861 |   |   |
| Liabilities  related to real estate and other assets held for sale                                                                                                                                         |       |                         | 29,429     |                        |       |   | 49,152 |   |   |
| Other current  liabilities                                                                                                                                                                                 |       |                         | 10,137     |                        |       |   | 9,835 |   |   |
| Total current  liabilities                                                                                                                                                                                 |       |                         | 204,310    |                        |       |   | 249,296 |   |   |
| Long-term  debt, less current portion                                                                                                                                                                      |       |                         | 10         |                        |       |   | 10,014 |   |   |
| Capital lease  obligations, less current portion                                                                                                                                                           |       |                         | 318        |                        |       |   | 714 |   |   |
| Notes payable on  real estate, less current portion                                                                                                                                                        |       |                         | 102,542    |                        |       |   | 7,118 |   |   |
| Other liabilities                                                                                                                                                                                          |       |                         | 7,592      |                        |       |   | 6,459 |   |   |
| Total liabilities                                                                                                                                                                                          |       |                         | 314,772    |                        |       |   | 273,601 |   |   |
| Minority interest                                                                                                                                                                                          |       |                         | 37,810     |                        |       |   | 28,896 |   |   |
| Stockholders’ equity (see  Note 15)                                                                                                                                                              |       |                         |       |                        |       |   |   |   |   |
| 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; 37,886,274 shares issued and  37,869,981 shares outstanding in 2004 and 37,783,595 shares issued and  36,862,242 shares outstanding in 2003 |       |                         | 378        |                        |       |   | 377 |   |   |
| Paid-in  capital                                                                                                                                                                                           |       |                         | 196,024    |                        |       |   | 192,336 |   |   |
| Retained earnings                                                                                                                                                                                          |       |                         | 162,768    |                        |       |   | 151,560 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                    |       |                         | 1,329      |                        |       |   | 1,106 |   |   |
| Less:    Treasury  stock                                                                                                                                                               |       |                         | (214       | )                           |       |   | (8,363 | ) |   |
| Unearned stock  compensation, net                                                                                                                                                                          |       |                         | (13,039    | )                           |       |   | (9,387 | ) |   |
| Total  stockholders’ equity                                                                                                                                                                           |       |                         | 347,246    |                        |       |   | 327,629 |   |   |
|                                                                                                                                                                                                       |       |                         | $          | 699,828                     |       |   |   | $ | 630,126 |   |   |

 

See accompanying notes.

3

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF INCOME(in thousands, except share and per share data)(Unaudited)**
| ** **                                                                                                                                   | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                                               | ** ** | **2003**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **REVENUES**                                                                                                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| ***User  Services:***                                                                                                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Facilities  management                                                                                                                       |       | $                                                                      | 52,633     |                                                                  | $          | 50,155 |   | $ | 153,945 |   | $ | 155,071 |   |
| Corporate advisory  services                                                                                                                 |       | 34,142                                                                 |       | 30,948                                                                |       | 90,420 |   | 83,264 |   |
| Project management  services                                                                                                                 |       | 23,268                                                                 |       | 16,111                                                                |       | 60,905 |   | 46,442 |   |
|                                                                                                                                         |       | 110,043                                                                |       | 97,214                                                                |       | 305,270 |   | 284,777 |   |
| ***Investor  Services:***                                                                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Property  management                                                                                                                         |       | 34,330                                                                 |       | 36,120                                                                |       | 103,654 |   | 109,558 |   |
| Brokerage                                                                                                                                    |       | 25,917                                                                 |       | 20,609                                                                |       | 76,776 |   | 61,707 |   |
| Construction  management                                                                                                                     |       | 2,926                                                                  |       | 2,508                                                                 |       | 6,987 |   | 7,292 |   |
|                                                                                                                                         |       | 63,173                                                                 |       | 59,237                                                                |       | 187,417 |   | 178,557 |   |
| Development and  construction                                                                                                                |       | 8,388                                                                  |       | 10,234                                                                |       | 25,522 |   | 27,788 |   |
|                                                                                                                                         |       | 181,604                                                                |       | 166,685                                                               |       | 518,209 |   | 491,122 |   |
| Gain on  disposition of real estate                                                                                                          |       | 7,253                                                                  |       | 358                                                                   |       | 11,606 |   | 5,199 |  |
|                                                                                                                                         |       | 188,857                                                                |       | 167,043                                                               |       | 529,815 |   | 496,321 |   |
| **COSTS AND EXPENSES**                                                                                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Salaries, wages  and benefits                                                                                                                |       | 119,970                                                                |       | 110,020                                                               |       | 348,915 |   | 331,975 |   |
| Commissions                                                                                                                                  |       | 28,623                                                                 |       | 23,826                                                                |       | 76,627 |   | 63,975 |   |
| General and  administrative                                                                                                                  |       | 31,279                                                                 |       | 26,407                                                                |       | 90,232 |   | 83,292 |   |
| Depreciation and  amortization                                                                                                               |       | 2,700                                                                  |       | 3,901                                                                 |       | 8,736 |   | 13,252 |   |
| Interest                                                                                                                                     |       | 1,213                                                                  |       | 1,330                                                                 |       | 3,168 |   | 5,091 |   |
|                                                                                                                                         |       | 183,785                                                                |       | 165,484                                                               |       | 527,678 |   | 497,585 |   |
| Operating income (loss)                                                                                                                      |       | 5,072                                                                  |       | 1,559                                                                 |       | 2,137 |   | (1,264 | ) |
| Interest and other income                                                                                                                    |       | 766                                                                    |       | 228                                                                   |       | 2,131 |   | 1,039 |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 5,838                                                                  |       | 1,787                                                                 |       | 4,268 |   | (225 | ) |
| Income tax  (expense) benefit                                                                                                                |       | (2,401                                                                 | )          | (784                                                                  | )          | (1,725 | ) | 98 |   |
| Minority interest,  net of income tax expense of $618, $453, $148 and $1,484                                                            |       | 842                                                                    |       | 598                                                                   |       | 217 |   | 1,919 |   |
| Income from  investments in unconsolidated subsidiaries, net of income tax expense of  $629, $410, $5,664 and $3,804                    |       | 1,668                                                                  |       | 567                                                                   |       | 8,351 |   | 4,916 |   |
| Income from  continuing operations                                                                                                           |       | 5,947                                                                  |       | 2,168                                                                 |       | 11,111 |   | 6,708 |   |
| Income (loss) from  discontinued operations, net of income tax (expense) benefit of $75, $295,  $(38) and $548                               |       | (93                                                                    | )          | (385                                                                  | )          | 56 |   | (709 | ) |
| Net income                                                                                                                                   |       | $                                                                      | 5,854      |                                                                  | $          | 1,783 |   | $ | 11,167 |   | $ | 5,999 |   |
| Income per share from  continuing operations:                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                                                                                        |       | $                                                                      | 0.16       |                                                                  | $          | 0.06 |   | $ | 0.31 |   | $ | 0.19 |   |
| Diluted                                                                                                                                      |       | $                                                                      | 0.15       |                                                                  | $          | 0.06 |   | $ | 0.30 |   | $ | 0.18 |   |
| Income (loss) per share  from discontinued operations, net of income taxes:                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                                                                                        |       | $                                                                      | —     |                                                                  | $          | (0.01 | ) | $ | — |   | $ | (0.02 | ) |
| Diluted                                                                                                                                      |       | $                                                                      | —     |                                                                  | $          | (0.01 | ) | $ | — |   | $ | (0.02 | ) |
| Net income per share:                                                                                                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                                                                                        |       | $                                                                      | 0.16       |                                                                  | $          | 0.05 |   | $ | 0.31 |   | $ | 0.17 |   |
| Diluted                                                                                                                                      |       | $                                                                      | 0.15       |                                                                  | $          | 0.05 |   | $ | 0.30 |   | $ | 0.16 |   |
| Weighted average common  shares outstanding:                                                                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                                                                                        |       | 35,708,289                                                             |       | 35,265,354                                                            |       | 35,584,361 |   | 35,655,077 |   |
| Diluted                                                                                                                                      |       | 37,911,301                                                             |       | 36,681,330                                                            |       | 37,588,366 |   | 36,668,488 |   |

 

See accompanying notes.

4

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYNine Months Ended September 30, 2004 (Unaudited) and Year EndedDecember 31, 2003 (Note 1)(in thousands, except share data)**
| ** **                                                              | ** ** | **Common Shares** | ** ** | **Common  Stock Par** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**           | ** ** | **Unearned  Stock** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|---------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **Issued**             | ** ** | **Treasury**               | ** ** | **Value**   | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income (Loss)** | ** ** | **Stock**           | ** ** | **Compensation** | ** ** | **Total** | ** ** |
| Balance at January 1, 2003                                         |       | 36,227,820             |       | 48,647                     |       |        | $          | 362          |       |                                  | $          | 178,977                |       | $                   | 130,874    |             |       | $ | (589 | ) |   | $ | (464 | ) |   | $ | (806 | ) |   | $ | 308,354 |   |
| Net income                                                              |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | 21,040                 |       |                | —     |             |       | — |   |   | — |   |   | 21,040 |   |
| Issuance of restricted stock                                            |       | 1,413,000              |       | (223,500                   | )          |        | 14         |         |       | 12,269                                |       | —                 |       |                | —     |             |       | 2,028 |   |   | (14,311 | ) |   | — |   |
| Forfeiture of restricted stock                                          |       | —                 |       | 237,570                    |       |        | —     |         |       | (26                                   | )          | —                 |       |                | —     |             |       | (1,996 | ) |   | 1,807 |   |   | (215 | ) |
| Amortization of unearned stock compensation                             |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | —     |             |       | — |   |   | 3,923 |   |   | 3,923 |   |
| Issuance of common stock                                                |       | 142,775                |       | (275,764                   | )          |        | 1          |         |       | 1,116                                 |       | (354                   | )          |                | —     |             |       | 2,504 |   |   | — |   |   | 3,267 |   |
| Stock repurchase                                                        |       | —                 |       | 1,134,400                  |       |        | —     |         |       | —                                |       | —                 |       |                | —     |             |       | (10,435 | ) |   | — |   |   | (10,435 | ) |
| Foreign currency translation adjustment, net of tax                     |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | 1,358      |             |       | — |   |   | — |   |   | 1,358 |   |
| Change in fair value of interest rate swap agreement,  net of tax  |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | 337        |             |       | — |   |   | — |   |   | 337 |   |
| Balance at December 31,  2003                                      |       | 37,783,595             |       | 921,353                    |       |        | 377        |         |       | 192,336                               |       | 151,560                |       |                | 1,106      |             |       | (8,363 | ) |   | (9,387 | ) |   | 327,629 |   |
| Net income                                                              |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | 11,167                 |       |                | —     |             |       | — |   |   | — |   |   | 11,167 |   |
| Issuance of restricted stock                                            |       | 28,000                 |       | (638,313                   | )          |        | —     |         |       | 2,826                                 |       | —                 |       |                | —     |             |       | 5,796 |   |   | (8,622 | ) |   | — |   |
| Forfeiture of restricted stock                                          |       | —                 |       | 18,465                     |       |        | —     |         |       | —                                |       | —                 |       |                | —     |             |       | (233 | ) |   | 195 |   |   | (38 | ) |
| Amortization of unearned stock compensation                             |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | —     |             |       | — |   |   | 4,775 |   |   | 4,775 |   |
| Issuance of common stock                                                |       | 74,679                 |       | (285,212                   | )          |        | 1          |         |       | 862                                   |       | 41                     |       |                | —     |             |       | 2,586 |   |   | — |   |   | 3,490 |   |
| Foreign currency translation adjustment, net of tax                     |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | 223        |             |       | — |   |   | — |   |   | 223 |   |
| Balance at  September 30,  2004                                    |       | 37,886,274             |       | 16,293                     |       |        | $          | 378          |       |                                  | $          | 196,024                |       | $                   | 162,768    |             |       | $ | 1,329 |   |   | $ | (214 | ) |   | $ | (13,039 | ) |   | $ | 347,246 |   |

 

See accompanying notes.

5

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                            | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                                              | ** ** | **2003** | ** ** |
| **Operating activities**                                              |       |                                                                  |       |   |   |
| Cash flows from earnings:                                             |       |                                                                  |       |   |   |
| Net income                                                            |       | $                                                                     | 11,167     |   | $ | 5,999 |   |
| Reconciliation of net  income to net cash provided by earnings:       |       |                                                                  |       |   |   |
| Depreciation and  amortization                                        |       | 8,897                                                                 |       | 13,391 |   |
| Amortization of  employment contracts and unearned stock compensation |       | 5,928                                                                 |       | 3,673 |   |
| Amortization of  contract intangibles                                 |       | 1,631                                                                 |       | 1,554 |   |
| Bad debt expense                                                      |       | 562                                                                   |       | 1,696 |   |
| Provision for  losses and writedowns for impairment on real estate    |       | 672                                                                   |       | 3,052 |   |
| Gain on  disposition of real estate held for investment               |       | (741                                                                  | )          | — |   |
| Minority interest                                                     |       | (365                                                                  | )          | (3,403 | ) |
| Deferred income  tax provision                                        |       | 317                                                                   |       | 257 |   |
| Income from  investments in unconsolidated subsidiaries               |       | (14,015                                                               | )          | (8,720 | ) |
| Net cash provided  by earnings                                        |       | 14,053                                                                |       | 17,499 |   |
| Changes in operating  assets and liabilities:                         |       |                                                                  |       |   |   |
| Restricted cash                                                       |       | 1,310                                                                 |       | 950 |   |
| Accounts  receivable                                                  |       | 5,439                                                                 |       | 29,077 |   |
| Receivables from  affiliates                                          |       | (5,002                                                                | )          | (12,516 | ) |
| Notes receivable  and other assets                                    |       | 4,831                                                                 |       | (5,274 | ) |
| Real estate held  for sale and under development                      |       | (46,833                                                               | )          | (17,152 | ) |
| Notes payable on  real estate held for sale and under development     |       | 33,965                                                                |       | 12,769 |   |
| Accounts payable  and accrued expenses                                |       | 1,383                                                                 |       | (16,763 | ) |
| Payables to  affiliates                                               |       | (102                                                                  | )          | 19 |   |
| Income taxes  payable                                                 |       | (5,332                                                                | )          | (4,264 | ) |
| Other liabilities                                                     |       | 1,299                                                                 |       | 7,194 |   |
| Net cash flows  from changes in working capital                       |       | (9,042                                                                | )          | (5,960 | ) |
| Net cash provided  by operating activities                            |       | 5,011                                                                 |       | 11,539 |   |
| **Investing activities**                                              |       |                                                                  |       |   |   |
| Expenditures for  furniture and equipment                             |       | (4,545                                                                | )          | (5,874 | ) |
| Additions to real  estate held for investment                         |       | (65,945                                                               | )          | (10,034 | ) |
| Net proceeds from  disposition of real estate held for investment     |       | 18,438                                                                |       | — |   |
| Investments in  unconsolidated subsidiaries                           |       | (5,754                                                                | )          | (1,040 | ) |
| Distributions from  unconsolidated subsidiaries                       |       | 13,078                                                                |       | 17,294 |   |
| Net cash provided  by (used in) investing activities                  |       | (44,728                                                               | )          | 346 |   |
| **Financing  activities**                                             |       |                                                                  |       |   |   |
| Principal payments  on long-term debt and capital lease obligations   |       | (115,360                                                              | )          | (83,580 | ) |
| Proceeds from long-term  debt                                         |       | 102,539                                                               |       | 72,823 |   |
| Contributions from  minority interest                                 |       | 14,583                                                                |       | 2,644 |   |
| Distributions to  minority interest                                   |       | (5,304                                                                | )          | (8,958 | ) |
| Proceeds from  notes payable on real estate held for investment       |       | 59,660                                                                |       | 4,977 |   |
| Payments on notes  payable on real estate held for investment         |       | (29,756                                                               | )          | (3,275 | ) |
| Proceeds from  exercise of stock options                              |       | 575                                                                   |       | 463 |   |
| Proceeds from  issuance of common stock                               |       | 2,915                                                                 |       | 2,363 |   |
| Purchase of common  stock                                             |       | —                                                                |       | (10,435 | ) |
| Net cash provided  by (used in) financing activities                  |       | 29,852                                                                |       | (22,978 | ) |
| Net decrease in  cash and cash equivalents                            |       | (9,865                                                                | )          | (11,093 | ) |
| Cash and cash  equivalents, beginning of period                       |       | 105,616                                                               |       | 78,005 |   |
| Cash and cash  equivalents, end of period                             |       | $                                                                     | 95,751     |   | $ | 66,912 |   |

 

See accompanying notes.

6

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME(in thousands)(Unaudited)**
| ** **                                                                                                                                                                                                                                                | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **2004**                                                               | ** ** | **2003**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                                                                                                                                                                                                |       | $                                                                      | 5,854      |                                                                  | $          | 1,783 |   | $ | 11,167 |   | $ | 5,999 |   |
| Other  comprehensive income:                                                                                                                                                                                                                              |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Foreign currency translation adjustments, net of tax  expense of $186 and $177 in the three and nine months ended  September 30, 2004, respectively, and $29 and $451 in the three and nine  months ended September 30, 2003, respectively |       | 249                                                                    |       | 37                                                                    |       | 223 |   | 606 |   |
| Change in fair value of interest rate swap  agreement, net   of tax expense of $229 in the nine months ended September 30, 2003                                                                                                                      |       | —                                                                 |       | —                                                                |       | — |   | 337 |   |
| Comprehensive income                                                                                                                                                                                                                                      |       | $                                                                      | 6,103      |                                                                  | $          | 1,820 |   | $ | 11,390 |   | $ | 6,942 |   |

 

See accompanying notes.

7

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General

The condensed consolidated interim financialstatements of Trammell Crow Company and subsidiaries (the “Company”) includedherein have been prepared in accordance with the requirements for interimfinancial statements and do not include all disclosures required underaccounting principles generally accepted in the United States (“GAAP”) forcomplete financial statements. These financial statements should be read inconjunction with the consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003. Inthe opinion of management, all adjustments and eliminations, consisting only ofrecurring adjustments, necessary for a fair presentation of the financialstatements for the interim periods have been made. Interim results ofoperations are not necessarily indicative of the results to be expected for thefull year.

The Company hasexperienced and expects to continue to experience quarterly variations inrevenues and net income as a result of several factors. The Company’s quarterlyrevenues tend to increase throughout the year, particularly in the last quarterof the year, because its clients have demonstrated a tendency to closetransactions toward the end of the year. The timing and introduction of newcontracts, the disposition of investments in real estate assets and otherfactors may also cause quarterly fluctuations in the Company’s results ofoperations.

*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, 2003, and certain revenuesand expenses for the six months ended June 30, 2004, and the three andnine months ended September 30, 2003 have been reclassified to conform tothe presentation at and for the three months ended September 30, 2004 (seeNotes 7 and 9). As a result, certain balances differ from the amountsreported in previously filed documents.

*Use of Estimates*

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

*Consolidation*

The Company accounts forits interests in variable interest entities (“VIEs”) in accordance with FASBInterpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities* (“FIN 46R”). The Companydetermines whether an entity is a VIE and, if so, whether it should beconsolidated, by utilizing judgments and estimates that are inherentlysubjective. If the Company made different judgments or utilized differentestimates in these evaluations, it could result in differing conclusions as towhether or not an entity is a VIE and whether or not to consolidate suchentity.

8

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General(Continued)

The accompanying consolidated financial statements includethe accounts of the Company, its wholly-owned subsidiaries, and othersubsidiaries that are not considered VIEs and over which the Company hascontrol. In addition, the Company consolidates any VIEs of which it is theprimary beneficiary in accordance with FIN 46R. Intercompany accounts andtransactions have been eliminated. The Company’s investments in subsidiaries(including VIEs of which the Company is not the primary beneficiary) in whichit has the ability to exercise significant influence over operating andfinancial policies, but does not control (including subsidiaries where theCompany has less than 20% ownership), are accounted for by the equity method.The Company eliminates transactions with such equity method subsidiaries to theextent of its ownership in such subsidiaries. Accordingly, the Company’s shareof the earnings or losses of these equity method subsidiaries is included inconsolidated net income. Investments in other subsidiaries are carried at cost.The Company’s unconsolidated subsidiaries includeSavills plc (“Savills”)and other subsidiaries that primarilyown or invest in real estate development projects (see Note 3).

The Company is part of a co-lender group with anindependent third party that has issued a mezzanine loan to the owner of twooffice buildings. In April 2000, the Company provided $567 of the total$5,667 mezzanine loan. At that time, another independent third-party lenderprovided 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 theproperties, which the Company believes is a VIE. However, based upon theCompany’s evaluation, the Company is not the primary beneficiary of the entity.Therefore, the Company has not consolidated the entity that owns the officebuildings for which it has provided financing. The Company’s maximum exposureto loss as a result of its involvement with this VIE is $567 as of September 30,2004.

In September 2004,the Company issued a budget guaranty relating to a development project. Underthe budget guaranty, the Company is responsible for all costs in excess of anapproved budget of approximately $35,600. The Company was involved in thedesign of the underlying entity and has determined that its budget guarantyrepresents a variable interest in a VIE for which the Company is not theprimary beneficiary. The Company cannot estimate its actual maximum exposure toloss as a result of its involvement with this VIE because the budget guarantyis unlimited. However, based on the Company’s historic experience of minimalpayments under similar arrangements and the existence of a guaranteed maximumcontract between the general contractor and the owner of the project thatmitigates the Company’s risk, the Company believes that its exposure to loss isminimal.

*Income Taxes*

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

9

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General(Continued)

*Earnings Per Share*

The weighted-averagecommon shares outstanding used to calculate diluted earnings per share for thethree and nine months ended September 30, 2004, include 2,203,012 and2,004,005 shares, respectively, to reflect the dilutive effect of unvestedrestricted stock and options to purchase shares of common stock. Theweighted-average common shares outstanding used to calculate diluted earningsper share for the three and nine months ended September 30, 2003, include1,415,976 and 1,013,411 shares, respectively, to reflect the dilutive effect ofunvested restricted stock and options to purchase shares of common stock.

*Stock-BasedCompensation*

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

Proforma information regarding net income and net income per share, shown in thetable below, has been determined as if the Company had applied the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123,*Accounting for Stock-BasedCompensation*. 
| ** **                                                                                                                              | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **     2004     **   | ** ** | **     2003     **  | ** ** | **    2004    ** | ** ** | **     2003     ** | ** ** |
| Net income, as  reported                                                                                                                |       |                                                                   | $          | 5,854                                                                 |       |   |   | $ | 1,783 |   |   | $ | 11,167 |   |   | $ | 5,999 |   |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       |                                                                   | 1,172      |                                                                  |       |   | 605 |   |   | 2,829 |   |   | 1,449 |   |   |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       |                                                                   | 1,481      |                                                                  |       |   | 1,118 |   |   | 4,172 |   |   | 3,475 |   |   |
| Pro forma net  income                                                                                                                   |       |                                                                   | $          | 5,545                                                                 |       |   |   | $ | 1,270 |   |   | $ | 9,824 |   |   | $ | 3,973 |   |   |
| Net income per share:                                                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                  |       |                                                                   | $          | 0.16                                                                  |       |   |   | $ | 0.05 |   |   | $ | 0.31 |   |   | $ | 0.17 |   |   |
| Basic—pro forma                                                                                                                    |       |                                                                   | $          | 0.16                                                                  |       |   |   | $ | 0.04 |   |   | $ | 0.28 |   |   | $ | 0.11 |   |   |
| Net income per share:                                                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Diluted—as reported                                                                                                                |       |                                                                   | $          | 0.15                                                                  |       |   |   | $ | 0.05 |   |   | $ | 0.30 |   |   | $ | 0.16 |   |   |
| Diluted—pro forma                                                                                                                  |       |                                                                   | $          | 0.15                                                                  |       |   |   | $ | 0.03 |   |   | $ | 0.26 |   |   | $ | 0.11 |   |   |

 

10

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**1.**   General(Continued)

*Non-Controlling Interestsin Consolidated Limited Life Subsidiaries*

In May 2003,the FASB issued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“FAS 150”). Certainprovisions of FAS 150 would have required the Company to classifynon-controlling interests in consolidated limited life subsidiaries asliabilities adjusted to their settlement values in the Company’s financialstatements. In November 2003, the FASB indefinitely deferred applicationof the measurement and recognition provisions (but not the disclosurerequirements) of FAS 150 with respect to these non-controlling interests.As of September 30, 2004, the estimated settlement value ofnon-controlling interests in the Company’s consolidated limited lifesubsidiaries is $10,137, as compared to book value(included in minority interest on the Company’s balance sheet) of $6,676. Theexcess of settlement value over book value is driven by an even largerestimated appreciation of certain consolidated real estate assets andinvestments from the Company’s book value, offset by selling costs and debtprepayment penalties, if any.

**2.**   RealEstate

Allreal estate is included in the Company’s Development and Investment segment(see Note 12). Certain real estate assets owned by the Company secure theoutstanding balances of underlying mortgage or construction loans. Real estateowned by the Company consists of the following:
| ** **                                                         | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Real estate under  development (current)                           |       |                         | $          | 38,058                      |       |   |   | $ | 44,580 |   |   |
| Real estate  included in assets held for sale (see Note 7)(1) |       |                         | 45,219     |                        |       |   | 71,494 |   |   |
| Real estate under  development (non-current)                       |       |                         | 56,515     |                        |       |   | 6,345 |   |   |
| Real estate held  for investment(2)                                |       |                         | 112,522    |                        |       |   | 44,536 |   |   |
|                                                               |       |                         | $          | 252,314                     | (3)        |   |   | $ | 166,955 | (3) |   |

----

(1)          Net of allowances of $0and $1,047 at September 30, 2004, and December 31, 2003,respectively, to reduce the carrying value of assets to fair value less cost tosell.

(2)          Net of accumulateddepreciation of $725 and $307 at September 30, 2004, and December 31,2003, respectively.

(3)          Includes $13,630 and$124 at September 30, 2004, and December 31, 2003, respectively, oflease intangibles and tenant origination costs, net of accumulatedamortization.

In the nine months ended September 30, 2004 and2003, the Company recorded provisions for losses on real estate of $94 and$1,650, respectively, to increase the allowances on real estate held for saleto reduce the carrying value of assets to fair value less cost to sell. Of theamount recorded in 2003, $1,395 is 

11

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**2.**   Real Estate(Continued)

included in discontinuedoperations in the consolidated statements of income as it relates to a realestate project that is considered a discontinued operation under FAS 144.All remaining amounts are included in general and administrative expenses inthe consolidated statements of income.

In the nine months ended September 30, 2004 and2003, the Company recorded writedowns for impairment of real estate (notclassified as held for sale at the time of such writedowns) totaling $578 and$1,402,  respectively.Of the amount recorded in 2004, $120 is included in discontinued operations inthe consolidated statements of income as it related to a real estate projectthat is considered a discontinued operation under FAS 144. All remaining amountsare included in general and administrative expenses in the consolidatedstatements of income. The 2004 writedowns for impairment primarily relate to avacant land parcel in a market in which rental rates continue to decline andvacancy rates continue to increase. The Company obtained market comparisons forthe land parcel and determined that, based on those market comparisons, thevalue of the land was impaired. The 2003 writedowns for impairment primarilyrelate to a single-tenant office/industrial real estate project. Thenon-recourse note payable related to the real estate project had matured andthe Company subsequently conveyed the underlying property to the lender tosatisfy the note. The fair value of the asset was determined based on a discountedcash flow projection prior to the conveyance of the property to the lender.

In September 2004, the Company sold a real estateproject for $15,875. The Company is leasing back a portion of the space in theproject, and also has some continuing obligations regarding certain services tobe provided to the seller. As a result, the sale was recorded as a financingtransaction, and the gain will be recognized as income over the Company’s leaseterm, commencing when the continuing obligation period ends in the fourth quarter of 2004. AtSeptember 30, 2004, real estate and other assets held for sale includes$15,752 related to this realestate project, $14,974 of which is realestate. In addition, liabilities relatedto real estate and other assets held for sale includes $15,875 of notes payable from the sale of this real estateproject.

In September 2004, the Company conveyed amulti-tenant industrial real estate project to the lender in order to satisfythe underlying non-recourse note that had matured. With respect to thisdisposition, the Companyrecorded a loss on disposition of real estate of $3, including $61 of incomefor extinguishment of debt. The transaction resulted in a non-cash decrease inreal estate and other assets held for sale of $10,953 (increase in accountsreceivable of $2, decrease in other current assets of $164, decrease in realestate held for sale of $10,698and a decrease in other assets of $93), and a non-cash reduction in liabilitiesrelated to real estate and other assets held for sale of $10,950 (increase inaccounts payable of $57, decrease in accrued expenses of $273 and a decrease innotes payable on real estate of $10,734).

In December 2003, the Company sold a parcel ofland for $1,750 to an entity determined to be a VIE, of which the Company isnot the primary beneficiary. The consideration received included aninterest-bearing note from the buyer for $1,125. The Company retained aunilateral right to repurchase the property at any time through 2006, inaddition to maintaining the right to approve any plans for development on theproperty. If the Company exercises its repurchase option, the Company wouldrepay the amount it received from the buyer, plus a return on the buyer’sinvestment. Because of the Company’s continuing involvement in and option torepurchase the property, the transaction did not qualify as a sale 

12

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**2.**   Real Estate (Continued)

and as a result, afinancing transaction was recorded. As of September 30, 2004, real estateand other assets held for sale includes $844 of real estate and $1,111 of notesreceivable, and liabilities related to real estate and other assets held forsale include $1,750 of notes payable and $105 of accrued interest, all relatedto this parcel of land.

In 2003, the Company soldits 50% partnership interest in a consolidated subsidiary to the other partnerin the partnership for a net sales price of $1,032. The transaction resulted ina non-cash decrease in real estate and other assets held for sale of $11,004(accounts receivable of $4 and real estate of $11,000), a decrease in cash(included in real estate and other assets held for sale) of $92, and a non-cashreduction in liabilities related to real estate and other assets held for saleof $11,804 (decrease in accounts payable of $61, increase in accrued expensesof $164, and a decreasein notes payable on real estate of $11,907), and a non-cash increase inminority interest of $210. The Company recognized a gain on disposition of$1,530 as a result of this transaction.

**3.**   Investmentsin Unconsolidated Subsidiaries

Investmentsin unconsolidated subsidiaries consist of the following:
| ** **  | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------|------------|------------------------------|------------|-----------------------------|------------|
| Real estate |       |                         | $          | 39,778                      |       |   |   | $ | 35,546 |   |   |
| Other       |       |                         | 32,021     |                        |       |   | 29,479 |   |   |
|        |       |                         | $          | 71,799                      |       |   |   | $ | 65,025 |   |   |

 

The Company owns approximately 10.0% of theoutstanding stock of Savills,a property services firm headquartered in the United Kingdom and a leadingprovider of real estate services in Europe, Asia-Pacific and Australia. Theinvestment is classified as an “other” investment in the table above.

13

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

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

Summarized operatingresults for unconsolidated subsidiaries accounted for on the equity method areas follows:
| ** **       | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **       | ** ** | **    2004    **               | ** ** | **    2003    **              | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** |
| **Real Estate:** |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total revenues   |       | $                                                                      | 5,795      |                                                                  | $          | 13,272 |   | $ | 55,254 |   | $ | 59,399 |   |
| Total expenses   |       | 3,189                                                                  |       | 9,236                                                                 |       | 12,350 |   | 29,899 |   |
| Net income       |       | $                                                                      | 2,606      |                                                                  | $          | 4,036 |   | $ | 42,904 |   | $ | 29,500 |   |
| **Other:**       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total revenues   |       | $                                                                      | 167,790    |                                                                  | $          | 119,023 |   | $ | 452,890 |   | $ | 309,543 |   |
| Total expenses   |       | 146,140                                                                |       | 110,354                                                               |       | 413,868 |   | 291,698 |   |
| Net income       |       | $                                                                      | 21,650     |                                                                  | $          | 8,669 |   | $ | 39,022 |   | $ | 17,845 |   |
| **Total:**       |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total revenues   |       | $                                                                      | 173,585    |                                                                  | $          | 132,295 |   | $ | 508,144 |   | $ | 368,942 |   |
| Total expenses   |       | 149,329                                                                |       | 119,590                                                               |       | 426,218 |   | 321,597 |   |
| Net income       |       | $                                                                      | 24,256     |                                                                  | $          | 12,705 |   | $ | 81,926 |   | $ | 47,345 |   |

 

**4.**   Accrued Expenses

Accruedexpenses consist of the following:
| ** **                                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Payroll and  bonuses                                                                                                |       |                         | $          | 45,037                      |       |   |   | $ | 42,316 |   |   |
| Commissions                                                                                                         |       |                         | 24,882     |                        |       |   | 38,337 |   |   |
| Development costs                                                                                                   |       |                         | 11,047     |                        |       |   | 15,045 |   |   |
| Deferred income                                                                                                     |       |                         | 11,461     |                        |       |   | 5,691 |   |   |
| Interest                                                                                                            |       |                         | 302        |                        |       |   | 1,175 |   |   |
| Insurance                                                                                                           |       |                         | 2,439      |                        |       |   | 3,032 |   |   |
| Restructuring  charges (see Note 13)                                                                           |       |                         | 1,611      |                        |       |   | 1,864 |   |   |
| Other                                                                                                               |       |                         | 12,708     |                        |       |   | 9,584 |   |   |
|                                                                                                                |       |                         | 109,487    |                        |       |   | 117,044 |   |   |
| Less: Accrued  expenses included in liabilities related to real estate and other assets held  for sale (see Note 7) |       |                         | 551        |                        |       |   | 2,729 |   |   |
|                                                                                                                |       |                         | $          | 108,936                     |       |   |   | $ | 114,315 |   |   |

 

 

14

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**5.**   Long-Term Debt

Long-termdebt consists of the following:
| ** **                                                                                                  | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Borrowings under  $150,000 line of credit with a bank (the “Credit Facility”)                     |       |                         | $          | —                      |       |   |   | $ | 10,000 |   |   |
| Borrowings under  $25,000 discretionary line of credit with a bank                                          |       |                         | —     |                        |       |   | — |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       |                         | —     |                        |       |   | — |   |   |
| Other                                                                                                       |       |                         | 231        |                        |       |   | 1,095 |   |   |
| Total long-term  debt                                                                                       |       |                         | 231        |                        |       |   | 11,095 |   |   |
| Less: Current  portion of long-term debt                                                                    |       |                         | 221        |                        |       |   | 1,081 |   |   |
|                                                                                                        |       |                         | $          | 10                          |       |   |   | $ | 10,014 |   |   |

 

The Company is subject tovarious covenants associated with the Credit Facility, such as maintenance ofminimum equity and liquidity and certain key financial data. In addition, theCompany 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, and there are certain restrictions oninvestments and acquisitions that can be made by the Company. In September 2004,the Credit Facility was amended, primarily to permit certain stock transactionsincluding the Company’s Modified Dutch Auction tender offer (see Note 15).  At September 30, 2004, the Company is incompliance 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 borrowing capacityavailable to the Company under the Credit Facility to an amount less than the$150,000 commitment. At September 30, 2004, the Company has unusedborrowing capacity of $105,810 (taking into account letters of creditoutstanding and limitations from certain financial covenants) under its CreditFacility.

Borrowings under theCompany’s $25,000 discretionary line of credit are unsecured and reduce theborrowing capacity of the Credit Facility dollar for dollar.

**6.**   Notes Payable on Real Estate

TheCompany has loans secured by real estate consisting of the following:
| ** **                                                                                                                | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Current portion  of notes payable on real estate                                                                          |       |                         | $          | 28,541                      |       |   |   | $ | 49,861 |   |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 7) |       |                         | 28,878     |                        |       |   | 46,287 |   |   |
| Total notes  payable on real estate, current portion                                                                      |       |                         | 57,419     |                        |       |   | 96,148 |   |   |
| Notes payable on  real estate, non-current portion                                                                        |       |                         | 102,542    |                        |       |   | 7,118 |   |   |
| Total notes payable on  real estate                                                                                       |       |                         | $          | 159,961                     |       |   |   | $ | 103,266 |   |   |

 

15

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

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

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

At September 30, 2004, $8,491 of the currentportion and $15,388 of the non-current portion of notes payable on real estateare recourse to the Company (beyond being recourse tothe single-purpose entity that holds the real estate asset and is theobligor on the note payable). With respect to a project towhich $3,322 of the current recourse obligations relate, the Company has anagreement where an investor customer will purchase the project upon completion,the proceeds from which will be used to repay the related note payable.

The Company has aparticipating mortgage loan obligation related to a real estate projectclassified as real estate under development (non-current). The participatingmortgage loan is subordinate to a construction loan on the underlying project.The lender participates in net operating cash flow of the mortgaged real estateproject, if any, and capital proceeds, net of related expenses, upon the saleof the project, after payment of amounts due under the construction loan. Thelender receives 6% fixed interest on the outstanding balance of its note,compounded monthly, and participates in 35% to 80% of proceeds remaining afterthe construction loan is paid, based on reaching various internal rates ofreturn. The amount of the participation liability and the related debt discountare $9,435 and $5,550, respectively, at September 30, 2004. In 2004, theCompany amortized $3,885 of the debt discount, which has been capitalized toreal estate under development (non-current).

**7.**   Real Estate and Other Assets Held forSale and Related Liabilities

Real estate and other assets held for sale includecompleted real estate projects or land for sale in their present condition thathave met all of the “held for sale” criteria of FAS 144 and other assetsdirectly related to such projects. Liabilities related to real estate and otherassets held for sale have been included as a single line item in the Company’sbalance sheet. In accordance with FAS 144, balances related to assetsclassified as held for sale at September 30, 2004, or sold in the ninemonths ended September 30, 2004, that were not classified as held for saleat December 31, 2003, have been reclassified to real estate and otherassets held for sale in the Company’s balance sheet as of December 31,2003 presented herein.

16

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**7.**   Real Estate andOther Assets Held for Sale and Related Liabilities (Continued)

Real estate and otherassets held for sale and related liabilities are as follows:
| ** **                                                               | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets:**                                                              |       |                         |       |                        |       |   |   |   |   |
| Notes and other receivables                                              |       |                         | $          | 1,374                       |       |   |   | $ | 1,285 |   |   |
| Real estate held for sale (see Note 2)                                   |       |                         | 45,219     |                        |       |   | 71,494 |   |   |
| Other current assets                                                     |       |                         | 314        |                        |       |   | 1,082 |   |   |
| Other assets                                                             |       |                         | 779        |                        |       |   | 59 |   |   |
| Total real estate  and other assets held for sale                        |       |                         | 47,686     |                        |       |   | 73,920 |   |   |
| **Liabilities:**                                                         |       |                         |       |                        |       |   |   |   |   |
| Accrued expenses (see Note 4)                                            |       |                         | 551        |                        |       |   | 2,729 |   |   |
| Notes payable on real estate held for sale (see Note  6)                 |       |                         | 28,878     |                        |       |   | 46,287 |   |   |
| Other current liabilities                                                |       |                         | —     |                        |       |   | 136 |   |   |
| Total liabilities  related to real estate and other assets held for sale |       |                         | 29,429     |                        |       |   | 49,152 |   |   |
| **Net real estate and other  assets held for sale**                      |       |                         | $          | 18,257                      |       |   |   | $ | 24,768 |   |   |

 

**8.**   Stockholders’ Equity

Asummary of the Company’s stock option activity for the nine months ended September 30,2004, is as follows:
| ** **                                         | ** ** | **Exercise Price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise Price  of $9.74 to  $14.50 (at  market price  at grant date)** | ** ** | **Exercise Price  of $14.51 to  $22.75 (at  market price  at grant date)** | ** ** | **Exercise Price  of $22.76 to  $36.00 (at  market price  at grant date)** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| **Options outstanding:**                           |       |                                                                                            |       |                                                                                                         |       |                                                                                                          |       |                                                                                                          |       |      |       |   |   |   |   |   |   |   |   |
| December 31, 2003                             |       |                                                                                            | 956,649    |                                                                                                         |       |                                                                                                          | 3,207,925  |                                                                                                          |       |      | 2,086,341  |   |   |   | 151,739 |   |   | 6,402,654 |   |
| Granted                                            |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | —     |                                                                                                          |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                          |       |                                                                                            | (37,134    | )                                                                                                            |       |                                                                                                          | (37,125    | )                                                                                                             |       |      | —     |   |   |   | — |   |   | (74,259 | ) |
| Forfeited                                          |       |                                                                                            | —     |                                                                                                         |       |                                                                                                          | (80,125    | )                                                                                                             |       |      | (100,920   | ) |   |   | (7,118 | ) |   | (188,163 | ) |
| September 30, 2004                            |       |                                                                                            | 919,515    |                                                                                                         |       |                                                                                                          | 3,090,675  |                                                                                                          |       |      | 1,985,421  |   |   |   | 144,621 |   |   | 6,140,232 |   |
| **Options exercisable at September 30, 2004** |       |                                                                                            | 919,515    |                                                                                                         |       |                                                                                                          | 2,290,051  |                                                                                                          |       |      | 1,985,421  |   |   |   | 144,621 |   |   | 5,339,608 |   |

 

**9.**   Gain on Disposition of Real Estate andDiscontinued Operations

During the nine months ended September 30, 2004,the Company sold eight real estate projects for a net sales price of $34,621,resulting in an aggregate gain on disposition of $11,268, including interestforgiveness of $61. In addition, the Company recognized $338 of deferred gainfrom dispositions in prior periods. Duringthe first nine months of 2003, the Company sold six real estate projects for anaggregate net 

17

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**9.**   Gain onDisposition of Real Estate and Discontinued Operations (Continued)

salesprice of $7,240 (including a note receivable of $230 from a buyer of oneproject), resulting in an aggregate gain on disposition of $4,860. The Company also recognized $339 of deferredgain from a previous period disposition.

The Company’s discontinuedoperations include the operations and gains on disposition of real estateprojects held for sale or sold subsequent to the adoption of FAS 144effective January 1, 2002, that are considered “components of an entity”as defined by FAS 144 and for which the Company does not have or expect tohave any significant involvement in the operations of the project after thedisposal. As required by FAS 144, certain revenues and expenses for thesix months ended June 30, 2004, and the three and nine months ended September 30,2003, have been reclassified to conform to the presentation for the threemonths ended September 30, 2004.

In the first nine months of 2004, the Company sold tworeal estate projects that were considered discontinued operations underFAS 144. The aggregate net sales price for these projects was $14,177, andthe Company recognized an aggregate gain on disposition of $834, includinginterest forgiveness of $326. In the nine months ended September 30, 2003,the Company sold two real estate projects that were considered discontinuedoperations under FAS 144. The aggregate sales price for these two projectswas $12,380, and the Company recognized an aggregate gain on disposition of$1,747. The aggregate gain on disposition related to these projects has beenreported as discontinued operations, net of applicable income taxes, in theconsolidated statements of income.

The components of discontinued operations are asfollows:
| ** **                                                       | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **    2004    **               | ** ** | **    2003    **              | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** |
| **Revenues:**                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Development and  construction                                    |       |                                                                   | $          | 110                                                                   |       |   |   | $ | 9 |   |   |   | $ | 110 |   |   | $ | 132 |   |
| Gain on disposition of  real estate                              |       |                                                                   | 13         |                                                                  |       |   | — |   |   |   | 834 |   |   | 1,747 |   |
| Other                                                            |       |                                                                   | 1          |                                                                  |       |   | 1 |   |   |   | 2 |   |   | 25 |   |
|                                                             |       |                                                                   | $          | 124                                                                   |       |   |   | $ | 10 |   |   |   | $ | 946 |   |   | $ | 1,904 |   |
| **Expenses:**                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries, wages and  benefits                                    |       |                                                                   | $          | —                                                                |       |   |   | $ | — |   |   |   | $ | — |   |   | $ | 55 |   |
| Commissions                                                      |       |                                                                   | 17         |                                                                  |       |   | — |   |   |   | 17 |   |   | 197 |   |
| General and  administrative                                      |       |                                                                   | 140        |                                                                  |       |   | 218 |   |   |   | 437 |   |   | 1,867 |   |
| Depreciation and  amortization                                   |       |                                                                   | 71         |                                                                  |       |   | 33 |   |   |   | 161 |   |   | 139 |   |
| Interest                                                         |       |                                                                   | 64         |                                                                  |       |   | 439 |   |   |   | 237 |   |   | 903 |   |
|                                                             |       |                                                                   | 292        |                                                                  |       |   | 690 |   |   |   | 852 |   |   | 3,161 |   |
| Income (loss) from  discontinued operations, before income taxes |       |                                                                   | (168       | )                                                                     |       |   | (680 | ) |   |   | 94 |   |   | (1,257 | ) |
| Income tax (expense)  benefit                                    |       |                                                                   | 75         |                                                                  |       |   | 295 |   |   |   | (38 | ) |   | 548 |   |
| Income (loss) from discontinued operations, net of  income taxes |       |                                                                   | $          | (93                                                                   | )          |   |   | $ | (385 | ) |   |   | $ | 56 |   |   | $ | (709 | ) |

 

18

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**10.**   Financial Instruments

The Company has entered into various interest rateagreements to manage market risks related to changes in interest rates,primarily in satisfaction of requirements under the Company’s Credit Facility.The Company’s participation in derivative transactions has been limited to risk management purposes.Derivative instruments are not held or issued for trading purposes.

On March 24, 2001, an existing interest rate swapagreement was renewed for a 24-month period ending March 24, 2003,with a notional amount of $150,000. This interest rate swap agreementestablished a fixed interest pay rate of 4.68% on a portion of the Company’svariable rate debt. Under the interest rate swap agreement, if the actual LIBOR-basedrate was less than the specified fixed interest rate, the Company was obligatedto pay the differential interest amount, such amount being recorded asincremental interest expense. Conversely, if the LIBOR-based rate wasgreater than the specified fixed interest rate, the differential interestamount was paid to the Company and recorded as a reduction of interest expense.The weighted average receive rate under the interest rate swap agreement forthe three months ended March 31, 2003 was 1.37%. In connection with thisagreement, the Company recorded incremental interest expense, excluding theliability reduction described below, of $567 for the three months ended March 31,2003.

Prior to November 1, 2001, the interest rate swapagreement was not effectively designated as a hedge (although it was enteredinto for hedging purposes), and the Company recognized changes in fair value incurrent period earnings. For the period from January 1, 2001 through October 31,2001, $4,809 was charged to expense due to a change in fair value of theinterest rate swap agreement. As of November 1, 2001, in accordance withStatement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“FAS 133”), the Company designated the interestrate swap agreement as a cash flow hedge of the Company’s variable interestflow exposure, and began assessing effectiveness of the cash flow hedge inaccordance with the hypothetical derivative method of FAS 133Implementation Issue G7. The hypothetical derivative method captured the impactof the $4,809 swap liability already existing at November 1, 2001, asfuture hedge ineffectiveness of the newly designated hedge relationship becausethe liability originated from interest rate movements prior to the applicationof hedge accounting.

Accordingly, changes in fair value of the interestrate swap agreement attributable solely to the passage of time and paymentsmade to settle the liability serve to reduce the liability, thereforebenefiting net income in future periods. During the three months ended March 31,2003, the Company recorded $588 of payments against its liability that wouldhave been recorded to interest expense had the interest rate swap agreementbeen designated as a hedge since its inception. Changes in the fair value ofthe interest rate swap agreement attributable to changes in benchmark marketinterest rates represented the effective portion of the hedge relationship.These changes in fair value were recorded in other comprehensive income inaccordance with FAS 133 and were fully amortized over the remaining lifeof the interest rate swap agreement. Any hedge ineffectiveness was recorded incurrent period earnings. The interest rate swap agreement expired on March 24,2003, therefore the liability balance is zero at September 30, 2004.

In September 2004, the Company entered into aninterest rate cap agreement with a notional amount of $10,000 expiring December 24,2004, under which the Company will receive payments if the 30-day 

19

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**10.**   Financial Instruments (Continued)

LIBOR based interest rateexceeds 3.0%. The interest rate cap agreement has been designated an effectivehedge on certain variable rate debt of the Company, and, to the extent thehedging relationship remains effective, changes in fair value of the interestrate cap agreement will be recorded in other comprehensive income.

In March 2003, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas a notional amount of $11,400 and the Company will receive payments if theLIBOR-based interest rate exceeds 3.5%. The interest rate cap agreementhas not been designated as an effective hedge, and therefore the interest ratecap agreement will be marked to market each period with the change in fairmarket value recognized in current period earnings. The interest rate cap agreementexpires on March 1, 2005. Through September 30, 2004, amountsrecorded by the Company related to this interest rate cap agreement were notmaterial.

Accounts receivable,accounts payable and accrued expenses and other liabilities are carried at amountsthat reasonably approximate their fair values. The fair values of the Company’slong-term debt and notes payable on real estate reasonably approximate theirfair values based on the Company’s incremental borrowing rates for similartypes of borrowing arrangements.

**11.**   Commitments and Contingencies

At September 30, 2004, the Company has guaranteedrepayment of a maximum of $6,528 of real estate notes payable of itsunconsolidated subsidiaries, of which $5,263 of the underlying notes payable isoutstanding. These notes are secured by the underlying real estate and havematurity dates through August 2007. At September 30, 2004, theCompany has outstanding letters of credit totaling $19,904, $9,243 and $5,891of which collateralize amounts recorded in other current liabilities and otherliabilities, respectively. The letters of credit expire at varying datesthrough September 2005.

During the nine months ended September 30, 2004,the Company issued several debt repayment guarantees of unconsolidatedsubsidiaries that are subject to the fair value provisions of FASBInterpretation No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Direct Guarantees ofIndebtedness of Others* (“FIN 45”). The Company estimates that its likely exposureunder these guarantees is minimal. On this basis, the Company estimates that the fair value ofthese guarantees is equivalent to the amountnecessary to secure the guarantees usingletters of credit from a bank, and the aggregate amount is nominal. The Companydid not issue or modify any other guarantees or letters of credit in 2004 thatare subject to the fair value provisions of FIN 45.

In addition, at September 30, 2004, the Companyhas numerous completion and budget guarantees relating to development projects.These guarantees are made with third-party owners in the normal course ofbusiness. Each of these guarantees requires the Company to completeconstruction of the relevant project within a specified time frame and/orwithin a specified budget, with the Company potentially being liable for coststo complete in excess of such budget. However, the Company generally has “guaranteed

20

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

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

maximum price” contractswith reputable general contractors with respect to projects for which theCompany provides these guarantees. These contracts are intended to pass thebudget risk to such contractors. Management does not expect to incur anymaterial losses under these guarantees.

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 customer 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.

The Company has made refundable and non-refundableearnest money deposits totaling $4,079, of which $2,815 is non-refundable, inconjunction with contracts to acquire approximately $193,620 of real estatefrom other entities.

The Company and one of itssubsidiaries are defendants in a lawsuit styled* **Bank One Oklahoma, N.A., et al.*(the “Bank”) *v. Trammell Crow Services, Inc. and Trammell Crow Company*,No. 03 C 3624, pending in the US District Court for the Northern Districtof Illinois, originally filed on April 2, 2003. The claims asserted by theplaintiffs relate to a sale/leaseback transaction involving a property inOklahoma City previously owned by the Bank. The suit alleges breach ofcontract, breach of fiduciary duty, negligent misrepresentation, fraudulentmisrepresentation and fraudulent concealment against the Company and/or itssubsidiary and alleges that the plaintiffs have been damaged in an unspecifiedamount in excess of $15,000. The plaintiffs seek to recover actual damages,punitive damages and reasonable attorneys’ fees. The suit is in the process ofdiscovery, and no trial date has been set. As of the date of this Form 10-Q,the outcome of the suit cannot be predicted with any certainty, and the Companycannot at this time estimate an amount or range of potential loss in the eventof an unfavorable outcome. While the Company cannot predict with any certaintythe outcome of this matter, the Company currently believes the plaintiffs’claims are without merit and is vigorously defending the lawsuit.

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

21

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   Segment Information

*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 customers. 

TheDevelopment and Investment segment includes development activities performed onbehalf of investor and user customers on a fee basis, as well as developmentactivity pursuant to which the Company takes an ownership position. TheDevelopment and Investment segment also includes activities related to theCompany’s operating real estate projects prior to disposition.

*Measurement ofSegment Profit or Loss and Segment Assets*

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

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

The Company’sreportable segments are defined by the nature of the service provided andactivities conducted. Because development services require specializedknowledge, the Company’s organizational structure allows the group ofindividuals with specialized knowledge and experience in development activitiesto perform these services with greater focus through the Company’s Developmentand Investment segment. The organizational structure of the Global Servicessegment allows the Company to leverage resources in specific geographic areas,as non-development services provided to user and investor customers oftenrequire similar expertise.

Virtuallyall of the Company’s revenues are from customers located in the United States.For the three and nine months ended September 30, 2004, one individualcustomer accounts for $23,597, or 12%, and $59,820, or 11%, respectively, ofthe Company’s consolidated revenues. For the three and nine months ended September 30,2003, the same customer accounted for $17,897, or 11%, and $54,319, or 11%,respectively, of the Company’s consolidated revenues. Revenues from thiscustomer are included primarily in the Company’s Global Services segment.

22

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   Segment Information (Continued)

Summarized financialinformation for reportable segments is as follows:
| ** **                                                                                                                                   | ** ** | **For the Three Months  Ended September 30,**           | ** ** | **For the Nine Months  Ended September 30,**            | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| **Global Services:**                                                                                                                         | ** ** |                                                                             | ** ** | ** **                                                                       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total revenues                                                                                                                               |       |                                                                             | $          | 173,403                                                                          | ** ** |   |   | $ | 156,451 | ** ** |   |   | $ | 493,084 | ** ** |   |   | $ | 464,550 | ** ** |   |
| Costs and  expenses(1)                                                                                                                       |       |                                                                             | 167,803    | ** **                                                                       |       |   | 151,786 | ** ** |   |   | 481,496 | ** ** |   |   | 454,180 | ** ** |   |
| Operating income                                                                                                                             |       |                                                                             | 5,600      | ** **                                                                       |       |   | 4,665 | ** ** |   |   | 11,588 | ** ** |   |   | 10,370 | ** ** |   |
| Interest and other income (loss)                                                                                                             |       |                                                                             | 415        | ** **                                                                       |       |   | (3 | **)** |   |   | 1,104 | ** ** |   |   | 545 | ** ** |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries        |       |                                                                             | 6,015      | ** **                                                                       |       |   | 4,662 | ** ** |   |   | 12,692 | ** ** |   |   | 10,915 | ** ** |   |
| Minority interest,  before income taxes                                                                                                      |       |                                                                             | 520        | ** **                                                                       |       |   | 226 | ** ** |   |   | 503 | ** ** |   |   | 488 | ** ** |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 2,254      | ** **                                                                       |       |   | 875 | ** ** |   |   | 4,812 | ** ** |   |   | 1,465 | ** ** |   |
| Income from  continuing operations, before income taxes                                                                                      |       |                                                                             | 8,789      | ** **                                                                       |       |   | 5,763 | ** ** |   |   | 18,007 | ** ** |   |   | 12,868 | ** ** |   |
| Income from  discontinued operations, before income taxes                                                                                    |       |                                                                             | 26         | ** **                                                                       |       |   | — | ** ** |   |   | 26 | ** ** |   |   | 253 | ** ** |   |
| Income before  income taxes                                                                                                                  |       |                                                                             | $          | 8,815                                                                            | ** ** |   |   | $ | 5,763 | ** ** |   |   | $ | 18,033 | ** ** |   |   | $ | 13,121 | ** ** |   |
| **Development and Investment:**                                                                                                              |       |                                                                             |       | ** **                                                                       |       |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Total revenues                                                                                                                               |       |                                                                             | $          | 15,454                                                                           | ** ** |   |   | $ | 10,592 | ** ** |   |   | $ | 36,731 | ** ** |   |   | $ | 31,771 | ** ** |   |
| Costs and  expenses(1)                                                                                                                       |       |                                                                             | 15,982     | ** **                                                                       |       |   | 13,698 | ** ** |   |   | 46,182 | ** ** |   |   | 43,405 | ** ** |   |
| Operating loss                                                                                                                               |       |                                                                             | (528       | **)**                                                                            |       |   | (3,106 | **)** |   |   | (9,451 | **)** |   |   | (11,634 | **)** |   |
| Interest and other income                                                                                                                    |       |                                                                             | 351        | ** **                                                                       |       |   | 231 | ** ** |   |   | 1,027 | ** ** |   |   | 494 | ** ** |   |
| Loss from  continuing operations before income taxes, minority interest  and income from investments in unconsolidated subsidiaries          |       |                                                                             | (177       | **)**                                                                            |       |   | (2,875 | **)** |   |   | (8,424 | **)** |   |   | (11,140 | **)** |   |
| Minority interest,  before income taxes                                                                                                      |       |                                                                             | 940        | ** **                                                                       |       |   | 825 | ** ** |   |   | (138 | **)** |   |   | 2,915 | ** ** |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 43         | ** **                                                                       |       |   | 102 | ** ** |   |   | 9,203 | ** ** |   |   | 7,255 | ** ** |   |
| Income (loss) from  continuing operations, before income taxes                                                                               |       |                                                                             | 806        | ** **                                                                       |       |   | (1,948 | **)** |   |   | 641 | ** ** |   |   | (970 | **)** |   |
| Income (loss) from  discontinued operations, before income taxes                                                                             |       |                                                                             | (194       | **)**                                                                            |       |   | (680 | **)** |   |   | 68 | ** ** |   |   | (1,510 | **)** |   |
| Income (loss)  before income taxes                                                                                                           |       |                                                                             | $          | 612                                                                              | ** ** |   |   | $ | (2,628 | **)** |   |   | $ | 709 | ** ** |   |   | $ | (2,480 | **)** |   |
| **Total:**                                                                                                                                   |       |                                                                             |       | ** **                                                                       |       |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Total revenues                                                                                                                               |       |                                                                             | $          | 188,857                                                                          | ** ** |   |   | $ | 167,043 | ** ** |   |   | $ | 529,815 | ** ** |   |   | $ | 496,321 | ** ** |   |
| Costs and  expenses(1)                                                                                                                       |       |                                                                             | 183,785    | ** **                                                                       |       |   | 165,484 | ** ** |   |   | 527,678 | ** ** |   |   | 497,585 | ** ** |   |
| Operating income (loss)                                                                                                                      |       |                                                                             | 5,072      | ** **                                                                       |       |   | 1,559 | ** ** |   |   | 2,137 | ** ** |   |   | (1,264 | **)** |   |
| Interest and other income                                                                                                                    |       |                                                                             | 766        | ** **                                                                       |       |   | 228 | ** ** |   |   | 2,131 | ** ** |   |   | 1,039 | ** ** |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       |                                                                             | 5,838      | ** **                                                                       |       |   | 1,787 | ** ** |   |   | 4,268 | ** ** |   |   | (225 | **)** |   |
| Minority interest,  before income taxes                                                                                                      |       |                                                                             | 1,460      | ** **                                                                       |       |   | 1,051 | ** ** |   |   | 365 | ** ** |   |   | 3,403 | ** ** |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                 |       |                                                                             | 2,297      | ** **                                                                       |       |   | 977 | ** ** |   |   | 14,015 | ** ** |   |   | 8,720 | ** ** |   |
| Income from  continuing operations, before income taxes                                                                                      |       |                                                                             | 9,595      | ** **                                                                       |       |   | 3,815 | ** ** |   |   | 18,648 | ** ** |   |   | 11,898 | ** ** |   |
| Income (loss) from  discontinued operations, before income taxes                                                                             |       |                                                                             | (168       | **)**                                                                            |       |   | (680 | **)** |   |   | 94 | ** ** |   |   | (1,257 | **)** |   |
| Income before  income taxes                                                                                                                  |       |                                                                             | $          | 9,427                                                                            | ** ** |   |   | $ | 3,135 | ** ** |   |   | $ | 18,742 | ** ** |   |   | $ | 10,641 | ** ** |   |

----

(1)    Costs and expenses for the three and nine months ended September 30,2004, include non-cash compensation expense related to the amortization ofemployment contracts and unearned stock compensation of $1,633 and $4,118related to the Global 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**12.**   SegmentInformation (Continued)

Services segment and$677 and $1,810 related to the Development and Investment segment,respectively. Costs and expenses for the three and nine months ended September 30,2003, include non-cash compensation expense related to the amortization ofemployment contracts and unearned stock compensation of $678 and $2,720 relatedto the Global Services segment and $630 and $953 related to the Development andInvestment segment, respectively.
| ** **                  | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Total Assets:**           |       |                         |       |                        |       |   |   |   |   |
| Global Services             |       |                         | $          | 298,002                     |       |   |   | $ | 296,876 |   |   |
| Development and  Investment |       |                         | 401,826    |                        |       |   | 333,250 |   |   |
| Total consolidated assets   |       |                         | $          | 699,828                     |       |   |   | $ | 630,126 |   |   |

 

**13.   RestructuringCharges**

During 2001, the Company announced an internalreorganization of its business designed to consolidate all of the property andfacilities management, brokerage and corporate advisory, and construction andproject management services delivered to both user and investor customers undera single leadership structure. As part of its restructuring plans, primarilyduring the fourth quarter of 2001, the Company closed several offices andidentified offices with excess space that it intends to sublease to thirdparties. The Company recorded restructuring charges primarily comprised oflease obligations, costs to sublease excess space (offset by estimated futuresublease income) and miscellaneous furniture and equipment writeoffs. Theseaccruals will be relieved over the remaining terms of the underlying leasesthrough March 2012.

Norestructuring charges have been incurred or recorded since 2001. Activityrelated to the Company’s lease obligations and related costs included inrestructuring accruals in 2004 is as follows:
| Balance at  December 31, 2003  |   | $   | 1,864  |   |
|-------------------------------------|--------|-----|--------|--------|
| Cash payments                       |   | 253 |   |
| Balance at  September 30, 2004 |   | $   | 1,611  |   |

 

**14.**   Supplemental CashFlow Information

Supplementalcash flow information is summarized below:
| ** **                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                            | ** ** | **2003** | ** ** |
| **Non-cash activities:**                         |       |                                                |       |   |   |
| Issuance of restricted stock, net of forfeitures |       | $                                                   | 8,389      |   | $ | 11,479 |   |
| Capital lease obligations                        |       | 664                                                 |       | 882 |   |
|                                                  |            |                                                     |            |  |  |  |  |

 

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2004 (in thousands, except share and per share data) (Unaudited)**

**15.**   Subsequent Event

On September 3,2004 the Company commenced a Modified Dutch Auction tender offer whereby itoffered to purchase up to 4,444,444 shares of its common stock. Under the termsof the tender offer, the Company invited shareholders to tender their shares ata purchase price not in excess of $15.75 nor less than $13.50 per share.

The tender offer was completed in October 2004,and as a result, the Company purchased 2,354,437 shares of common stock pricedat $15.75 per share for a total of $37,082, excluding the costs of the tenderoffer. The transaction was financed from the Company’s existing available cash.

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

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

**Overview**

Trammell Crow Company (the “Company”) is one of thelargest diversified commercial real estate service companies in the UnitedStates. The Company delivers a comprehensive range of services to leadingmultinational corporations, institutional investors and other users of realestate services. In the United States, the Company is a leading provider ofcommercial property and facilities management services, commercial propertybrokerage and transaction management services, commercial property developmentand construction services and project management services. In addition to itsfull service offices located throughout the United States, the Company hasoffices in Canada, Europe, Asia and Latin/South America focused on the deliveryof real estate services to users of commercial real estate. The Companydelivers brokerage services outside the United States through strategicalliances with leading providers—in Europe and Asia, through Savills plc, (“Savills”)a leading property services company based in the United Kingdom; and in Canada,through JJ Barnicke, a leading Canadian real estate services provider. TheCompany delivers four core services—building management services, brokerageservices, project management services and development services—to both user andinvestor customers. The Company’s business is organized under two separatenational leadership structures. The Global Services Group includessubstantially all of the building management services, brokerage services, andproject management services delivered to both user and investor customers.Substantially all of the Company’s real estate development, capital markets andinvestment activities are conducted through the Company’s Development and InvestmentGroup.

Within the Global Services segment, with approximately6,000 full-time equivalent (“FTE”) employees, the Company provides services touser customers, including multinational corporations, hospitals anduniversities, who are typically the primary occupants of the commercialproperties with respect to which services are performed, and investor customersthat are not typically the primary occupants of the commercial properties withrespect to which services are performed. The building management servicesprovided to user customers consist primarily of facilities management, whichentails providing comprehensive day-to-day occupancy related services,principally to large corporations, healthcare systems and other users thatoccupy commercial facilities in multiple locations. These services includeadministration and day-to-day maintenance and repair of customer-occupiedfacilities. Brokerage services provided to user customers include corporateadvisory services such as portfolio management and tenant representation.Project management services provided to user customers include facilityplanning and project management, such as construction oversight, spaceplanning, site consolidations, facilities design, and workplace moves, adds,and changes. The building management services provided to investor customersinclude property management services relating to all aspects of buildingoperations, tenant relations and oversight of building improvement processes.Brokerage services provided to investor customers include project leasing andinvestment sales services whereby the Company advises buyers, sellers andlandlords in connection with the leasing and sale of office, industrial andretail space, and land. Project management services provided to investor customersinclude construction management services such as space planning and tenantfinish and coordination.

Within the Development andInvestment segment, encompassing approximately 190 FTE employees, the Companyprovides development services to both investor and user customers—both thosepursuant to which the Company takes an ownership position in a project andthose pursuant to which the Company provides development services to others inexchange for fees. The Company provides comprehensive project developmentservices and acquires and disposes of commercial real estate projects. The 

26

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developmentservices provided include financial planning, site acquisition, procurement ofapprovals and permits, design and engineering coordination, constructionbidding and management, tenant finish coordination, project closeout andproject finance coordination. The Company will continue to focus its efforts inthis area on risk-mitigated opportunities for investor customers and feedevelopment and build-to-suit projects for user customers, including those inhigher education and healthcare. From time to time, the Company may pursuedevelopment and investment activities, including opportunistic propertyacquisitions and new development, for its own account. With an organizationcomprised of professionals dedicated fully to development and investmentactivities, the Company is positioned to pursue and execute new developmentbusiness, particularly programmatic business with the Company’s large investorcustomers, and exploit niche market opportunities.

**Results of Operations—Three and Nine Months Ended September 30,2004 Compared to Three and Nine Months Ended September 30, 2003**

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 six months ended June 30, 2004 andthe three and nine months ended September 30, 2003, have been reclassifiedto conform to the presentation for the three months ended September 30,2004. As a result, certain balances differ from the amounts reported inpreviously filed documents. See *Income (Loss) fromDiscontinued Operations, Net of Income Taxes*, below, for additionalinformation.

27

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| ** **                                                                                                                                   | ** ** | **For the Nine Months  Ended September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                                              | ** ** | **2003**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                                   | ** ** | **($ in thousands)**                                        | ** ** |
| **REVENUES:**                                                                                                                                |       |                                                                  |       |       |       |              |       |   |   |
| ***User  Services:***                                                                                                                        |       |                                                                  |       |       |       |              |       |   |   |
| Facilities  management                                                                                                                       |       | $                                                                     | 153,945    |       | $          | 155,071           |       | $ | (1,126 | ) | (0.7 | )% |
| Corporate advisory services                                                                                                                  |       | 90,420                                                                |       | 83,264     |       | 7,156             |       | 8.6 | % |
| Project  management services                                                                                                                 |       | 60,905                                                                |       | 46,442     |       | 14,463            |       | 31.1 | % |
|                                                                                                                                         |       | 305,270                                                               |       | 284,777    |       | 20,493            |       | 7.2 | % |
| ***Investor  Services:***                                                                                                                    |       |                                                                  |       |       |       |              |       |   |   |
| Property management                                                                                                                          |       | 103,654                                                               |       | 109,558    |       | (5,904            | )          | (5.4 | )% |
| Brokerage                                                                                                                                    |       | 76,776                                                                |       | 61,707     |       | 15,069            |       | 24.4 | % |
| Construction  management                                                                                                                     |       | 6,987                                                                 |       | 7,292      |       | (305              | )          | (4.2 | )% |
|                                                                                                                                         |       | 187,417                                                               |       | 178,557    |       | 8,860             |       | 5.0 | % |
| Development and construction                                                                                                                 |       | 25,522                                                                |       | 27,788     |       | (2,266            | )          | (8.2 | )% |
|                                                                                                                                         |       | 518,209                                                               |       | 491,122    |       | 27,087            |       | 5.5 | % |
| Gain on disposition of real estate                                                                                                           |       | 11,606                                                                |       | 5,199      |       | 6,407             |       | 123.2 | % |
|                                                                                                                                         |       | 529,815                                                               |       | 496,321    |       | 33,494            |       | 6.7 | % |
| **COST  AND EXPENSES:**                                                                                                                      |       |                                                                  |       |       |       |              |       |   |   |
| Salaries, wages  and benefits                                                                                                                |       | 348,915                                                               |       | 331,975    |       | 16,940            |       | 5.1 | % |
| Commissions                                                                                                                                  |       | 76,627                                                                |       | 63,975     |       | 12,652            |       | 19.8 | % |
| General and  administrative                                                                                                                  |       | 90,232                                                                |       | 83,292     |       | 6,940             |       | 8.3 | % |
| Depreciation and  amortization                                                                                                               |       | 8,736                                                                 |       | 13,252     |       | (4,516            | )          | (34.1 | )% |
| Interest                                                                                                                                     |       | 3,168                                                                 |       | 5,091      |       | (1,923            | )          | (37.8 | )% |
|                                                                                                                                         |       | 527,678                                                               |       | 497,585    |       | 30,093            |       | 6.0 | % |
| Operating income (loss)                                                                                                                      |       | 2,137                                                                 |       | (1,264     | )          | 3,401             |       | 269.1 | % |
| Interest and other income                                                                                                                    |       | 2,131                                                                 |       | 1,039      |       | 1,092             |       | 105.1 | % |
| Income (loss)  from continuing operations before income taxes, minority interest and income  from investments in unconsolidated subsidiaries |       | 4,268                                                                 |       | (225       | )          | 4,493             |       | 1,996.9 | % |
| Income tax  (expense) benefit                                                                                                                |       | (1,725                                                                | )          | 98         |       | (1,823            | )          | (1,860.2 | )% |
| Minority  interest, net of income taxes                                                                                                      |       | 217                                                                   |       | 1,919      |       | (1,702            | )          | (88.7 | )% |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                                 |       | 8,351                                                                 |       | 4,916      |       | 3,435             |       | 69.9 | % |
| Income from  continuing operations                                                                                                           |       | 11,111                                                                |       | 6,708      |       | 4,403             |       | 65.6 | % |
| Income (loss)  from discontinued operations, net of income taxes                                                                             |       | 56                                                                    |       | (709       | )          | 765               |       | 107.9 | % |
| **Net income**                                                                                                                               |       | $                                                                     | 11,167     |       | $          | 5,999             |       | $ | 5,168 |   | 86.1 | % |

 

28

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| ** **                                                                                                                            | ** ** | **For the Three Months  Ended September 30,** | ** ** | ** **     | ** ** | ** **               | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------|------------|--------------------------|------------|
| ** **                                                                                                                            | ** ** | **2004**                                                               | ** ** | **2003**       | ** ** | **$ Change**        | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** ** | **($ in thousands)**                                         | ** ** |
| **REVENUES:**                                                                                                                         |       |                                                                   |       |           |       |                     |       |   |   |   |   |
| ***User  Services:***                                                                                                                 |       |                                                                   |       |           |       |                     |       |   |   |   |   |
| Facilities  management                                                                                                                |       | $                                                                      | 52,633     |           | $          | 50,155                   |       | $ | 2,478 |   |   | 4.9 | % |   |
| Corporate  advisory services                                                                                                          |       | 34,142                                                                 |       | 30,948         |       | 3,194                    |       |   | 10.3 | % |   |
| Project  management services                                                                                                          |       | 23,268                                                                 |       | 16,111         |       | 7,157                    |       |   | 44.4 | % |   |
|                                                                                                                                  |       | 110,043                                                                |       | 97,214         |       | 12,829                   |       |   | 13.2 | % |   |
| ***Investor  Services:***                                                                                                             |       |                                                                   |       |           |       |                     |       |   |   |   |   |
| Property  management                                                                                                                  |       | 34,330                                                                 |       | 36,120         |       | (1,790                   | )          |   | (5.0 | )% |   |
| Brokerage                                                                                                                             |       | 25,917                                                                 |       | 20,609         |       | 5,308                    |       |   | 25.8 | % |   |
| Construction  management                                                                                                              |       | 2,926                                                                  |       | 2,508          |       | 418                      |       |   | 16.7 | % |   |
|                                                                                                                                  |       | 63,173                                                                 |       | 59,237         |       | 3,936                    |       |   | 6.6 | % |   |
| Development and construction                                                                                                          |       | 8,388                                                                  |       | 10,234         |       | (1,846                   | )          |   | (18.0 | )% |   |
|                                                                                                                                  |       | 181,604                                                                |       | 166,685        |       | 14,919                   |       |   | 9.0 | % |   |
| Gain on disposition of real estate                                                                                                    |       | 7,253                                                                  |       | 358            |       | 6,895                    |       |   | 1,926.0 | % |   |
|                                                                                                                                  |       |   188,857                                                         |       |   167,043 |       |   21,814            |       |   | 13.1 | % |   |
| ** **                                                                                                                            |       |                                                                   |       |           |       |                     |       |   |   |   |   |
| **COST AND EXPENSES:**                                                                                                                |       |                                                                   |       |           |       |                     |       |   |   |   |   |
| Salaries, wages and  benefits                                                                                                         |       | 119,970                                                                |       |   110,020 |       |     9,950 |       |   | 9.0 | % |   |
| Commissions                                                                                                                           |       | 28,623                                                                 |       | 23,826         |       | 4,797                    |       |   | 20.1 | % |   |
| General and  administrative                                                                                                           |       | 31,279                                                                 |       | 26,407         |       | 4,872                    |       |   | 18.4 | % |   |
| Depreciation and  amortization                                                                                                        |       | 2,700                                                                  |       | 3,901          |       | (1,201                   | )          |   | (30.8 | )% |   |
| Interest                                                                                                                              |       | 1,213                                                                  |       | 1,330          |       | (117                     | )          |   | (8.8 | )% |   |
|                                                                                                                                  |       | 183,785                                                                |       | 165,484        |       | 18,301                   |       |   | 11.1 | % |   |
| Operating income                                                                                                                      |       | 5,072                                                                  |       | 1,559          |       | 3,513                    |       |   | 225.3 | % |   |
| Interest and other income                                                                                                             |       | 766                                                                    |       | 228            |       | 538                      |       |   | 236.0 | % |   |
| Income from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries |       | 5,838                                                                  |       | 1,787          |       | 4,051                    |       |   | 226.7 | % |   |
| Income tax expense                                                                                                                    |       | (2,401                                                                 | )          | (784           | )          | (1,617                   | )          |   | (206.3 | )% |   |
| Minority interest, net  of income taxes                                                                                               |       | 842                                                                    |       | 598            |       | 244                      |       |   | 40.8 | % |   |
| Income from investments  in unconsolidated subsidiaries, net of income taxes                                                          |       | 1,668                                                                  |       | 567            |       | 1,101                    |       |   | 194.2 | % |   |
| Income from continuing  operations                                                                                                    |       | 5,947                                                                  |       | 2,168          |       | 3,779                    |       |   | 174.3 | % |   |
| Loss from discontinued  operations, net of income taxes                                                                               |       | (93                                                                    | )          | (385           | )          | 292                      |       |   | 75.8 | % |   |
| **Net income**                                                                                                                        |       | $                                                                      | 5,854      |           | $          | 1,783                    |       | $ | 4,071 |   |   | 228.3 | % |   |
|                                                                                                                                       |            |                                                                        |            |                |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Revenues.*****  **Facilitiesmanagement revenue increased for the three months ended September 30,2004, and decreased slightly for the nine months ended September 30, 2004,from comparable periods in the prior year. The year-to-date decrease isprimarily due to the termination of certain customer relationships as part ofthe Company’s wind-down of its centralized call center operations. Thisdecrease was offset by an increase in revenue resulting from an expansion of acustomer relationship in the second quarter, which resulted in an overallincrease in facilities management revenue in the third quarter of 2004 as compared to the third quarter of 2003.

Corporate advisoryservices revenue increased for the three and nine months ended September 30,2004, from comparable periods in 2003, primarily driven by increased commissionrevenues in 2004. The 

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Construction management revenue increased for thethree months ended September 30, 2004, and decreased for the nine monthsended September 30, 2004, from comparable periods in the prior year. Theyear-to-date decrease is primarily due to less construction/tenant finishprojects in 2004, although the Company did experience an increase in newprojects in the third quarter of 2004 compared to the third quarter of 2003.Construction management revenue is generated from services including spaceplanning and tenant finish coordination for investor customers in conjunctionwith property management and leasing assignments, and are directly related tocustomers’ real estate demands.

Revenue from development and construction decreasedfor the three and nine months ended September 30, 2004, from comparableperiods in the prior year. Development fees decreased because of lowerincentive development fees, largely due to the timing of significanttransactions in 2004 as compared to 2003. In addition, the decrease in 2004 isdue to a reduction in the Company’s development andinvestment starts (includingproperty acquisitions) in recent years. Typically, the impactof increases and decreases in the Company’s development and investment starts is notreflected in financial results until later periods, and the Company hasexperienced reductions in its 2004 development and construction revenue as aconsequence of reduced 2002 and 2003 development and investment starts. However,development and investment startsbegan trending up in 2004 with starts for the first nine months of 2004 more than doubling those for allof 2003.

Some of the Company’s development resources focus onproviding development services to investor clients that invest in speculativecommercial real estate projects. In aneffort to mitigate the cyclicality of real estate development activity forinvestor customers, the Company has increased its focus andresources to user-driven development areas such as development and constructionactivities for healthcare and higher education customers and fee developmentfor user customers.

Gain on disposition of real estate increased for thethree and nine months ended September 30, 2004, from comparable 2003periods. During the three months ended September 30, 2004, the Companysold four real estate projects for an aggregate net sales price of $19.0million, resulting in an aggregate gain on disposition of $7.3 million,including interest forgiveness of $0.1 million. For the three months ended September 30,2003, the Company sold one real estate project for an aggregate net sales priceof $1.1 million, resulting in an aggregate gain on disposition of $0.4 million.For the nine months ended September 30, 2004, the Company sold eight realestate projects for an aggregate net sales price of $34.6 million, resulting inan aggregate gain on disposition of $11.3 million, including interestforgiveness of $0.1 million. In addition, the Company recognized deferred gainof $0.3 million relating to a disposition in a previous period. For the ninemonths ended September 30, 2003, the Company sold six real estate projectsfor an aggregate net sales price of $7.2 million, resulting in an aggregategain on disposition of $4.9 million, and recognized deferred gain of $0.3million relating to a disposition in a previous period.

***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 bycustomers (“reimbursed employees”); salaries, benefits and annual incentivebonuses for employees whose compensation is not so reimbursed (“unreimbursedemployees”); and transaction-related incentive compensation other thanbrokerage commissions, primarily paid in connection with development andinvestment transactions. The increases in the three and nine months ended September 30,2004 were primarily driven by growth in salaries, wages and benefits forreimbursed employees. This growth is primarily due to project managementheadcount additions resulting from customer expansions and the addition of newcustomers.

The 2004 increase in commission expense was directlyattributable to the increase in the Company’s corporate advisory services andbrokerage revenue discussed above.

General and administrative expenses increased for thethree and nine months ended September 30, 2004, from comparable periods inthe prior year. The overall increase in general and administrative 

30

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expenses primarilyresulted from increased customer-reimbursed out-of-pocket general andadministrative expenses, largely driven by the growth in the Company’s projectmanagement service line.

Depreciation and amortization decreased for the threeand nine months ended September 30, 2004, from comparable periods in theprior year. The Company has replaced many of its computer assets at a lowercost than the assets that were retired, which has reduced the Company’sdepreciation expense.

The decrease in interest expense is primarily theresult of the expiration of the interest rate swap at the end of the firstquarter of 2003 for which the Company recorded $0.6 million of interest expensein 2003. The Company also had lower average outstanding balances on itsrevolving line of credit and capital leases during the 2004 periods as comparedto the 2003 periods.

***Minority Interest, Net of Income Taxes.***   Minority interest income increased for the threemonths ended September 30, 2004, and decreased for the nine months ended September 30,2004. The increase for the third quarter of 2004 relates to losses in theCompany’s fifth discretionary development and investment fund (“Fund V”)established with outside partners. Fund V has acquired operating real estateproperties, which it plans to redevelop, lease and sell, that have generatedlosses in the current period. The decrease for the 2004 nine-month period isprimarily a result of 2004 gains on dispositions of consolidated real estateprojects in which outside parties have an interest. In addition, the results ofoperations of certain consolidated real estate entities with outside ownersimproved due to lower charges for impairment of real estate held by theseentities in 2004, as compared to 2003.

***Income from Investments in UnconsolidatedSubsidiaries, Net of Income Taxes.***   In the ordinary course of business, a significantportion of the Company’s development and investment activities are conducted,and are expected to be conducted in future periods, through unconsolidatedsubsidiaries. The Company also has certain investments in unconsolidatedsubsidiaries which are not related to its development and investmentactivities. Income from investments in unconsolidated subsidiaries fluctuatesfrom period to period based on the volume and profitability of transactionscarried out by the underlying unconsolidated subsidiaries, in addition to theCompany’s ownership percentage in the unconsolidated subsidiaries. The overallincrease in 2004 was primarily the result of significant income from anunconsolidated subsidiary that sold its building portfolio in the first quarterof 2004 and increased income from the Company’s investment in Savills due toits improved operating results.

***Income(Loss) from Discontinued Operations, Net of Income Taxes.***   Income (loss) from discontinued operationsincludes the operations of real estate properties and gain on disposition ofreal estate properties held for sale or sold subsequent to the adoption ofFAS 144 effective January 1, 2002, that were considered components ofan entity under FAS 144 and in which the Company has not retained or doesnot expect to retain significant continuing involvement. Dispositions of realestate assets have been and will continue to be a significant part of theCompany’s activities and, as a result of applying the provisions ofFAS 144, the Company expects a greater amount of these activities to beclassified as discontinued operations in future periods as fewer assetdispositions will qualify for grandfathered treatment under FAS 144. Duringthe three months ended September 30, 2004, the Company sold one realestate project that was considered a discontinued operation for a net salesprice of $2.8 million, resulting in a gain on disposition of $0.01 million. Therewere no sales that were considered to be discontinued operations in the threemonths ended September 30, 2003. In the nine months ended September 30,2004, the Company sold two real estate projects that were considereddiscontinued operations for an aggregate net sales price of $14.2 million. Thesales resulted in an aggregate gain on disposition of real estate (beforeincome taxes) of $0.8 million, including interest forgiveness of $0.3 million. Inthe nine months ended September 30, 2003, the Company sold two real estateprojects that were considered discontinued operations for an aggregate salesprice of $12.4 million, resulting in an aggregate gain on disposition of $1.7million. Income from discontinued operations for the nine months ended September 30,2003, 

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includes a provisionfor loss of $1.4 million to reflect a real estate held for sale asset at fairvalue less cost to sell. The related real estate asset was sold in the firstquarter of 2004.

**Quarterly Results of Operations and Seasonality**

The results of operations forany 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 somewhat greater than in each of the first three fiscalquarters, primarily because its clients have demonstrated a tendency to closetransactions toward the end of the fiscal year. The timing and introduction ofnew contracts, the disposition of investments in real estate assets, therecognition of incentive fees towards the latter part of the fiscal year ascontractual targets are met and other factors may also cause quarterlyfluctuations in the Company’s results of operations.

**Liquidity and Capital Resources**

The Company’s liquidity and capital resourcesrequirements include the funding of working capital needs, primarily costsincurred in providing services to its clients before collection of relatedbillings; the funding of capital investments, including the acquisition of orinvestments in other real estate service companies; the repurchase of itsshares if authorized by the Board of Directors; expenditures for real estateand payments on notes payable associated with its development and investmentactivities; and expenditures related to upgrading the Company’s managementinformation systems. The Company finances its operations with internallygenerated funds and borrowings under the Credit Facility (described below). Theportion of the Company’s development and investment business that includes theacquisition and development of real estate is financed with loans secured byunderlying real estate, external equity, internal sources of funds, or acombination thereof.

Net cash provided by operating activities totaled $5.0million for the first nine months of 2004, compared to $11.5 million for thesame period in 2003. Cash provided by operating activities, excluding thechange in real estate and relatedborrowings, increased to $17.9 million in 2004 ascompared to $15.9million in 2003. Although net income for the first nine months of 2004 exceedednet income for the same period in 2003, cash provided by earnings decreasedfrom $17.5 million in 2003 to $14.1 million in 2004. This decrease was largelydue to  $14.0million (before income taxes) of the Company’s earnings for the first ninemonths of 2004 being generated from investments in unconsolidated subsidiaries,for which the related cash provided is reflected as an investing activity (asdescribed below), as compared to $8.7 million (before income taxes) in the sameperiod of 2003. In addition, cash used in real estate activities, net of related borrowings, was$12.9 million in the first nine months of 2004, compared to $4.4 million forthe same period in 2003 as a result of greater real estate acquisitions in 2004.

Net cash used in investing activities totaled $44.7million for the first nine months of 2004, compared to $0.3 million provided byinvesting activities for the same period in 2003. This change is primarily dueto $65.9 million of expenditures made in 2004 related to real estate classifiedas “held for investment,” as compared to similar expenditures of $10.0 millionin 2003. These 2004 expenditures were offset by $18.4 million of proceeds fromthe dispositions of real estate projects classified as “held for investment” atthe time of distribution in accordance with FAS 144, as compared to no suchproceeds in 2003. In addition, distributions from investments in unconsolidatedsubsidiaries, net of contributions, decreased to $7.3 million in 2004, comparedto $16.3 million in 2003.

Net cash provided by financing activities totaled$29.9 million for the first nine months of 2004, compared to $23.0 million usedin financing activities for the same period in 2003. In 2004, the Companyreceived net proceeds from borrowings of $29.9 million under notes payablerelated to real estate held for investment as compared to net proceeds of $1.7million in 2003. In addition, the Company received contributions, net ofdistributions, from minority interest holders of $9.3 million in 2004, comparedto $6.3 

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million of distributions,net of contributions in 2003. The increase in cash provided in 2004 is alsoattributable to the Company’s repurchases of common stock of $10.4 million in2003, as compared to no such repurchases in the same period in 2004.

In June 2002, the Company obtained a$150.0 million revolving line of credit (the “Credit Facility”) arrangedby Bank of America, N.A., as the administrative agent (the “AdministrativeAgent”), which replaced the Company’s previous $150.0 million revolvingline of credit. The Company can obtain loans under the terms of the CreditFacility, which are Base Rate Loans or Eurodollar Rate Loans. Base Rate Loansbear interest at a base rate plus a margin up to 0.75% depending on the Company’sleverage ratio. The base rate is the higher of the prime lending rate announcedfrom time to time by the Administrative Agent or an average federal funds rateplus 0.5%. Eurodollar Rate Loans bear interest at the Eurocurrency rate plus amargin, which ranges from 1.75% to 2.5%, depending upon the Company’s leverageratio. The Credit Facility contains various covenants such as the maintenanceof minimum equity, liquidity, revenues, interest coverage ratios and fixedcharge ratios. The Credit Facility also includes restrictions on recourseindebtedness and total indebtedness, restrictions on liens and certainrestrictions on investments and acquisitions that can be made by the Company.In addition, the Company may not pay dividends, repurchase common shares, ormake other distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization. In September 2004,the Credit Facility was amended, primarily to permit certain stock transactionsincluding the Company’s Modified Dutch Auction tender offer. The CreditFacility is guaranteed by certain significant subsidiaries of the Company andis secured by a pledge of a stock of such significant subsidiaries and a pledgeof certain intercompany indebtedness.

The Company’s participation in derivative transactionshas been limited to risk management purposes, andderivative instruments are not held for trading purposes. The Credit Facilityrequires the Company to enter into one or more interest rate agreements for theCompany’s floating rate indebtedness in excess of $30.0 million (otherthan construction loans under which interest is capitalized in accordance withaccounting principles generally accepted in the United States (“GAAP”)) ensuringthe net interest on such excess is fixed, capped or hedged. In March 2001,the Company renewed an existing interest rate swap agreement for a two-yearperiod ending March 24, 2003, with a fixed interest pay rate of 4.68% anda notional amount of $150.0 million. The interest rate swap agreementexpired on March 24, 2003, and the related weighted average receive ratewas 1.37% for the three months ended March 31, 2003. Subsequent to theexpiration of the interest rate swap agreement, the Company has entered intovarious short-term interest rate agreements to comply with the requirements ofthe Credit Facility. In September 2004, the Company entered into aninterest rate cap agreement with a notional amount of $10.0 million expiring December 24,2004, under which the Company will receive payments if the 30-day LIBOR basedinterest rate exceeds 3%. The interest rate cap agreement has been designatedan effective hedge, and, to the extent the hedging relationship remainseffective, changes in fair value of the interest rate cap agreement will berecorded in other comprehensive income.

The Company also has a $25.0 milliondiscretionary line of credit (the “Discretionary Line”) with Bank of America,N.A. Each loan obtained by the Company under the Discretionary Line matures infive business days, but no later than June 28, 2005, and bears interest ata LIBOR-based rate (plus a bank margin negotiated from time to time).Borrowings under the Discretionary Line are unsecured and reduce borrowingcapacity under the Credit Facility.

At September 30, 2004, the Company had noborrowings under the Credit Facility or the Discretionary Line. The covenants contained in the Credit Facility andthe amount of the Company’s other borrowings and contingent liabilities mayhave the effect of limiting the borrowing capacity available to the Companyunder the Credit Facility to an amount less than the $150.0 millioncommitment. The Company’s unused borrowing capacity (takinginto account letters of credit and borrowings outstanding and limitations fromcertain financial covenants) under the Credit Facility was $105.8 millionat September 30, 

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2004. Since it takes longer for the Company to disposeof real estate investments in a weaker economy, the recent economic slow downcould adversely impact the Company’s ability to comply with certain of the realestate-related financial covenants in the Company’s Credit Facility,which could negatively impact the Company’s borrowing capacity. Also, sincemany of the financial covenants in the Credit Facility are dependent on theCompany’s “EBITDA,” as defined in the Credit Facility agreement and calculatedon a trailing four-quarter basis, a decline in the Company’s overall operationscould adversely impact the Company’s ability to comply with these financialcovenants and, in turn, the Company’s borrowing capacity.

At September 30, 2004, the Company was incompliance with all covenants of the Credit Facility. The Company expects tocontinue to borrow under the Credit Facility to finance future strategicacquisitions, fund its co-investment activities and provide the Company with anadditional source of working capital.

In March 2003, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas a notional amount of $11.4 million and the Company will receive payments ifthe LIBOR-based interest rate exceeds 3.5%. The interest rate capagreement has not been designated as a hedge, and therefore the interest ratecap agreement will be marked to market each period with the change in fairmarket value recognized in current period earnings. The interest rate capagreement expires on March 1, 2005. As of September 30, 2004, amountsrecorded by the Company related to this interest rate cap agreement were notmaterial.

As of September 30,2004, the Company has various commitments that could impact its liquidity assummarized below (in millions):
| ** **                 | ** ** | **Total**                    | ** ** | **Amount of Commitments by   Time of Expiration** | ** ** |
|----------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Amounts   Committed** | ** ** | **Less than   1 year**                                           | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
| Standby letters  of credit |       |                         | $          | 14.9                                                                            |       |   |   | $ | 14.9 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Debt repayment  guarantees |       |                         | 5.3        |                                                                            |       |   | 3.9 |   |   |   | 1.2 |   |   |   | 0.2 |   |   |   | — |   |   |
| Total commitments          |       |                         | $          | 20.2                                                                            |       |   |   | $ | 18.8 |   |   |   | $ | 1.2 |   |   |   | $ | 0.2 |   |   |   | $ | — |   |   |

 

The Company does notanticipate paying any dividends in the foreseeable future. The Company believesthat funds generated from operations, together with existing cash and availablecredit under the Credit Facility and loans secured by underlying real estatewill be sufficient to finance its current operations, planned capitalexpenditure requirements, payment obligations for development purchases, sharerepurchases, acquisitions of service companies, signing bonuses or loans fornew employees and internal growth for the foreseeable future. The Company’sneed, if any, to raise additional funds to meet its working capital and capitalrequirements will depend upon numerous factors, including the success and paceof implementation of its growth strategy. The Company regularly considerscapital raising alternatives to be able to take advantage of available avenuesto supplement its working capital, including strategic corporate partnershipsor other alliances, bank borrowings and the sale of equity and/or debtsecurities.

**Off-balance Sheet Arrangements**

The Company does not haveany off-balance sheet arrangements, as defined in Regulation S-K Item 303(a)(4)(ii)(A)-(D),that have or are reasonably likely to have a current or future effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

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**Forward-Looking Statements**

Certain statementscontained or incorporated by reference in this Quarterly Report on Form 10-Q,including without limitation statements containing the words “believe,” “anticipate,”“forecast,” “will,” “may,” “expect,” “envision,” “project,” “budget,” “target,”“estimate,” “could,” “should,” “conceivable,” “intend,” “possible,” “foresee,” “lookfor,” “look to” and words of similar import, are forward-lookingstatements within the meaning of the federal securities laws. Such forward-lookingstatements involve known and unknown risks, uncertainties and other matterswhich may cause the actual results, performance or achievements of the Companyor industry results to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such risks, uncertainties and other matters include, but are notlimited to (i) the timing of individual transactions, (ii) theability of the Company to identify, implement and maintain the benefit of costreduction measures and achieve economies of scale, (iii) the ability ofthe Company to compete effectively in the international arena, (iv) theability of the Company to retain its major customers and renew its contacts, (v) theability of the Company to attract new user and investor customers, (vi) theability of the Company to manage fluctuations in net earnings and cash flowwhich could result from the Company’s participation as a principal in realestate investments,  (vii) theCompany’s ability to continue to pursue its growth strategy, (viii) theCompany’s ability to pursue strategic acquisitions on favorable terms andmanage challenges and issues commonly encountered as a result of those acquisitions, (ix) the Company’s ability to compete in highly competitive nationaland local business lines, and (x) the Company’s ability to attract andretain qualified personnel in all areas of its business (particularly seniormanagement). In addition, the Company’s ability to achieve certain anticipatedresults will be subject to other factors affecting the Company’s business thatare beyond the Company’s control, including but not limited to general economicconditions (including the cost and availability of capital for investment inreal estate and customers’ willingness to make real estate commitments), theeffect of government regulation on the conduct of the Company’s business andthe threat of terrorism and acts of war. Given these uncertainties, readers arecautioned not to place undue reliance on such forward-looking statements.The Company disclaims any obligation to update any such statements or publiclyannounce any updates or revisions to any of the forward-lookingstatements contained herein to reflect any change in the Company’s expectationwith regard thereto or any change in events, conditions, circumstances orassumptions underlying such statements. Reference is hereby made to thedisclosures contained under the heading “Risk Factors” in “Item 1.Business” of the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 15, 2004.

**ITEM 3.**   *Quantitative andQualitative Disclosures About Market Risk*

The Company’s primarymarket risk exposure is to changes in interest rates. The Company is exposed tomarket risk related to its Credit Facility and loans secured by real estateproperties as discussed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” and inNotes 5 and 6 to the Company’s Condensed Consolidated FinancialStatements. The Credit Facility and the majority of the loans secured by realestate bear interest at variable rates and are subject to fluctuations in themarket. From time to time, the Company purchases interest rate agreements tohedge, cap or lock a portion, but not all, of its exposure to fluctuations ininterest rates, and, as such, the effects of interest rate changes are expectedto be limited. The Company’s earnings are also somewhat affected byfluctuations in the value of the U.S. dollar as compared to foreign currenciesas a result of its operations in Europe, Asia and Australia. There have been nosignificant changes in the interest rate or foreign currency market risks sinceDecember 31, 2003.

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

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of management, including its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures (as defined in 13a-15(e) of the Securities ExchangeAct of 1934 (the “Exchange Act”)). Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic filings withthe Securities and Exchange Commission. There were no changes in the Company’sinternal 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—OTHER INFORMATION**

**ITEM 1.**   *Legal Proceedings*

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

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

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**ITEM6.**   *Exhibits*

(a)           Exhibits:
| 3.1(1)   | Certificate of  Incorporation of the Company                                                                                                                                  |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2(1)   | Bylaws of the  Company                                                                                                                                                        |
| 3.2.1(2) | First Amendment  to the Bylaws of the Company                                                                                                                                 |
| 3.2.1(3) | Second Amendment  to the Bylaws of the Company                                                                                                                                |
| 3.2.1(4) | Third Amendment  to the Bylaws of the Company                                                                                                                                 |
| 4.1(5)   | Form of  Certificate for Shares of Common Stock of the Company                                                                                                           |
| 10.1(6)  | First Amendment  of Credit Agreement dated  September 1, 2004, between the Company and Bank of America, N.A.                                                             |
| 10.2     | Form of  Indemnification Agreement, with schedule of signatories                                                                                                         |
| 10.3(7)  | Employment  Agreement dated as of September 28, 2004, between the Company and Matthew  S. Khourie                                                                        |
| 31.1     | Certification by  the Chief Executive Officer of the Company Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                  |
| 31.2     | Certification by  the Chief Financial Officer of the Company Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                  |
| 32.1     | Certification by  the Chief Executive Officer of the Company Pursuant to 18 U.S.C. § 1350,  adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 |
| 32.2     | Certification by  the Chief Financial Officer of the Company Pursuant to 18 U.S.C. § 1350,  adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 |

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

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

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

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

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

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on September 2, 2004, and incorporatedherein by reference.

(7)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on September 29, 2004, and incorporatedherein by reference.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                              | TRAMMELL CROW COMPANY |
|------------------------------|-----------------------|
|                         | By:                   | /s/  DEREK R. MCCLAIN |
|                         | * *              | Derek R. McClain |
|                         | * *              | *Chief  Financial Officer* |
| * *                     | * *              | *(Principal  Financial Officer and duly authorized to sign this report on behalf of the  Registrant)* |
| Date: November 9,  2004 | * *              | * * |

 

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**Exhibit Index**
| Exhibit  Number | ** ** | ** **                                                                                                                                                                             | ** ** | **Description** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(1)          |       | Certificate of Incorporation of the Company                                                                                                                                            |
| 3.2(1)          |       | Bylaws of the Company                                                                                                                                                                  |
| 3.2.1(2)        |       | First Amendment to the Bylaws of the Company                                                                                                                                           |
| 3.2.1(3)        |       | Second Amendment to the Bylaws of the Company                                                                                                                                          |
| 3.2.1(4)        |       | Third Amendment to the Bylaws of the Company                                                                                                                                           |
| 4.1(5)          |       | Form of Certificate for Shares of Common Stock  of the Company                                                                                                                    |
| 10.1(6)         |       | First Amendment of  Credit Agreement dated  September 1, 2004, between the Company and Bank of America, N.A.                                                                      |
| 10.2            |       | Form of Indemnification Agreement, with  schedule of signatories                                                                                                                  |
| 10.3(7)         |       | Employment Agreement dated as of September 28,  2004, between the Company and Matthew S. Khourie                                                                        |
| 31.1            |       | Certification by the Chief Executive Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                            |
| 31.2            |       | Certification by the Chief Financial Officer of the  Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                            |
| 32.1            |       | Certification by the Chief Executive Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2            |       | Certification by the Chief Financial Officer of the  Company Pursuant to 18 U.S.C. § 1350, adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

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

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

(3)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with the Securitiesand Exchange Commission on March 31, 2003, and incorporated herein byreference.

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

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

(6)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on September 2, 2004, and incorporatedherein by reference.

(7)                 Previouslyfiled as Exhibit 10.1 to the Company’s Form 8-K filed with theSecurities and Exchange Commission on September 29, 2004, and incorporatedherein by reference.

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